2012 (1) TMI 294 - AT - Income Tax

Summary

Issues Involved:
The judgment involves the confirmation of addition u/s 14A of the Income Tax Act, the computation of disallowance of expenses, and the allocation of expenses between taxable and exempt income.

Confirmation of Addition u/s 14A:
The appellant contested the addition of &8377; 2,66,554 u/s 14A, arguing that no expenses were incurred to earn the income and that some expenses were statutorily required for maintaining the company. The AO computed the disallowance based on Rule 8D, resulting in the addition. The CIT(A) upheld the AO's decision, citing the applicability of Rule 8D for the assessment year. The appellant claimed that no expenditure was incurred in earning the dividend income, and thus, no disallowance should be made. The Tribunal held that the assessing officer must first examine the claim of the assessee with reference to the accounts before resorting to Rule 8D. Since the claim of nil expenditure was not properly examined, the disallowance exceeding the total expenditure was incorrect. The Tribunal accepted the appellant's contention that no expenditure should have been disallowed, and the appeal was allowed.

Restriction of Disallowance u/s 14A:
The appellant also argued that the disallowance u/s 14A should be restricted to &8377; 2,00,849, which was the total expenses claimed, as disallowance cannot exceed the total expenses. However, the AO and CIT(A) did not accept this argument. The Tribunal, after considering the statutory provisions and the claim of the assessee, concluded that the disallowance exceeding the total expenditure was incorrect. The Tribunal held that the disallowance could not have exceeded the actual expenditure claimed, and since no expenditure was found to be disallowable, the appeal was allowed.

Allocation of Total Expenses:
The appellant further contended that the total expenses should be proportionately allocated between taxable and exempt income, as not all expenses were incurred for earning exempt income. The Tribunal emphasized that the assessing officer must examine the claim of the assessee before invoking Rule 8D. Since the claim of nil expenditure was not properly addressed, the disallowance made by the lower authorities was deemed incorrect. The Tribunal accepted the appellant's argument that no expenditure should have been disallowed, and accordingly, the appeal was allowed.