2012 (7) TMI 1010 - AT - Income Tax

Summary

Issues involved: Penalty u/s.271(1)(c) on disallowance out of administrative expenditure u/s.14A for A.Y. 2002-03.

Summary:
The appeal was filed against the penalty imposed on disallowance of expenses u/s.14A for earning exempt income. The AO levied the penalty specifically on disallowance of &8377; 66,31,05,360/- made u/s.14A out of administrative and other expenses for earning exempt dividend and interest income. The assessee contended that no expenses were incurred for earning the exempt income. The AO, however, rejected this explanation and levied the penalty. The CIT(A) held that penalty on disallowance of interest u/s.14A was not justified but upheld the penalty on disallowance of administrative expenses on a proportionate basis.

The CIT(A) justified the penalty on administrative expenses disallowance, stating that there was substantial tax-free income and expenses could be attributed to earning this income. The assessee argued that no expenses were directly or indirectly related to earning dividend income. The Tribunal observed that the AO did not point out any expenses related to earning exempt income and the disallowance was made on an adhoc basis. The Tribunal found no reason to confirm the penalty on such adhoc disallowance of administrative expenditure u/s.14A. Consequently, the penalty sustained by the CIT(A) was set aside and deleted, allowing the appeal filed by the assessee.

In conclusion, the penalty on the disallowance of administrative expenditure u/s.14A was deleted, and the appeal was treated as allowed.