2010 (10) TMI 654 - AT - Income Tax

Disallowance u/s 14A - In the case before us 97% of dividends have come from one single company and through ECS clearance. While the Assessing Officer had himself disallowed a proportionate disallowance of Rs.6,74,003/- as a reasonable allocation expenses to earn the interest free income, the CIT(A) has restricted also a reasonable disallowance of Rs.25,000/- as against Rs.6,74,003 - The disallowance of expenses on the basis of proportionate basis on income parameter certainly cannot be said to be reasonable on the facts of this case - Decided against the revenue

Summary

Issues:
1. Disallowance of expenses relatable to earn exempt income under section 14A of the I.T. Act without appreciating the indivisibility of expenses.

Analysis:
The appeal before the Appellate Tribunal ITAT, Mumbai challenged the correctness of the CIT(A)'s order regarding the disallowance of expenses related to earning exempt income under section 14A of the I.T. Act for Assessment Year 2001-02. The Assessing Officer had disallowed a proportionate amount of expenses claimed by the assessee as related to earning tax-free dividend income. The CIT(A) partially agreed with the Assessing Officer's stand but restricted the disallowance to a nominal amount of Rs. 25,000 based on the facts of the case. The revenue contended that the disallowance should be higher, considering the significant dividend income received from a single company.

The Tribunal referred to the Hon'ble Bombay High Court's decision in the case of Godrej and Boyce Limited vs. ACIT, emphasizing that reasonable expenditure related to exempt income can be disallowed. In this case, where 97% of the dividends were from a single company and the expenses were minimal, the Tribunal found the CIT(A)'s decision of restricting the disallowance to Rs. 25,000 to be reasonable. The Tribunal noted that passive income like dividends does not warrant a proportionate allocation of all expenses incurred. Therefore, upholding the CIT(A)'s decision, the Tribunal dismissed the revenue's appeal, affirming the reasonable disallowance of Rs. 25,000.

In conclusion, the Tribunal's judgment clarified that while expenses related to earning exempt income can be disallowed under section 14A, such disallowances must be reasonable and based on the specific circumstances of the case. In this instance, the Tribunal found the CIT(A)'s decision to limit the disallowance to Rs. 25,000 appropriate, considering the nature of the income and the minimal expenses incurred.