2009 (12) TMI 617 - AT - Income Tax

In the Revenue s appeal the Revenue has challenged the order of the learned Commissioner of Income-tax (Appeals) in deleting the disallowance made by invoking the provisions of section 14A on the ground that the management expenses attributable to the dividend income disallowed by the Assessing Officer had been deleted Held that- . A perusal of the decision of the Punjab and Haryana High Court clearly shows that for the purpose of making a disallowance under section 14A a finding of incurring the expenditure for earning the exempt income is absolutely necessary. Here in the present case it is noticed that the Assessing Officer has not brought out any specific expenditure which has been incurred by the assessee for earning of exempt dividend income.Therefore appeal of the Revenue is dismissed.

Summary

Issues:
1. Disallowance of management expenses attributable to dividend income under section 14A.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2005-06, challenging the deletion of disallowance made under section 14A regarding management expenses attributable to dividend income. The Revenue contended that the Assessing Officer disallowed 2% of the dividend income as expenses, but the Commissioner of Income-tax (Appeals) deleted the addition citing lack of evidence linking the expenditure to tax-free dividend income. The Revenue argued that the decision of the Third Member of the Tribunal in a previous case supported their position. However, the assessee argued that the Punjab and Haryana High Court's decision in CIT v. Hero Cycles Ltd. required a specific finding of incurring expenditure for disallowance under section 14A, and since no evidence of such expenditure was provided by the Assessing Officer, the disallowance could not be sustained.

The Tribunal considered the submissions and observed that the Punjab and Haryana High Court's decision mandated a clear finding of incurring expenditure for earning exempt income to justify disallowance under section 14A. In this case, the Assessing Officer failed to identify any specific expenditure incurred by the assessee for earning exempt dividend income. Therefore, the Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) based on the principle established by the Punjab and Haryana High Court, which was the only relevant High Court decision available at the time. Since no conflicting decisions from other High Courts were presented, the Tribunal confirmed the earlier decision and dismissed the Revenue's appeal.

In conclusion, the Tribunal's judgment emphasized the necessity of demonstrating actual expenditure related to earning exempt income for disallowance under section 14A. The decision highlighted the importance of following established legal principles, as in the absence of specific evidence of incurring such expenses, the disallowance could not be upheld.