2012 (3) TMI 118 - AT - Income Tax

Expenditure in relation to exempt Income - Old Investments - interest Income NIL - Held That - Earning of the income in a particular year is not sine qua non of allowing expenditure. Thus, the income may be nil, yet the expenditure incurred in pursuit of earning such income is deductible. Exempt Income - Assessee No expenditure incurred - Held That - In view of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT,(Bombay High Court) & Maxopp Investment Ltd. Vs. CIT (Delhi High Court), dis-allowances couldn t be upheld.

Summary

Issues:
1. Disallowance under section 14A of the Income-tax Act.
2. Interpretation of the term "expenditure incurred by the assessee in relation to income."
3. Application of Rule 8D for disallowance of expenditure.
4. Failure of lower authorities to consider the claim of the assessee.

Issue 1: Disallowance under section 14A of the Income-tax Act:
The assessee-company filed its return declaring income, including investments where income was not includible. The AO disallowed expenditure under section 14A, upheld by the CIT(Appeals) citing the necessity to allocate expenditure related to non-includible income. The Tribunal referred to precedents supporting Rule 8D's application for disallowance and upheld the AO's decision.

Issue 2: Interpretation of the term "expenditure incurred by the assessee in relation to income":
The Tribunal deliberated whether the provision in section 14A could be invoked in the absence of earned income not forming part of the total income. It analyzed the narrow vs. wide interpretation of "income" and concluded that expenditure can be disallowed even if no income is earned in a year but investments are capable of yielding income.

Issue 3: Application of Rule 8D for disallowance of expenditure:
The Tribunal examined the necessity of evidence to show actual expenditure incurred in relation to earning non-includible income. It referenced cases emphasizing the AO's obligation to verify the correctness of the claim of no expenditure by the assessee before applying Rule 8D. It criticized the lower authorities for not considering the claim and directly computing disallowance under Rule 8D, ultimately ruling against upholding the disallowance.

Issue 4: Failure of lower authorities to consider the claim of the assessee:
The Tribunal highlighted the failure of the lower authorities to examine the claim of no expenditure by the assessee before applying Rule 8D. It emphasized the importance of assessing the correctness of the claim before making disallowances, as mandated by section 14A(1). Due to the small amount involved and the authorities' non-compliance with the law, the disallowance was not upheld, and the appeal was allowed.

This detailed analysis of the judgment addresses the issues related to the disallowance under section 14A of the Income-tax Act, the interpretation of the term "expenditure incurred by the assessee in relation to income," the application of Rule 8D for disallowance of expenditure, and the failure of lower authorities to consider the claim of the assessee adequately.