2012 (6) TMI 567 - AT - Income Tax

Disallowance u/s 14A Act r.w.r. 8D of the Rules - the assessee submitted that no expenditure was incurred in relation to the investments in question Held that - Determining the amount disallowable as per provisions of Rule 8D(2) the condition precedent is that the AO must come to a conclusion having regard to the accounts of the assessee that claim of the assessee that no expenditure was incurred in relation to exempt income is not correct as no such satisfaction has been arrived at, computation of disallowable amount as per Rule 8D(2) cannot be sustained - in CIT Vs. Hero Cycles Ltd. 2009 (11) TMI 33 (HC) held that disallowance u/s 14A requires a finding of incurring of expenditure where it is found that for earning exempt income, no expenditure has been incurred, disallowance u/s 14A cannot be sustained in favour of assessee.

Summary

Issues involved:
Disallowance of expenditure under section 14A of the Income Tax Act for the assessment year 2008-2009.

Detailed Analysis:
1. The appellant contested the disallowance of expenditure amounting to Rs. 37,87,800/- by the ld. CIT(A) under section 14A of the Act. The Assessing Officer based the disallowance on the substantial increase in investments made by the assessee during the year under consideration. The appellant argued that no expenditure was incurred in relation to the investments. The ld. CIT(A) confirmed the disallowance, but deleted the disallowance of interest. The primary issue for adjudication was the disallowance of expenditure of Rs. 37,87,800/-.

2. The appellant relied on various decisions to contest the applicability of section 14A to the case, emphasizing that no income exempt from tax was earned and no expenditure was incurred to earn such income. However, the ld. CIT(A) upheld the disallowance under section 14A. The ld. CIT(A) reasoned that the investments constituted a significant part of the appellant's business activity, justifying the disallowance of indirect expenses. The appellant disputed the sustenance of the disallowance and appealed against it.

3. The Tribunal noted that while the Special Bench decision in Cheminvest Ltd. Vs. ITO clarified that exempt income need not have accrued to the assessee for disallowing expenditure under section 14A, it also emphasized that the Assessing Officer must objectively establish the incurring of expenditure related to exempt income. In this case, the Assessing Officer failed to demonstrate that the appellant's claim of no expenditure related to the investments was incorrect. The Tribunal referred to precedents emphasizing the necessity of objective satisfaction before invoking Rule 8D. As the Assessing Officer did not meet this requirement, the disallowance of Rs. 37,87,800/- under section 14A was deemed unsustainable, and the Tribunal allowed the appeal, deleting the disallowance.

4. The Tribunal's decision highlighted the importance of objective satisfaction by the Assessing Officer regarding the incurring of expenditure related to exempt income before invoking Rule 8D for disallowance under section 14A. The Tribunal's ruling emphasized the need for a factual basis to support the disallowance of expenditure, ensuring fairness and adherence to legal provisions in determining tax liabilities.