2012 (12) TMI 130 - AT - Income Tax

Disallowance on account of expenses other than interest u/s 14A in relation to exempt income i.e. dividends - Held that - Assessing Officer must in the first instance determine whether the claim of the assessee is correct and determination must be made having regard to the accounts of the assessee. The legislature directs him to follow rule 8D only where the Assessing Officer is not satisfied with the claim of assessee - Assessing Officer has not fulfilled his onus of recording his findings - disallowance under section 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions disallowance deleted in favor of assessee.

Summary

Issues:
1. Disallowance of expenses under section 14A in relation to exempt income.
2. Application of Rule 8D for disallowance.
3. Deletion of interest charged under section 234D.

Issue 1: Disallowance of expenses under section 14A in relation to exempt income:
The assessee appealed against the disallowance of Rs. 8,90,039 out of expenses other than interest under section 14A in relation to exempt income, i.e., dividends. The Assessing Officer added back the amount based on Rule 8D, as no expenditure relating to administrative and managerial services was disallowed by the assessee. The CIT(A) upheld the disallowance, citing that Rule 8D is applicable for computation of disallowance under section 14A. The Tribunal noted that no major activity of sale or purchase of shares was done, and no direct expenses were incurred for earning exempt income. The Assessing Officer did not specify any direct expense or assess the correctness of the claim made by the assessee. The Tribunal held that no disallowance under section 14A read with Rule 8D could be made in this case.

Issue 2: Application of Rule 8D for disallowance:
The CIT(A) upheld the decision of the Assessing Officer to apply Rule 8D for disallowance under section 14A. The Tribunal observed that the Assessing Officer did not fulfill the requirement of determining the correctness of the claim of the assessee regarding expenses. The Tribunal referred to judicial pronouncements emphasizing the need for a clear finding of incurring expenditure before making a disallowance under section 14A. As the Assessing Officer did not record findings regarding the claim of the assessee, the Tribunal concluded that no disallowance under Rule 8D could be made in this case.

Issue 3: Deletion of interest charged under section 234D:
The assessee contended that the interest charged under section 234D should be deleted. However, the judgment did not provide detailed analysis or discussion on this issue, and it was not a primary focus of the Tribunal's decision.

In conclusion, the Tribunal allowed the appeal filed by the assessee, primarily based on the lack of specific identification of expenses for earning exempt income and the failure of the Assessing Officer to determine the correctness of the claim of the assessee. The Tribunal emphasized the necessity of a clear finding of incurring expenditure before making a disallowance under section 14A, and in this case, ruled that no disallowance under Rule 8D could be justified.