2013 (9) TMI 764 - HC - Income Tax

Disallowance u/s 14A of the Income Tax act - Clear nexus has not been established that the interest bearing funds have been vested for investments generating tax free dividend income Held that - Expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds - Disallowance under Section 14A was not sustainable - Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible Decided against the Revenue.

Summary

Issues:
Appeals under Section 260-A of the Income Tax Act, 1961 regarding disallowance of Rs. 30,31,212 under Section 14-A read with Rule 8-D for assessment years 2007-08, 2008-09, and 2009-10.

Analysis:
1. The appeals involved a common issue of disallowance of Rs. 30,31,212 under Section 14-A of the Income Tax Act, 1961 read with Rule 8-D of the Income Tax Rules. The dispute centered around whether the assessee had incurred any expenses in earning exempted income as dividend.

2. The assessee, an individual deriving income from various sources including exempted dividend income, had not shown any expenses against the earning of such income. The Assessing Officer made an addition of Rs. 30,31,212 under Section 14-A. The Commissioner of Income Tax (Appeals) later deleted this addition, leading to an appeal by the revenue, which was dismissed by the Tribunal.

3. The revenue contended that the assessee must prove no expenditure was incurred to escape the applicability of Section 14-A. The Tribunal observed that before any disallowance could be made, there must be evidence of expenditure incurred by the assessee, which was missing in this case.

4. The Tribunal's judgment highlighted that the Assessing Officer did not bring on record any expenses incurred by the assessee to earn the exempt income. It emphasized that without evidence of expenditure, no disallowance could be made under Rule 8-D or otherwise against the exempt income.

5. Referring to Section 14-A of the Act, the Tribunal emphasized that the onus was on the assessee to prove the quantum of expenditure incurred on earning tax-free dividend income. The Tribunal found no infirmity in the Commissioner's decision and dismissed the revenue's appeal.

6. The Tribunal also referenced a previous decision involving Hero Cycles Limited, where it was established that if no expenditure had been incurred for earning exempted income, disallowance under Section 14-A could not stand. The Tribunal concluded that no substantial question of law arose for adjudication and dismissed the appeals.

7. In summary, the judgment clarified the application of Section 14-A and Rule 8-D in determining the disallowance of expenses related to exempt income. It underscored the importance of establishing actual expenditure incurred by the assessee and highlighted that without evidence of such expenditure, disallowance could not be justified.