2014 (1) TMI 432 - AT - Income Tax

Disallowance u/s 14A Disallowance on account of administrative expenses for managing the portfolio - Held that - Following Maxopp Investment Ltd. v. CIT 2011 (11) TMI 267 - Delhi High Court - The Assessing Officer have to indicate cogent reasons for the same The determination of the amount of expenditure in relation to exempt income under rule 8D would be done when the Assessing Officer rejects the claim of the assessee in this regard - The operation of Rule 8D is applicable prospectively w.e.f. A.Y. 2007-08 - The assessee suo motu had made the disallowance of administrative expenses - Decided in favour of assessee.

Summary

Issues:
Appeal against CIT(A) order - Disallowance u/s 14A.

Analysis:
The case involves an appeal by the assessee against the order of the ld. CIT(A)-VIII, Ahmedabad regarding the disallowance u/s 14A. The assessee, a public limited company engaged in the natural gas business, filed its return declaring income, which was scrutinized and assessed by the A.O. The A.O. disallowed a portion of administrative expenses under section 14A related to earning exempt income, leading to the appeal. The only effective ground raised by the assessee was against this disallowance.

During assessment, the A.O. observed dividend income and disallowed administrative expenses proportionately, despite the assessee's claim that no borrowed funds were used for investments. The CIT(A) upheld the A.O.'s decision citing previous judgments supporting disallowance of administrative expenses related to exempt income. The assessee argued that no additional disallowance should be made as they had already self-disallowed a portion of expenses based on fair deployment of resources.

The ITAT, considering the facts and legal precedents, found that the A.O. did not provide sufficient reasoning for enhancing the disallowance made by the assessee. The tribunal noted that Rule 8D was not applicable for the relevant assessment year and that the assessee had already self-disallowed expenses. Referring to a Delhi High Court decision, the ITAT emphasized that if no expenditure was incurred in relation to exempt income, no disallowance could be made under section 14A. Therefore, the ITAT allowed the assessee's appeal, ruling in their favor.

In conclusion, the ITAT allowed the appeal of the assessee, overturning the disallowance u/s 14A made by the A.O. The tribunal emphasized that the A.O. did not provide adequate justification for enhancing the disallowance and that the assessee had already self-disallowed expenses appropriately. The decision was based on legal principles and the specific facts of the case, ensuring fairness and adherence to tax laws.