2014 (3) TMI 426 - AT - Income Tax

Disallowance of interest u/s 14A of the Act Held that -Disallowance under section 14A read with rule 8D can only be invoked when the assessee has incurred some expenditure on earning of tax exempt income Relying upon Goetze (India) Ltd. vs- CIT 2009 (5) TMI 615 - ITAT DELHI and COMMISSIONER OF INCOME TAX Versus WIMCO SEEDLINGS LTD. 2011 (12) TMI 16 - DELHI HIGH COURT - the burden is on the AO to establish the nexus of expenses having incurred for earning of exempted income before making disallowance under section 14A - unless it is demonstrated that some expenses have been incurred in earning the tax exempt income, the provision of rule 8D cannot be invoked at all matter remitted back to the AO for de novo adjudication - Decided in favour of assesse.

Summary

Issues:
1. Disallowance under section 14A.
2. Addition of disallowed amount under section 14A while computing book profit under section 115JB.

Issue 1: Disallowance under section 14A:
The appeal was against the order of the CIT(A) confirming the disallowance of Rs.45,04,471 under section 14A of the Income Tax Act, 1961 for the assessment year 2008-09. The Assessing Officer (AO) invoked Rule 8D to calculate the disallowance as the assessee had earned dividend income but did not claim any expenditure against it. The assessee contended that disallowance under section 14A can only be invoked if actual expenditure was incurred for earning tax-exempt income. The counsel referred to judicial precedents and argued that in the absence of any expenses being incurred, Rule 8D cannot be applied. The Departmental Representative (D.R.) argued that under section 14A read with Rule 8D, the assumption of expenses being incurred is implicit. The Tribunal held that the burden is on the AO to establish the nexus of expenses being incurred for earning exempted income before making disallowance. If expenses are proven to have been incurred and cannot be identified, Rule 8D applies. The matter was remitted to the AO for fresh adjudication in accordance with law, giving the assessee a fair hearing.

Issue 2: Addition of disallowed amount under section 14A while computing book profit under section 115JB:
The assessee raised a grievance against the addition of Rs.45,04,471 disallowed under section 14A while computing book profit under section 115JB. Since the issue of disallowance under section 14A was remitted to the AO for fresh adjudication, the Tribunal deemed the grievance in this regard as infructuous and declined to address it. Consequently, ground no.2 was dismissed as infructuous. The appeal was partly allowed for statistical purposes based on the above decisions.

In conclusion, the Tribunal allowed the appeal partly for statistical purposes by remitting the issue of disallowance under section 14A back to the AO for fresh adjudication. The Tribunal emphasized the necessity for the AO to establish the actual incurring of expenses for earning tax-exempt income before invoking Rule 8D for disallowance. The issue regarding the addition of disallowed amount under section 14A while computing book profit was considered infructuous due to the remittance of the main issue for fresh assessment.