2015 (7) TMI 976 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - Held that - Every economic activity, particularly in today s extremely competitive environment, entails some degree of cerebral activity. There is, however, no corresponding expenditure, or claim in its respect, while the issue at hand is the apportionment of such expenditure. Income, which may or may not arise on incurring expenditure, and again with no certainty as to its quantum, cannot by itself form the basis of either incurring or allocation of expenditure. - Revenue s reading of r. 8D as equally misplaced. The estimate per r. 8D(2) is only qua expenditure relatable to tax exempt income/s. The expenditure claimed stands debited in the assessee s accounts, which could be inquired in to as to their purpose. For all we know, the assessee may be managing his investments in instruments yielding tax exempt incomes, which are at a healthy sum of ₹ 21.71 cr., i.e., on an average for the year, on his own, or could also be assisted by personnel, who stand remunerated. No inquiry in this regard stands made, while the assessee has maintained proper accounts, duly audited and, further, bases his claim of having incurred a lower expenditure than that per the statutory prescription of r. 8D, thereon. - The ingredients of s. 14A(2) r/w r. 8D(1) are clearly not satisfied in the instant case. We, accordingly find no infirmity in the assessee s claim of disallowance u/s. 14A(1) at ₹ 1,00,000 - Decided against assessee.

Summary

Issues:

1. Disallowance of expenses under section 14A of the Income Tax Act, 1961.
2. Disallowance of expenditure claimed as a donation.

Issue 1: Disallowance of expenses under section 14A of the Income Tax Act, 1961:

The case involved an advocate with substantial investments in securities yielding tax-free income. The Assessing Officer (A.O.) made a disallowance under rule 8D, which was confirmed by the Commissioner of Income Tax (Appeals). The main contention was the mechanical application of rule 8D without considering the nature of administrative expenditure. The assessee argued that the expenditure should be allocated based on income earned, not the quantum of investments. The Revenue argued that rule 8D provides a uniform method for estimating such expenditure. The tribunal found that the Revenue's interpretation of rule 8D was incorrect. The tribunal held that the expenditure claimed was debited in the accounts and could be inquired into. The tribunal observed that the Revenue did not specify the relationship between the expenditure and tax-exempt income. Ultimately, the tribunal concluded that the requirements of section 14A(2) read with rule 8D(1) were not met in this case, and upheld the assessee's claim of disallowance under section 14A(1) at Rs. 1,00,000.

Issue 2: Disallowance of expenditure claimed as a donation:

The second ground of appeal related to the disallowance of expenditure claimed as a donation given to the family of an employee working at the bar association. No arguments were presented on this ground during the proceedings. Consequently, the tribunal dismissed this ground as not pressed and held accordingly.

In conclusion, the appellate tribunal partially allowed the assessee's appeal concerning the disallowance of expenses under section 14A of the Income Tax Act, 1961. The tribunal rejected the mechanical application of rule 8D and upheld the assessee's claim for disallowance at Rs. 1,00,000. Additionally, the tribunal dismissed the ground related to the disallowance of expenditure claimed as a donation due to lack of arguments presented.