2015 (7) TMI 1364 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - Assessee has made fresh investments in 9 schemes of mutual funds during the year under consideration and it has closed investments made in six schemes, which were standing at the beginning of the year. The assessee has also received dividend income to the tune of ₹ 15.29 lakhs. Assessee has indulged in quite number of transactions during the year and hence, we see no merit in the contentions of the assessee that it did not incur any expenses for earning the dividend income. Considering the number of transactions, quantum of aggregate expenditure as well as fact that the assessee has received dividend income we are of the view that a reasonable disallowance should be made as required under the provisions of section 14A - we are of the view that the disallowance of ₹ 50,000/- made by the AO is on the higher side. We hold that a disallowance would be reasonable in the facts and circumstance of the case. Accordingly, we set aside the order of the ld. CIT(A) on this issue and direct the AO to restrict the disallowance to ₹ 25000/-, as referred above.

Summary

Issues:
Challenge to disallowance under section 14A of the Income Tax Act, 1961 for assessment year 2005-06.

Detailed Analysis:

Issue 1: Disallowance under section 14A of the Act
- The appellant challenged the disallowance of Rs. 50,000 made by the AO under section 14A of the Income Tax Act, 1961.
- The AO disallowed the amount as the assessee earned dividend income of Rs. 15.29 lakhs claimed to be exempt from taxation without making any disallowance for expenses incurred.
- The Tribunal had earlier directed the AO to make a reasonable disallowance based on the decision in the case of Godrej & Boyce Mfg Co. Ltd.
- The AO, in the set-aside proceedings, noted a 5% disallowance of exempt income in another case but maintained the original disallowance of Rs. 50,000.
- The appellant argued that most of the dividend income was from mutual funds directly credited to the bank account, thus incurring no expenses for earning the income.
- The Tribunal observed the significant number of transactions and expenses incurred by the assessee, leading to a decision that a reasonable disallowance was necessary under section 14A.
- The Tribunal found the original disallowance of Rs. 50,000 to be on the higher side and directed the AO to restrict the disallowance to Rs. 25,000.

Conclusion:
The appeal was partly allowed, and the disallowance under section 14A was reduced to Rs. 25,000, as directed by the Tribunal on 2nd July 2015.