2016 (7) TMI 1128 - AT - Income Tax

Disallowance u/s 14A - Held that - The assessee has not claimed any expenditure against the investment income. The AO has made the addition on estimate basis which is not prescribed under the law. There is nothing on record to controvert the submissions made on behalf of the assessee. In view of the aforesaid facts, have no reason to disagree with the claim of the assessee that no further expenditure over and above the expenses already disallowed in the return of income is required to be disallowed under section 14A of the IT Act. Accordingly, it is held that the disallowance made by the assessing officer under section 14A of the IT Act by application of Rule 8D of the IT Rules is directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
Appeals against orders of Ld. CIT(A) for assessment year 2010-11; Disallowance u/s. 14A read with Rule 8D of the Income Tax Rules; Request for amendment of grounds of appeal.

Analysis:

Issue 1: Disallowance u/s. 14A read with Rule 8D of the Income Tax Rules
- The appeals were filed against the orders of Ld. CIT(A) for the assessment year 2010-11, challenging the disallowance made under section 14A of the Income Tax Act, 1961.
- The AO had made additions based on estimation under section 14A, which was contested by the assessee.
- Legal position clarified by Supreme Court and High Courts emphasized the need for a proximate relationship between expenditure and income not forming part of total income for disallowance under section 14A.
- The Bombay High Court in the case of Godrej Boyce highlighted the intention of section 14A to disallow expenses related to non-taxable income to prevent claiming allowances for expenditures on exempt income.
- The Delhi High Court in the case of Maxopp Investment emphasized that actual expenditure must be incurred for earning exempted income for disallowance under section 14A.
- As the assessee had not claimed any expenditure against the investment income, and the AO's addition was based on estimation, the Tribunal held that the disallowance made by the AO under section 14A by applying Rule 8D was not justified.
- The Tribunal directed the deletion of the disallowance amount, as there was no further expenditure to be disallowed under section 14A.

Issue 2: Request for Amendment of Grounds of Appeal
- The assessee had requested to add, amend, or alter the grounds of appeal at the time of hearing.
- However, the Tribunal did not address this issue specifically in the judgment, as the focus was on the disallowance under section 14A.

Conclusion:
- The Tribunal allowed both appeals filed by the separate assesses against the orders of Ld. CIT(A) for the assessment year 2010-11, primarily concerning the disallowance made under section 14A of the Income Tax Act, 1961.
- The Tribunal held that the disallowance under section 14A, based on estimation and without a proximate relationship between expenditure and exempt income, was not justified, leading to the deletion of the disallowance amounts in both cases.
- The judgment emphasized the legal principles established by the Supreme Court and High Courts regarding the interpretation and application of section 14A in relation to disallowance of expenses related to non-taxable income.