2017 (8) TMI 845 - AT - Income Tax

Addition u/s 14A - nexus between the expenditure claimed by the assessee and earning exempt income - adhoc disallowance of certain expenditures - Held that - In the absence of any direct nexus between expenditure claim to the exempt income the AO cannot invoke the provisions of section 14A r.w.r. 8D(2) to disallow expenditure. Hence we direct the AO to delete disallowances made u/s 14A r.w.r. 8D except demat charges of 574 which is directly incurred in relation to earning exempt income. On further verification of the P 3 lakhs against gross receipt of 238, 25, 000 which are in the nature of administrative expenses directly attributable to her professional activity except demat charges of 574. Therefore we are of the view that in the absence of any direct nexus between expenditure claim to the exempt income the AO cannot invoke the provisions of section 14A r.w.r. 8D(2) to disallow expenditure. Hence we direct the AO to delete disallowances made u/s 14A r.w.r. 8D except demat charges of 574 which is directly incurred in relation to earning exempt income.

Summary

Issues:
Appeals against orders of CIT(A) for assessment years 2009-10 & 2010-11 regarding disallowance of expenditure under section 14A.

Analysis:
1. The appeals were filed against identical orders of CIT(A) for two assessment years. The case was heard together due to common facts and issues for convenience.
2. The assessee, an individual and advocate, filed returns declaring income. The assessment under section 143(3) resulted in additions towards AIR information, disallowance of expenditure under section 14A, and adhoc disallowance of certain expenditures. The CIT(A) upheld the disallowance under section 14A based on Rule 8D provisions.
3. The assessee challenged the disallowance under section 14A before CIT(A), claiming no expenditure related to earning exempt income. CIT(A) held that the burden of proof lies with the assessee to establish the direct relation of expenditure to professional income. The AO was deemed correct in invoking Rule 8D for disallowance.
4. The AR argued that adhoc disallowance under section 14A lacked nexus between expenditure and exempt income. Citing legal precedents, the AR contended that the AO should have recorded satisfaction before invoking Rule 8D.
5. The DR supported CIT(A)'s decision, emphasizing the mandatory nature of disallowance under section 14A even if no expenditure was claimed. The AO's use of Rule 8D was deemed appropriate.
6. The Tribunal found in favor of the assessee, emphasizing the need for a nexus between claimed expenditure and exempt income. The AO's failure to establish this connection led to the direction to delete disallowances under section 14A except for directly related charges.
7. The appeal for one assessment year was partly allowed based on the above findings. The decision was applied to the second assessment year as the facts were identical, resulting in the partial allowance of the second appeal.
8. Both appeals were partly allowed based on the lack of nexus between expenditure and exempt income, leading to the deletion of disallowances except for directly related charges.

This detailed analysis outlines the legal proceedings and decisions regarding the disallowance of expenditure under section 14A, emphasizing the importance of establishing a direct connection between claimed expenses and exempt income to justify disallowances.