2019 (3) TMI 691 - AT - Income Tax

Disallowance of exemption income u/s 14A read with Rule 8D(2)(iii) - suo moto disallowance by the assessee - HELD THAT - We find that none of the expenses above stated have nexus that the exempt income rather all these are related to business income. The assessee suo moto has disallowed a sum of ₹ 33,815/- relatable to the exempt income which according to us is quite reasonable. Even otherwise, the issue is covered by the Tribunal s decision as assessee s own case for AY 2011-12, respectfully following the same and in given facts and circumstances, we delete the disallowance. Hence, we allow the appeal of the assessee.

Summary

Issues:
Disallowance of expenses relatable to exempt income under section 14A of the Income Tax Act, 1961.

Analysis:
The appeal pertains to the disallowance of expenses related to exempt income under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed expenses under Rule 8D(2)(iii) amounting to ?7,01,959, whereas the assessee had initially disallowed ?33,315. The primary contention was the lack of nexus between the disallowed expenses and the exempt income. The Tribunal examined the expenses incurred by the assessee, which were specific in nature and not directly related to earning exempt income. The assessee had already disallowed a reasonable sum of ?33,315 in its computation. The Tribunal referred to a previous case involving the same assessee where a similar issue was decided in favor of the assessee, emphasizing the need for a direct link between expenses and exempt income.

Furthermore, the Tribunal noted that none of the expenses incurred had a direct nexus with the exempt income; instead, they were related to business income. The Tribunal found the assessee's initial disallowance of ?33,815 reasonable and in line with the facts presented. Citing the precedent set in the assessee's previous case for AY 2011-12, the Tribunal ruled in favor of the assessee and deleted the disallowance. The Tribunal emphasized that the computation under Rule 8D is not mandatory in cases where expenses do not have a clear connection to exempt income.

In conclusion, the Tribunal allowed the appeal of the assessee, stating that the disallowance of expenses under section 14A of the Act was unwarranted due to the lack of a direct link between the expenses and the exempt income. The decision was based on the specific nature of the expenses incurred and the absence of a clear correlation with the exempt income, as established in the assessee's own case for a previous assessment year.