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2025 (3) TMI 1082 - AT - Income TaxAddition u/s 14A r.w.rule 8D - As argued no expenditure was incurred by the appellant to earning exempt income - HELD THAT -Section 14A is applicable if the assessee has income which is not includible in its total income and further assessee has incurred certain expenditure to earn such income. In the instant case the assessee has not incurred any expenditure which could be related to earning exempt income though it had exempt income. The language of section 14A is not at all ambiguous and in fact very clear and by virtue of the same only expenditure actually incurred in relation to income not includible in total income shall be disallowed. In no way it could be interpreted that it seeks to disallow expenses on assumption basis. Therefore disallowance u/s 14A can be made only when assessee has actually incurred any expenses in relation to such exempt income. The Hon ble Supreme court in the case of Maxopp Investment 2018 (3) TMI 805 - SUPREME COURT also expressed this view. Looking to the fact that assessee has not claimed any expenditure which was incurred in relation to earn exempt income and further before invoking the provision of section 14A along with Rule 8D the AO has failed to record satisfaction with respect to expenses claimed as related to earn exempt income thus in our considered opinion the addition made made by invoking the provisions of section 14A r.w. rule 8D of the IT Rules 1962 is not sustainable. Appeal of the assessee is allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issue in this case revolves around the disallowance made under Section 14A of the Income Tax Act, 1961, concerning the expenditure incurred in relation to earning exempt income. The specific questions considered include:
ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents Section 14A of the Income Tax Act, 1961, disallows deductions of expenditure incurred in relation to income not forming part of the total income. Rule 8D prescribes the method for determining the amount of such expenditure. The Supreme Court in Maxopp Investment Ltd. vs. CIT established that disallowance under Section 14A requires a causal connection between the expenditure and the exempt income. Court's Interpretation and Reasoning The Tribunal emphasized that Section 14A applies only when actual expenditure is incurred in relation to earning exempt income. The provision is not intended to disallow expenses on an assumption basis. The Tribunal referenced the Supreme Court's decision in Maxopp Investment, which clarified that expenditure without a causal connection to exempt income should not be disallowed. Key Evidence and Findings The assessee argued that no interest or other expenses were claimed for earning the exempt income, as the fund manager did not charge any fees. The assessee highlighted that the finance costs included bank charges and interest on TDS and Income Tax, which were already offered for taxation. The AO failed to demonstrate any specific expenditure incurred in relation to the exempt income. Application of Law to Facts The Tribunal found that the AO did not record any satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D. The AO's general observations did not specifically address the facts of the case, as required by Section 14A(2) and Rule 8D(1). The Tribunal noted that the AO must objectively assess the accounts and record dissatisfaction with the assessee's claim before applying Rule 8D. Treatment of Competing Arguments The Tribunal considered the Department's argument that managing a sizable investment portfolio incurs administrative and staff costs. However, it found the Department's position unsubstantiated by specific evidence of incurred expenses related to exempt income. Conclusions The Tribunal concluded that the disallowance under Section 14A was unsustainable due to the lack of evidence of incurred expenses related to exempt income and the failure of the AO to record satisfaction as required by law. SIGNIFICANT HOLDINGS The Tribunal held that:
Based on the above reasoning, the Tribunal directed the deletion of the addition of Rs. 37,98,056/- made by invoking Section 14A read with Rule 8D, and the appeal of the assessee was allowed.
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