2012 (7) TMI 95 - AT - Income Tax

Disallowance made u/s 14A r.w.r.8D - assessee submitted that investments were made out of own funds and no borrowed funds have been utilized and no other expenses were incurred - Held that - The A.O. has not given any clear finding of incurring of expenses, and has not established nexus of expenses incurred with the earning of exempt income - The satisfaction of the A.O. as to the incorrect claim made by the assessee is a pre-condition and a necessity for invoking the applicability of Rule 8D whereas in this case A.O. has directly invoked provision of Rule 8D without rendering any opinion on the correctness or otherwise of the assessee s claim - in favour of assessee. 1/4th ad-hoc disallowance of various expenses holding it to be of personal nature - Held that - The assessee has incurred various expenses as listed in his paper book and suo-moto disallowed expenses from them. The A.O. has in addition to the disallowance made by assessee further disallowed the expenses. The disallowance of expenses by A.O. was adhoc in nature as he has not pointed out the expenses which are of non business in nature - as in the assessee s own case in earlier years ITAT had restricted the disallowance pertaining to motor car and telephone expenses and the assessee has on the same basis suo-moto disallowed the expenses no point of any further disallowance - in favour of assessee.

Summary

Issues:
1. Disallowance of expenses related to exempt income under section 14A/Rule 8D of the Income Tax Act, 1961.
2. Ad-hoc disallowance of various expenses considered to be of personal nature.

Issue 1: Disallowance of expenses related to exempt income under section 14A/Rule 8D:
- The appellant, an individual and professional architect, appealed against the CIT (A)'s order for the assessment year 2008-09.
- The Assessing Officer (A.O.) disallowed Rs.51,272 under section 14A/Rule 8D due to investments in mutual funds, bonds, and shares, resulting in exempt income like dividends and capital gains.
- The A.O. invoked Rule 8D since the assessee did not disallow any part of other expenses and due to the Mumbai High Court's ruling on Rule 8D's applicability from A.Y. 2008-09.
- The CIT (A) upheld the disallowance, leading to the appellant's appeal before the ITAT.
- The ITAT held that the A.O. did not establish the nexus of expenses with earning exempt income, and Rule 8D cannot be invoked without questioning the correctness of the assessee's claim.
- Consequently, the ITAT directed the deletion of the disallowance under section 14A/Rule 8D.

Issue 2: Ad-hoc disallowance of various expenses considered to be of personal nature:
- The A.O. made a 1/4th ad-hoc disallowance of various expenses like telephone, computer, traveling, etc., treating them as personal due to the proximity of the appellant's business premises and residence.
- The CIT (A) partially upheld the disallowance, considering a personal element in some expenses but also noted the appellant's suo moto disallowance of certain expenses.
- The appellant contended that the expenses were already disallowed personally and provided evidence to support the business nature of certain expenses.
- The ITAT found the A.O.'s disallowance ad-hoc, without pinpointing non-business expenses, and directed the deletion of the disallowance.
- The ITAT allowed the appeal, emphasizing the absence of identified non-business expenses and the appellant's proactive disallowance of personal expenses.

This judgment highlights the meticulous analysis by the ITAT regarding the disallowance of expenses related to exempt income and the ad-hoc disallowance of expenses considered personal. The ITAT emphasized the necessity for establishing a clear nexus between expenses and exempt income for invoking Rule 8D and ruled in favor of the appellant due to the lack of such nexus. Additionally, the ITAT scrutinized the ad-hoc disallowance of expenses, noting the appellant's proactive measures and the absence of specific non-business expenses identified by the A.O., leading to the deletion of the disallowance.