2012 (9) TMI 153 - AT - Income Tax

Dis-allowance u/s 14A of ad-hoc expenditure assumed for earning exempt dividend and interest income from shares and mutual funds & RBI tax free bonds - assessee contended that there is no provision under the law for such dis-allowance on an estimate and arbitrary basis for the AY 2007-08 - Held that - It is observed that out of total income of Rs 29,75,609/-, a sum of Rs.21,66,023/- related to income from old investments and income from new investments is only to the tune of Rs.8,09,586/- and that too as dividend from mutual funds for which assessee need not to incur any expenses. Therefore, the disallowance @ 0.5% of total of average investment as per Rule 8D is not justified as a very small amount of new investment has been made during the year. Moreover, Rule 8D is not applicable for the year under consideration and assessee has not incurred any interest expenditure for earning of the exempt income. Hence, no disallowance of expenditure u/s 14A can be made in the present case - Decided in favor of assessee.

Summary

Issues:
1. Disallowance of expenditure under section 14A of the Income Tax Act, 1961 for earning exempt income.
2. Applicability of Rule 8D for assessment year 2007-08.
3. Justification of disallowance of Rs.300,000 on an ad hoc basis.

Analysis:
Issue 1: Disallowance of expenditure under section 14A:
The appellant contested the disallowance of Rs.3,17,978 under section 14A by the Assessing Officer, arguing that no expenses were incurred for earning exempted income. The appellant emphasized that no disallowance should be made under section 14A as there is no provision for such disallowance on an arbitrary basis for the relevant assessment year. The Ld AR submitted that since no expenses were incurred for earning the exempted income, disallowance under section 14A should not apply. However, the Assessing Officer disagreed and disallowed the amount based on Rule 8D of the IT Rules.

Issue 2: Applicability of Rule 8D for assessment year 2007-08:
The appellant challenged the applicability of Rule 8D for the assessment year 2007-08, contending that the rule was introduced from the assessment year 2008-09 onwards. The appellant argued that since the investments were personal and not business investments, and no expenditure was debited in the books, the Assessing Officer could not disallow any expenditure. The Ld CIT(A) upheld the decision, stating that while Rule 8D was not applicable for prior years, the Assessing Officer must determine the expenditure related to income not forming part of the total income.

Issue 3: Justification of ad hoc disallowance of Rs.300,000:
The appellant further contested the ad hoc disallowance of Rs.300,000 made by the Ld CIT(A), arguing that it was unjustified, vague, and lacked documentary evidence. The appellant emphasized that investments in shares, mutual funds, and tax-free bonds were made from personal funds without any borrowed funds, and previous judgments in similar cases favored the appellant's position. The Tribunal, after considering the submissions and evidence, ruled in favor of the appellant, stating that no disallowance under section 14A could be made in the present case, citing previous decisions in the appellant's and his wife's cases.

In conclusion, the Tribunal allowed the appeal, emphasizing that no disallowance of expenditure under section 14A could be justified based on the facts and legal precedents presented in the case.