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2013 (6) TMI 545 - AT - Income TaxDisallownace u/s 14A r.w.r. 8D - Held that - From the details of the expenditure, it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. AO has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. When the AO has not pointed out that certain expenditure is not incurred for earning the professional income but are incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such instance of expenditure, finding of AO or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. Thus no disallowance under section 14A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income. AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure in relation to exempted income, the AO has to indicate cogent reasons for the same but from the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at % of the total value. Thus respectively following the case of J. K. Investors (Bombay) Ltd. 2013 (5) TMI 580 - ITAT MUMBAI - appeal of revenue is dismissed.
Issues Involved:
1. Deletion of addition made by AO under section 14A read with Rule 8D(2)(iii) of the I.T. Rules, 1962. Issue-wise Detailed Analysis: 1. Deletion of Addition Made by AO under Section 14A read with Rule 8D(2)(iii) of the I.T. Rules, 1962 The appeal by the revenue challenged the order of CIT(A), who deleted the addition made by the AO under section 14A read with Rule 8D(2)(iii). The primary contention was whether the AO was justified in making the disallowance of Rs.32,43,231/- for expenses related to exempt dividend income. Assessment Proceedings: During the assessment proceedings, the AO noted that the assessee earned dividend income of Rs.32,43,231/- and claimed it as exempt under section 10(34) of the Act. The AO required the assessee to provide details of expenses incurred to earn this income. The assessee responded that no expenditure was incurred, as no new investments were made, no interest was paid, and no loans were taken for these investments. Despite this, the AO applied Rule 8D and computed a disallowance of Rs.32,43,231/-. CIT(A) Decision: The CIT(A) deleted the disallowance, noting that the AO had already disallowed 100% of the expenses claimed by the assessee under "Income from Other Sources." The CIT(A) found that the AO mechanically applied Rule 8D without appreciating that the entire expenses claimed were already disallowed. Therefore, the CIT(A) directed the deletion of the disallowance made under section 14A. Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not provide any evidence of expenditure incurred towards earning the dividend income. The Tribunal referenced several judicial precedents, including the Mumbai Tribunal's decision in J.K. Investors (Bombay) Ltd. and the Delhi High Court's decision in Maxopp Investment Ltd. These cases highlighted that the AO must be satisfied with the correctness of the assessee's claim before invoking Rule 8D. The AO must record reasons for not being satisfied with the assessee's claim, which was not done in this case. Judicial Precedents: The Tribunal cited various judgments to support its decision: - Godrej & Boyce Mfg. Co. Ltd. vs. DCIT: The Bombay High Court held that the AO must be satisfied with the correctness of the assessee's claim before applying Rule 8D. - Maxopp Investment Ltd. vs. CIT: The Delhi High Court emphasized that the AO must record dissatisfaction with the assessee's claim before determining the expenditure under Rule 8D. - CIT vs. Hero Cycles Ltd: The Punjab & Haryana High Court ruled that disallowance under section 14A is not sustainable if no expenditure is incurred for earning exempt income. - Justice Sam P Bharucha vs. Addl. CIT: The Tribunal held that no disallowance under section 14A is called for if the assessee has not incurred any expenditure for earning exempt income. Conclusion: The Tribunal concluded that the AO did not examine the assessee's accounts or provide reasons for not being satisfied with the assessee's claim. The AO directly applied Rule 8D without fulfilling the prerequisite conditions. Hence, the CIT(A)'s order to delete the disallowance was upheld, and the revenue's appeal was dismissed. Final Order: The appeal of the revenue was dismissed, and the order was pronounced in open court.
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