2014 (1) TMI 1134 - AT - Income Tax

Disallowance u/s 14A - Held that - As per sub-section (2) of section 14A - The Assessing Officer has to determine the amount of expenditure incurred in relation to such exempt income, if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure relating to exempt income - In the case of assessee no such exercise has been done by the Assessing Officer - No borrowed funds have been utilized for the investment purposes - Regarding the administrative expenditure, no satisfaction about the correctness of the assessee s claim has been looked into - The disallowance on account of administrative expenditure is too excess than the expenditure claimed in the Profit & Loss account and without rebutting the correctness of the assessee s claim - The order passed by the learned Commissioner (Appeals) is set aside - Decided in favour of assessee.

Summary

Issues:
Challenging disallowance of expenses under section 14A of the Income Tax Act, 1961 for the assessment year 2007-08.

Analysis:
1. The appellant contested the disallowance of expenses amounting to Rs. 7,99,580 under section 14A. The grounds raised included errors in facts and law regarding the disallowance calculation and the lack of proper consideration by the authorities. The appellant argued that the expenses were not related to exempt income and were essential for the business operations.

2. The Assessing Officer disallowed a total of Rs. 10,77,677, including expenses directly attributable to exempt income and a calculated amount based on the average value of investments. The Commissioner (Appeals) upheld part of the disallowance but removed the interest component. The appellant's argument was supported by references to relevant case law and the necessity of the expenses for the business.

3. The Tribunal analyzed the disallowance in detail, noting that the interest disallowance was resolved and certain expenses were already self-disallowed by the appellant. The Tribunal found that the disallowance of Rs. 7,99,580 was excessive compared to the actual expenditure claimed in the Profit & Loss account. It emphasized that the disallowance should only relate to income not forming part of the total income, and the Assessing Officer had not properly examined the expenditure in relation to exempt income. Therefore, the Tribunal allowed the appellant's appeal, setting aside the Commissioner (Appeals) order.

4. The Tribunal's decision highlighted the importance of correctly determining the expenditure related to exempt income under section 14A. It emphasized the necessity of a thorough examination of the expenses claimed by the assessee and the requirement to rebut the correctness of the claim before making any disallowances. The Tribunal concluded that the disallowance made by the appellant at Rs. 46,309 was appropriate, and the excessive disallowance of Rs. 7,99,580 was unwarranted.

5. Ultimately, the Tribunal allowed the appellant's appeal, overturning the previous decisions and emphasizing the need for a proper examination of expenses related to exempt income under section 14A. The judgment was pronounced in the open court on 6th December 2013.