2014 (7) TMI 215 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D of the Act - Trading in shares Shares treated as stock in trade Held that - The assessee is having income from sale of shares, interest accrued from saving bonds and other interests, which are on account of finance business - the disallowance u/s 14A only pertains to the administrative expenses which have been disallowed by the AO after applying the provisions of rule 8D and the same has been confirmed by the Commissioner (Appeals) - most of the expenditures are directly related to the assessee s business - the AO without examining the nature of the expenses debited in the accounts of the assessee, has proceeded to apply the provisions of rule 8D - The provisions of rule 8D can only be triggered for the purpose of disallowance, when the AO is not satisfied having regard to the accounts of the assessee the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income thus, the matter is to be remitted back to the AO and directed to examine the nature of expenditure debited in the accounts, whether they are in any way attributable to the earning of exempt income or not Decided in favour of Assessee.

Summary

Issues:
Challenge to order disallowing expenditure under section 14A r/w rule 8D for assessment year 2009-10.

Analysis:
The appeal was filed challenging the order disallowing expenditure under section 14A r/w rule 8D for the assessment year 2009-10. The assessee, an individual with income from various sources, received exempt income during the year. The Assessing Officer disallowed a specific amount as expenditure related to earning exempt income. The assessee contended that there was no direct relationship between the expenditure claimed and the investments generating tax-free income. The Commissioner (Appeals) partially allowed the appeal, accepting the assessee's explanation regarding interest disallowance but upholding the disallowance of administrative expenses under rule 8D.

The assessee argued that no expenditure was incurred for earning the tax-free income and that the conditions of section 14A(2) and 14A(3) were not met. The Departmental Representative supported the Commissioner (Appeals)'s decision to apply rule 8D due to the Assessing Officer's dissatisfaction with the assessee's claim.

The Tribunal noted that the exempt income was mainly from interest on tax-free bonds, LIC maturity proceeds, and dividends. It observed that most expenditures were directly related to the assessee's business activities. However, it found that the Assessing Officer did not properly examine the nature of expenses before applying rule 8D. Therefore, the Tribunal set aside the Commissioner (Appeals)'s order and directed the Assessing Officer to re-examine the nature of expenditures debited in the accounts to determine their relation to earning exempt income. The assessee was instructed to provide explanations, and the Assessing Officer was tasked with deciding the disallowance issue in compliance with the law.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes, emphasizing the need for a thorough examination of expenditures before applying rule 8D for disallowance under section 14A.