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2014 (12) TMI 207 - AT - Income TaxQuantification of the disallowance u/s. 14A(1) Exclusion of certain expenditure - assessee is a non-banking financial company (NBFC) - Held that - The method followed by the assessee, which gets in fact validated by its adoption by the A.O., has a strong rationale to it - the assessee s explanation and method of apportionment is to that extent arbitrary and de hors its accounts - a proximate cause, i.e., with the tax exempt income - which does not fall under any head of income, which is required to satisfy the test of in relation to , specified in section 14A(1), including both direct and indirect expenditure, is eminently satisfied - the expenses falling for allowance under any provision, i.e., from sections 15 to 59, would qualify for disallowance u/s.14A, which is a separate and complete code in itself - an identity or unity, i.e., in principle, between the working of the assessee and the A.O., so that what remains is to eliminate the errors inflicting their respective workings, doing which would lead to the same result. In the absence of any factual basis to the assessee s claim, the same, it was explained, would not even qualify to be one - The matter is factual, so that where, the initial onus has not been discharged by the assessee, the disallowance u/s. 14A(1) cannot be impugned for non-compliance of the procedure laid down u/s. 14A(2) relying upon GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - the disallowance u/s.14A(1) is upheld.
Issues Involved:
1. Quantification of the disallowance under Section 14A(1) of the Income Tax Act, 1961. Detailed Analysis: 1. Quantification of the Disallowance under Section 14A(1): This appeal by the Assessee challenges the order by the Commissioner of Income Tax (Appeals)-18, Mumbai, which dismissed the assessee's appeal regarding its assessment under Section 143(3) read with Section 254 of the Income Tax Act, 1961, for the assessment year 2005-06. The sole issue in this appeal is the quantification of the disallowance under Section 14A(1). The Revenue estimated the disallowance at Rs. 2,86,95,583, whereas the assessee had disallowed Rs. 1,25,48,725 suo motu. The assessee, a non-banking financial company (NBFC), argued that it had identified all expenses bearing on the dividend income and allocated these expenses to the dividend income claimed tax-exempt in the same ratio as the dividend income bore to the assessee's gross income for the year. The Assessing Officer (A.O.), however, allocated the entire expenditure incurred by the assessee in the ratio of the dividend income to the assessee's total income without pointing out any error in the assessee's working. The Tribunal noted that both the assessee and the A.O. adopted a similar method in principle for allocating the operating expenditure toward the income not forming part of the total income. The method adopted by the assessee, which was validated by the A.O., had a strong rationale. The Tribunal observed that the A.O. had committed some mistakes in applying the method, but these errors did not detract from the merit of the method itself. The Tribunal required the assessee to justify the exclusion of some expenditure forming part of its operating expenses. The assessee claimed that certain expenses were incurred solely for taxable incomes and thus were not allocable to the tax-exempt dividend income. However, the Tribunal found this claim to be unsubstantiated and inconsistent with the assessee's accounts and records. The Tribunal concluded that the assessee's explanation and method of apportionment were arbitrary and not based on its accounts. It emphasized that the assessee's claim, made without showing any basis or reason for excluding certain expenses, was not valid in law. The initial onus was on the assessee to justify the exclusion of expenses, and only upon discharge of this onus would the A.O. be required to state the reasons for any dissatisfaction with the assessee's working. The Tribunal upheld the disallowance under Section 14A(1) in principle but directed the A.O. to remove all aberrations in the computation of the disallowance, restricting the expenditure to be appropriated to that claimed by the assessee per its return of income and on the income not forming part of the total income and claimed exempt. In conclusion, the assessee's appeal was disposed of in these terms. Order pronounced in the open court on 1.8.2014.
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