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2015 (8) TMI 211 - AT - Income TaxDisallowance as per section 14A r.w.Rule 8D(2)(iii) - Disallowance of administrative expenses - the entire administrative expenses was incured by the assessee for the purpose of investment in shares - Held that - The Assessing Officer while making the disallowance u/s 14A worked out the disallowance under Rule 8D(2)(iii) at ₹ 20,86,230/- which shows that the working under the provisions of Rule 8D negates the actual total expenditure debited by the assessee in the P&L account on administrative and other expenses. In any case, disallowance cannot be made more than the total expenses debited to the P&L Account. From the details of the expenses, it is clear that most of the expenses are specific in nature and exclusively incurred for the business activity of the assessee. Therefore, the expenses on account of auditor fee, legal and professional fees, profession tax, business support fees cannot be said to have any direct or proximate nexus with the activity of investment or earning the exempt income. Thus the disallowance u/s 14A can be made only to the extent of allocation of these expenses which has direct or proximate nexus with earning of exempt income. From the details of the expenses, we find that the prining and stationary expenses and bank charges & commision are only two items which could have direct or proximate nexus with the investment and exempt income. Therefore, the disallwoance u/s 14A r.w. Rule 8D(2)(iii) cannot exceed to the allocable expenses incurred by the assessee for a composite activity resulting taxable and exempt income. The working of disallowance under Rule 8D(2)(iii) by the Assessing Officer clearly shows that it exceeds not only the expenses debited and claimed by the assessee which could have a proximate nexus with the earning of exempt income but also to the total expenditure debited by the assessee in the P&L account under the head administrative and other expenses. Therefore, it turns out to be contradictory to the actual facts and gives absured results in complete disregard to the scheme of disallowance u/s 14A. Accordingly, we delete the disallowance made by the Assessing Officer. - Decided in favour of assessee.
Issues: Disallowance of administrative expenses under section 14A r.w.Rule 8D(2)(iii) for A.Y. 2010-11
Analysis: 1. The Assessing Officer disallowed administrative expenses of &8377; 6,94,167 out of &8377; 7,70,905 made by the Assessing Officer on investment in shares, claiming the entire administrative expenses were incurred by the assessee for the purpose of investment in shares. 2. The assessee submitted explanations regarding the disallowance as per section 14A r.w.Rule 8D(2)(iii), stating that the expenses should be restricted only to the actual expenses debited to the P&L Account. However, the Assessing Officer did not accept the contentions and made a disallowance as per Rule 8D(2)(iii) amounting to &8377; 20,86,230. 3. The CIT(A) upheld the action of the Assessing Officer, leading to the assessee challenging the decision before the ITAT Mumbai. 4. The ITAT Mumbai considered the contentions of both parties and analyzed the details of the expenses debited to the P&L account. Most expenses were specific and exclusively incurred for the business activity, with only printing and stationary expenses and bank charges having a direct or proximate nexus with the investment and exempt income. 5. The ITAT Mumbai found that the disallowance under Rule 8D(2)(iii) exceeded not only the expenses claimed by the assessee but also the total expenditure debited in the P&L account. This was deemed contradictory to the actual facts and unrealistic, leading to the conclusion that Rule 8D(2)(iii) cannot be applied in this case. 6. Consequently, in the absence of any specific expenses debited to the P&L account with a direct nexus to earning dividend income, the ITAT Mumbai deemed the suo motu disallowance made by the assessee as just and proper, and thus deleted the disallowance made by the Assessing Officer. 7. The appeal of the assessee was allowed by the ITAT Mumbai, pronouncing the order on March 11, 2015.
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