2017 (6) TMI 335 - AT - Income Tax

Reworking the disallowance u/s 14A - Held that - Since the investment was made out of surplus funds, no further disallowance is required to be made u/s 14A of the Act as section 14A provides for disallowance of expenditure incurred in relation to income which does not form the part of the total income, meaning thereby, there should be direct nexus between the actual expenditure incurred for the purpose of earning tax free income. No doubt, the word in relation to appears to be broad at firm impression but on deeper examination and read in conjunction with the word incurred it seems that these are restrictive words, restricting the power of Assessing Officer to estimate a part of expenditure, incurred by the assessee, to produce nontaxable income. To elaborate further, the word incurred refers to factual spending of expenditure in relation to exempt income and does not refer to deemed spending or assumed spending for the purpose. While applying the section, there is no authority conferred by the section upon Assessing Officer to deem or assume certain expenditure to have been incurred in relation to tax free income. The proximity cause of disallowance u/s 14A is its relationship with the tax exempt income. Wherever the expenses incurred has no relationship with the income not includible in the total income, there cannot be any occasion to invoke the provision for making the disallowance u/s 14A of the Act. Thus it can be concluded that at best further disallowance of ₹ 28,815/-, as agreed by the assessee, can be made. Thus, this ground of the assessee is partly allowed. Reworking of disallowance towards administrative expenses of ₹ 50,000/-, ad-hoc basis is concerned, during hearing the Ld. counsel for the assessee, claimed that no long term capital gain was earned by the assessee. The Ld. Assessing Officer made disallowance of ₹ 1 lakh on account of salary, printing and stationary, bank charges and general expenses, which were reduced to ₹ 50,000/- by the Ld. Commissioner of Income Tax (Appeal). Considering the totality of facts and the circumstances narrated before us, the disallowance on account of administrative expenses is reduced to ₹ 25,000/- as against ₹ 50,000/-, sustained by the Ld. Commissioner of Income Tax (Appeal), thus, this ground of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Reworking of disallowance towards administrative expenses on an ad-hoc basis.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The assessee contested the disallowance of ?2,71,715/- under Section 14A towards interest expenditure. The assessee argued that sufficient own funds were available for investments, and thus, no disallowance should be made. The assessee also contended that the Commissioner of Income Tax (Appeal) overlooked judicial pronouncements and that the disallowance was based on presumptions. The Revenue defended the disallowance, citing significant investments made by the assessee.

The Tribunal reviewed the legislative history and judicial interpretations of Section 14A. It noted that Section 14A was introduced to prevent deductions for expenditures related to exempt income. The Tribunal emphasized that disallowance under Section 14A requires actual expenditure incurred in relation to exempt income. It also highlighted that the Assessing Officer must record dissatisfaction with the assessee's claim before determining the disallowance amount.

For the assessment year 2006-07, Rule 8D was not applicable. The Tribunal referred to the decision in Godrej & Boyce Mfg. Ltd. vs DCIT and other relevant cases, concluding that the assessee had sufficient own funds, and thus, no mechanical disallowance should be made. The Tribunal reduced the disallowance to ?28,815/- as agreed by the assessee's counsel.

2. Reworking of Disallowance towards Administrative Expenses on an Ad-hoc Basis:
The assessee challenged the reworking of disallowance towards administrative expenses of ?50,000/-, arguing that no long-term capital gain was earned. The Assessing Officer had initially disallowed ?1 lakh on account of various expenses, which was reduced to ?50,000/- by the Commissioner of Income Tax (Appeal).

The Tribunal considered the facts and circumstances and further reduced the disallowance to ?25,000/-, finding the initial reduction insufficient.

Conclusion:
The appeal of the assessee was partly allowed. The disallowance under Section 14A was reduced to ?28,815/-, and the disallowance towards administrative expenses was reduced to ?25,000/-.