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2019 (9) TMI 255 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - no expenditure incurred to earn the dividend income - reasonable nexus between the expenditure disallowed and the dividend income received - HELD THAT - Assessee has not at all incurred any expenditure to earn the dividend income and this being the factual position and not having been rebutted by the AO in any manner, the provisions of S.14A could not have been invoked. The disallowance was made by the AO by invoking provisions of S.14 A r/w Rule 8D of the Rules by alleging that the part of expenditure claimed by the assessee has been incurred for earning of tax-free income though the assessee had not incurred any expenses to earn tax free income. AO before making said addition has simply referred to the relevant provisions and judgment of Hon'ble Supreme Court in the case of CIT vs United General Trust Ltd. 1993 (2) TMI 96 - SC ORDER which cannot be applied to the instant case as the facts of the present case are totally different from the above case. No merit in the disallowance so made U/s 14A - decided in favour of assessee
Issues:
Disallowance of expenses under Section 14A of the Income Tax Act, 1961. Analysis: 1. The appeal was filed against the disallowance of expenses amounting to ?4,58,956 under Section 14A of the Act. The Assessing Officer (AO) noted that the assessee had made investments and earned exempt income. However, it was found that the AO did not have sufficient grounds to invoke the provisions of Section 14A as there was no evidence of expenditure incurred to earn the exempt income. 2. The AO's decision was challenged before the ITAT. The ITAT observed that the AO did not establish any nexus between the disallowed expenditure and the exempt income earned by the assessee. The ITAT referred to the legal requirement that the AO must be satisfied with the correctness of the claim of the assessee regarding the expenditure incurred in relation to exempt income before making any disallowance under Section 14A. 3. The ITAT also cited the case of Godrej & Boyce Manufacturing Company Ltd. vs. DCIT, where it was emphasized that the AO must have a valid reason and satisfaction based on the accounts of the assessee to disallow expenses under Section 14A. The ITAT further highlighted that the provisions of Section 14A cannot be invoked in a mechanical manner without proper justification. 4. Referring to similar cases such as M/s Ruby Merry Enterprises (P) Ltd. and DCIT vs. M/s. A.U. Financiers (India) Ltd., the ITAT reiterated that the AO must determine the expenditure incurred in relation to exempt income as per Rule 8D of the IT Rules. In the absence of proper satisfaction by the AO regarding the correctness of the claim of the assessee, the disallowance under Section 14A cannot be upheld. 5. Ultimately, the ITAT concluded that there was no merit in the disallowance made under Section 14A in the instant case. Consequently, the ITAT directed the AO to delete the disallowance, and the appeal of the assessee was allowed. In summary, the ITAT ruled in favor of the assessee, emphasizing the importance of establishing a valid link between the disallowed expenditure and the exempt income earned before invoking Section 14A of the Income Tax Act. The judgment highlighted the necessity for the AO to be satisfied with the correctness of the claim of the assessee regarding the expenditure incurred in relation to exempt income, as per Rule 8D of the IT Rules, to justify any disallowance.
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