By Jagdish D. Shah, Jagdish T. Punjabi Charted Accountants
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Section 14A and Rule 8D – Application of the Rule is not automatic. Disallowance cannot exceed the expenditure claimed and if no expenditure is claimed by the assessee then disallowance cannot be made
Facts:
During the assessment proceedings, the AO noted that the assessee had earned exempt income and the audit report did not show disallowance of any expenses relating to exempt income. According to the assessee, the investment transaction undertaken by him were managed by the investment advisors whose fees amounting to Rs. 5.64 lakh had been debited to the capital account of the assessee. Plus, demat expenses and security transaction tax amounting to Rs. 2.2 lakh was also debited to the capital account of the assessee. However, the AO held that looking into the fact that partof the expenses on account of salary, telephone and other administrative expenses must have been related to the activities for earning exempt income, he disallowed the sum of Rs. 16.36 lakh, being 0.5% of average investment of Rs. 32.72 crore.
On perusal of Profit and Loss Account of the assessee the CIT(A) noted that the assessee had not made any claim of expenditure incurred in relation to exempt income, therefore according to him, the provisions of section 14A (1) r.w.s.14A(2) were not attracted. Therefore, relying on the cases of Walfort Shares & Stock Brokers Pvt. Ltd.(326 ITR 1) and Godrej & Boyce Manufacturing Co. Ltd (328 ITR 81) he deleted the disallowance of Rs.16.36 lakh made by the AO.
Held:
The tribunal noted that as per the audit report filed by the assessee, expenses in respect of exempt income was Rs. Nil and the assessee had debited all expenses relating to exempt income in the capital account. The AO had merely presumed that the assessee must have incurred someexpenditure under the heads salary, telephone and other administrative charges for earning theexempt income. Further, it was noted that that the total expenditure claimed by the assessee for the year was about Rs. 13 lakh and the AO had made a disallowance of about Rs.16 lakh. According to it, the AO had just adopted the formula of estimating expenditure on the basis of investments. But, the justification for calculating the disallowance was missing. The onus was on the AO to prove that out of the expenditure incurred under various heads part related to earning of exempt income. Not only thatthe AO was required to give the basis of calculation. In any manner disallowance of Rs.16.36 lakh, as against the total expenditure of Rs.13 lakh claimed by the assessee was not justified. Provisions of Rule 8D cannot and should not be applied in a mechanical way. Facts of the case have to be analysed before invoking them. Accordingly, the appeal filed by the AO was dismissed and the order of the CIT(A) was confirmed.
