3 Section 14A – Business expenditure – Disallowance – Assessing Officer cannot attribute administrative expenses for earning tax free income in excess of total administrative expenditure

The assessee incurred administrative expenses amounting to Rs. 30 lakhs. The Assessing Officer was of the view that the assessee failed to fully disclose the expenditure for earning the exempt income and based on the format provided under rule 8D, made the disallowance to the tune of Rs. 60 lakhs.

The Tribunal noted that the entire administrative expenses of the assessee was Rs. 30 lakhs, out of which, the assessee had offered Rs. 10 lakhs i.e., 1/3rd of the total administrative expenditure for earning income covered u/s. 14A. The Tribunal was of the opinion that even after completing the format, the disallowance cannot exceed the total administrative expenditure incurred by the assessee.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i)    Under no circumstances, can the Assessing Officer attribute administrative expenses for earning tax free income in excess of the total administrative expenditure incurred by the assessee.

ii)    If it is a case where Assessing Officer disputes, question and disallow the very declaration of the assessee regarding total administrative expenditure, the issue can be somewhat different. Nevertheless, when the Assessing Officer has in the present case did not disturb the assessee’s declaration that total administrative expenses incurred by the assessee for all its activities was Rs. 30 lakhs, there was no question of disallowing administrative expenses to the tune of Rs. 60 lakhs u/s. 14A with the aid of rule 8D.”