Exempt income – Disallowance u/s 14A – Disallowance of expenditure incurred to earn exempt income – No evidence of such expenditure – Failure by A.O. to record dissatisfaction – No disallowance could be made u/s 14A

Exempt income – Disallowance u/s 14A – Disallowance of expenditure incurred to earn exempt income – No evidence of such expenditure – Failure by A.O. to record dissatisfaction – No disallowance could be made u/s 14A

The assessee was engaged in the business of real estate development. For the A.Y. 2009-10 the A.O. made a disallowance u/s 14A.

The Commissioner (Appeals) sustained the disallowance of the interest disallowed u/s 14A read with Rule 8D of the Income-tax Rules, 1962, to the extent of Rs. 1,09,99,962 u/s 14A read with Rule 8D(2)(iii) and deleted the disallowance of interest u/s 14A read with Rule 8D(2)(ii) to the extent of Rs. 15,27,310. The Tribunal, inter alia, held that there was no material on record to substantiate that overdraft account was utilised for making tax-free investments and the investment proceeds were from the public issue of shares. Therefore, it could not be held that funds from the overdraft account from which interest had been paid had been invested in mutual funds which yielded income exempt from tax. Thus, deletion of disallowance u/s 14A read with Rule 8D(2)(ii) to the tune of Rs. 15,27,310 was upheld.

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

‘i) The A.O. had not rendered any finding with regard to the incorrectness of the claim of the assessee either with regard to its accounts or that he was not satisfied with the claim of the assessee in respect of such expenditure in relation to exempt income as is required in accordance with section 14A(2) for making a disallowance under Rule 8D.

ii) Thus, the Tribunal had rightly concluded that the A.O. had not recorded the satisfaction with regard to the claim of the assessee for disallowance u/s 14A read with Rule 8D(2). Section 14A was not applicable.’