By Jagdish D. Shah, Jagdish T. Punjabi, Chartered Accountants
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12 Indo German International Pvt. Ltd. v. DCIT
ITAT ‘C’ Bench, New Delhi
Before I. P. Bansal (JM) and Deepak R. Shah (AM)
ITA Nos. 4971/Del./2007
A.Y. : 2004-05. Decided on : 9-5-2008
Counsel for assessee/revenue : Ramo Jain/
M. P. Singh
S. 14A of the Income-tax Act, 1961 — Disallowance of
expenditure incurred to earn exempt income — Where no nexus is established
between the expenditure and the income earned, can the expenditure be disallowed
— Held, No.
Per Deepak R. Shah :
Facts :
The assessee was engaged in the business of export and import
of iron, steel and allied products and as commission agent. During the year it
earned dividend income of Rs.78.05 lacs which was claimed as exempt u/s.10(33).
According to the AO, the provisions of S. 14A were applicable and as the
assessee had not furnished any evidence to establish that no expenses had been
incurred in earning the dividend income, it was held that 5% of dividend income
was incurred for earning dividend income.
The CIT(A) on appeal held that the AO had rightly applied the
provisions of S. 14A, as incurring of expenditure had to be inferred from the
accounts. According to it, if no expenses were debited against the exempt
income, the AO was justified in estimating the same.
Before the Tribunal, the Revenue relied on the Mumbai Bench
Tribunal decision in the case of Citicorp Finance (India) Ltd. and contended
that the orders of the lower authorities be upheld.
Held :
According to the Tribunal, the pre-requisite for disallowance
u/s.14A is that the expenditure should have been incurred in relation to exempt
income. In the given case, the assessee had all along claimed that it had not
incurred any expenditure. It further noted that the AO had not been able to
correlate any expenditure, which could be said to have been incurred for earning
exempt income. According to it, the decision in the case of Citicorp Finance
(India) Ltd. relied on by the Revenue was based on the provisions in Ss.(2) and
(3) which were inserted by the Finance Act, 2006 w.e.f. 1-4-2007. According to
it, the insertion of the said provisions was not retrospective in nature. Hence,
the ratio as laid down in the said Tribunal decision cannot be applied to the
case of the assessee. Further, relying on the decision of the Delhi Tribunal in
the case of Wimco Seedling Ltd., the Tribunal allowed the appeal of the assessee.
Cases referred to :
1. ACIT v. Citicorp Finance (India) Ltd., 12 SOT 248 (Mum.)
2. Wimco Seedling Ltd. v. DCIT, 107 TTJ 267 (Del)
Note :
Attention of the readers is drawn to the insertion of Ss.(2)
and (3) to S. 14A by the Finance Act, 2006 w.e.f. 1-4-2007 and the Rule 8D which
prescribes the method in which expenditure incurred to earn exempt income could
be determined.
