· Assessee claimed exempt income to the tune of Rs.1.13 crores and suo-moto disallowed the interest portion of Rs.6.36 lakhs and indirect expenses to the tune of Rs.8.74 lakhs.
· The AO, however, ignoring the explanation of assessee, made a disallowance of Rs.1.78 crores by applying the provisions of Rule 8D, after making adjustment of the suo-moto disallowance made by assessee.
· It was submitted by assessee that assessee had made investments in mutual funds out of excess funds or own surplus funds available.
· Assessee contended that the word ‘incurred’ must be taken literally in the sense that expenditure must have actually taken place. It was further contended that the expression ‘in relation to’ implies that there must be direct and proximate connection with the subject matter.
· Tribunal considered the provisions of section 14A and also considered the law in this regard prior to the insertion of said section in the statute. Tribunal was of the view that unless and until there was actual expenditure for earning exempted income, there could not be any disallowance under section 14A.Further, if no expenditure is incurred in relation to exempt income, no disallowance can be made u/s 14A of the Act.
· Tribunal further observed that the scope of section 14A(2) of the Act is that it provides the manner in which AO is to determine the amount of expenditure incurred in relation to income which does not form part of total income. Tribunal was further of the view that the requirement of AO embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if AO returns a finding that he is not satisfied with the correctness of the claim of assessee in respect of such expenditure. Tribunal further held that sub-section (3) applies to cases where assessee claims that no expenditure has been incurred in relation to income which does not form part of total income.
· Tribunal, thus, concluded that section 14A, even prior to the introduction of sub-sections (2) and (3), would require the AO to first reject the claim of assessee with regard to the extent of such expenditure, and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by AO would arise.Even where assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, AO will have to verify the correctness of such claim.
· Tribunal further concluded that since investment was made out of surplus funds, no further disallowance was required to be made u/s 14A of the Act.
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Further Reading