Tribunal limits disallowance to 5% for dividend income expenses under section 14A

The Tribunal partially allowed the appeal, directing the Assessing Officer to re-examine the disallowance under section 14A after verifying the claim of the assessee regarding the absence of expenses for earning dividend income. The estimated disallowance of expenses was justified but restricted to 5% of total expenses.

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Issues involved: Disallowance of expenses on estimate basis and disallowance u/s 14A of the Income Tax Act.

Dispute relating to estimated disallowance of expenses: The AO disallowed a sum of Rs. 70,000 on estimate basis from the claimed Miscellaneous Expenses, Entertainment Expenses, Motor Car Expenses, and Conveyance Expenses. The CIT(A) confirmed the disallowance to the extent of Rs. 50,000. The Tribunal held that the estimated disallowance of expenditure was justified, but restricted it to 5% of total expenses.

Dispute regarding disallowance u/s 14A: The AO made a disallowance of Rs. 1,91,153 u/s 14A as per Rule 8D, applicable from assessment year 2008-09, in respect of exempt dividend income. The CIT(A) upheld the disallowance, citing the applicability of Rule 8D from the said assessment year. The Tribunal set aside the CIT(A)'s order, stating that the AO must verify the claim of the assessee regarding the absence of expenses for earning dividend income and give a clear finding on the same.

Conclusion: The Tribunal partly allowed the appeal of the assessee, directing the AO to re-examine the issue of disallowance u/s 14A after verifying the claim of the assessee regarding the absence of expenses for earning dividend income.

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