2012 (3) TMI 509 - AT - Income Tax

Tribunal limits disallowance under Income Tax Act, stresses expenses must directly relate to income

The Tribunal partially allowed the appeal filed by the assessee regarding disallowance under Section 14A of the Income Tax Act. The Tribunal found that ... Disallowance u/s. 14A - Held that:- As seen from the details of the P&L account filed by assessee receipts were to the tune of ₹ 1.79 crores whereas the expenditure was only ₹ 13.69 lakhs, out of which ₹ 10 lakhs was donation. Out of the balance expenditure, the professional fees were to comply with certification charges and ROC matters and only an amount of ₹ 2.75 lakhs was paid for due diligence which has no relation to earning of exempt income. Only an amount of ₹ 55,183/-was paid as bank charges for clearance of various cheques in business activity. AO simply invoked Rule 8D disallowing the amount u/s. 14A without examining whether there is any nexus with the amount claimed as exempt income. Moreover, the disallowance made is more than the expenditure claimed in the P&L account. Therefore, we are unable to uphold the orders of AO and Ld. CIT(A) on this issue. Considering that an amount of ₹ 77,63,301/- was earned by way of dividend, a token amount of ₹ 5,000/- was only considered as expenditure incurred towards earning exempt income, out of the total claim of expenditure in the P&L account. Accordingly, disallowance is restricted to an amount of ₹ 5,000/-. The AO is directed to allow the balance expenditure as claimed. The grounds raised by the assessee are accordingly, partly allowed. Issues: Disallowance under Section 14AIssue Analysis:The issue in the assessee's appeal pertains to the disallowance under Section 14A of the Income Tax Act. The Assessing Officer made a disallowance of Rs. 6,36,513 invoking Rule 8D due to certain investments made by the assessee. The Ld. CIT(A) confirmed the disallowance based on the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT, stating that even for earlier years, the AO has the authority to determine and disallow expenditure having a proximate nexus with exempt income, despite Rule 8D not being applicable. The Ld. Counsel argued that the company had minimal expenditure apart from specific items like donations and professional fees, which were not related to earning exempt income. The Counsel relied on a Co-ordinate Bench's order to support the argument that disallowance under Section 14A was not justified. The Ld. Departmental Representative supported the AO and Ld. CIT(A)'s orders.The Tribunal analyzed the details of the Profit & Loss account submitted by the assessee, noting that the expenditure was significantly lower than the receipts, with a substantial portion being donations. The professional fees paid were for compliance and due diligence, not for earning exempt income. The Tribunal found that the disallowance made by the AO under Rule 8D was unjustified as it exceeded the actual expenditure claimed. Considering the dividend income earned and the lack of nexus between most expenses and exempt income, the Tribunal restricted the disallowance to a nominal amount of Rs. 5,000. The AO was directed to allow the remaining claimed expenditure. Consequently, the Tribunal partly allowed the appeal filed by the assessee.In conclusion, the Tribunal's decision focused on the justification and calculation of the disallowance under Section 14A, emphasizing the need for a direct nexus between expenses and exempt income to warrant such disallowance. The judgment highlighted the importance of assessing the actual relationship between expenses and income to prevent arbitrary disallowances, ultimately leading to a partial allowance of the appeal.