ITAT Delhi Bench allows appeals, deletes adhoc disallowance on tax-free income

The ITAT Delhi Bench allowed the appeals for A.Y. 2006-07 and 2007-08, deleting the adhoc disallowance under section 14A on tax-free interest and dividend income. The disallowance was deemed unjustified as no actual expenditure was incurred for earning interest on tax-free bonds, and Rule 8D was found not applicable for those assessment years. The disallowance was deleted due to the absence of indirect expenses and the investments being from the assessee's own funds. The decision was based on precedents and the nature of the income.

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Issues involved: Appeal against CIT(A)'s order for A.Y. 2006-07 & 2007-08 regarding adhoc disallowance u/s 14A on tax-free interest income earned from various sources.

A.Y. 2006-07:
1. The CIT(A) made an adhoc disallowance of Rs. 2,68,550 on presumptions and assumptions out of tax-free interest income without considering actual expenditure incurred by the assessee.
2. CIT(A) erred in directing re-computation under rule 8D despite it not being applicable for the assessment year.
3. Addition for presumed expenditure on earning interest & dividend income deemed vague and defective.
4. Lack of documentary evidence for incurring the above addition.

A.Y. 2007-08:
1. Adhoc disallowance of Rs. 3,73,824 u/s 14A on tax-free interest & dividend income without considering actual expenditure.
2. CIT(A) erred in confirming disallowance under rule 8D not applicable for the assessment year.
3. Addition for presumed expenditure on earning interest & dividend income deemed vague and defective.
4. Lack of documentary evidence for incurring the above addition.

The ITAT Delhi Bench considered the assessee's appeals, noting similar disallowances made in the husband's case. Referring to the decision in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT, the ITAT Delhi Bench 'F' deleted the addition based on lack of actual expenditure incurred for earning interest on tax-free bonds. The Tribunal observed that no actual interest was received, only accrued, hence no expenditure was incurred. The decision of the Special Bench in Daga Capital Management (P) Ltd. was also discussed, noting that Rule 8D is applicable only from AY 2008-09. As the investments were from the assessee's own funds and the income was recurring, the disallowance u/s 14A was deemed unjustified and deleted.

In conclusion, both appeals were allowed, and the disallowance of expenditure was deleted based on the absence of indirect expenses and the nature of the investments being from the assessee's own funds. The order was pronounced on 31-3-2011.

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