Section 14A disallowance needs actual exempt-income expenditure; business-linked public sponsorship and obsolete stock write-off may still qualify.

Section 14A disallowance cannot rest on an ad hoc estimate unless actual expenditure incurred in relation to exempt income is shown, so the estimated disallowance was deleted. A sponsorship contribution for construction of a public building was treated as revenue expenditure under section 37(1) because no capital asset was acquired and the outlay was connected with business benefit, so the disallowance was upheld as deleted. Write-off of obsolete meters was not subjected to further estimated salvage disallowance where obsolescence and net realisable value were accepted. The inter-corporate deposit write-off was remanded for fresh factual examination as a possible capital loss.

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Issues: (i) Whether disallowance under section 14A could be sustained on an ad hoc estimate without finding actual expenditure incurred in relation to exempt income; (ii) whether contribution made towards construction of a public building was allowable as business expenditure under section 37(1); (iii) whether write-off of obsolete meters was liable to further disallowance on estimated salvage value; (iv) whether the inter-corporate deposit write-off required examination as capital loss.

Issue (i): Whether disallowance under section 14A could be sustained on an ad hoc estimate without finding actual expenditure incurred in relation to exempt income.

Analysis: The disallowance was made by estimating administrative expenditure at 1.5% of exempt income and by adding interest, without recording any finding of actual expenditure incurred for earning exempt income. The governing principle is that section 14A applies only to expenditure actually incurred in relation to exempt income, and where no such expenditure is shown, no disallowance can be made on conjecture or estimate.

Conclusion: The disallowance under section 14A was rightly deleted and this issue was decided in favour of the assessee.

Issue (ii): Whether contribution made towards construction of a public building was allowable as business expenditure under section 37(1).

Analysis: The payment was made as sponsorship for construction of a public office building, no capital asset was acquired by the assessee, and the expenditure was connected with the business and capable of yielding business benefit. A contribution to a public welfare or public utility fund is allowable where it is directly related to the assessee's business or results in benefit to the business.

Conclusion: The contribution was allowable as revenue expenditure and the deletion of the disallowance was upheld in favour of the assessee.

Issue (iii): Whether write-off of obsolete meters was liable to further disallowance on estimated salvage value.

Analysis: The inventory had been written off after considering obsolescence and net realisable value, the meters had become outdated due to technological change, and the disallowance was made only on a presumption that some salvage value might remain. A further disallowance cannot rest on mere estimate when the factual basis of obsolescence and net realisable value is not controverted.

Conclusion: The deletion of the disallowance on obsolete meters was upheld and this issue was decided in favour of the assessee.

Issue (iv): Whether the inter-corporate deposit write-off required examination as capital loss.

Analysis: The assessee had not raised the capital-loss claim before the lower authorities and sought to press it for the first time in appeal. In the interests of fairness, the matter required factual examination by the Assessing Officer to determine allowability in accordance with law.

Conclusion: The issue was remanded to the Assessing Officer for fresh examination and was allowed for statistical purposes.

Final Conclusion: The assessee succeeded on the disallowance under section 14A, the revenue's challenge to the sponsorship payment and obsolete-meter write-off failed, and the claim relating to the inter-corporate deposit was sent back for reconsideration.

Ratio Decidendi: Disallowance under section 14A must be founded on actual expenditure incurred in relation to exempt income and cannot be sustained on an arbitrary estimate; similarly, a contribution directly connected with business or yielding business benefit may qualify under section 37(1) even if it also serves a public purpose.

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