TaxTMI 
TaxTMI 
2012 (12) TMI 409
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....under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. 2. The learned CIT(A) has erred in not appreciating the fact that the AO applied the provisions of rule 8D of the Income Tax Rules, 1962 without giving any finding on why he was not satisfied with the appellant's books of accounts and submissions that he did not incur any expenditure for earning the exempt income. 3. During the year the assessee has earned dividend of Rs. 30,43,306 from mutual funds and Rs. 6,71,468/- from shares besides interest on RBI tax free bonds of Rs. 13,73,750/- which are exempt income. The assessing officer disallowed a sum of Rs. 2,26,581/- under section 14 A by applying rule 8D of Income Tax Rules by fol....
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....ome Tax Act. He has further submitted that the assessee is maintaining separate books of account for the purpose of profession and no expenditure, which is personal in nature, has been shown in the books of account maintained for business or profession of the assessee. Since the investments in mutual funds are made by the assessee in his personal capacity and out of his own capital funds, no disallowance is called for under section 14 A on account of earning of dividend income on such investment. In support of his contention, he has relied upon the decision of Co-ordinate Bench of this Tribunal dated 11th Jan 2011 in case of Pawan Kumar Parameshwarlal v. ACIT [ITA No. 530/Mum/2009] as well as in case of Auchtel Products Ltd v. Asstt. CIT 52....
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.... Ltd. [2010] 326 ITR 1 that for attracting the provisions of section 14A, there should be proximate cause for disallowance which as relationship with the tax exempt income. 5.1 The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it was for the assessing officer to determine as to whether the assessee had incurred any expenditure in relation to income which did not form part of....
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.... relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such instance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. 5.3 In the case of Pawan Kumar Parameshwarlal supra this tribunal has considered and decided an identical issue in para 4 as under: "4. After hearing the assessee in person and arguments of the learned D.R. we are of the opinion that....
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.... 5.4 Similarly in case of Auchtel Products Ltd (supra), it was held by this Tribunal in para 15 has under: "15. A bare perusal of the above provisions indicates that the AO shall determine the amount disallowable as per Rule 8D, if he, "is not satisfied with the correctness of the claim of the assessee" in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee's claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee's claim of having incurred no expenditure or....