TaxTMI 
TaxTMI 
2016 (4) TMI 656
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....essee is a director of M/s Tip Top General Agencies Pvt. Ltd. He is also the proprietor of the concern M/s Trimblesh "N" Savas, dealing in trading of earthmovers' tyres. During the year, the assessee's sources of income were salary, short term capital gains, long term capital gains, business & professional income and income from other sources. The assessee also earned exempt income in the form of dividend and long term capital gains. Exempt dividend in personal capacity was Rs. 14,30,530/- and as the proprietor of M/s Trimblesh "N" Savas, it was Rs. 19,87,946/-. Against the total exempt income of Rs. 34,18,476/-, the assessee had shown the expenditure incurred to earn the exempt income at NIL. The assessee was issued a show cause notice pri....
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....Rs. 57,97,639/-. It was also pointed out that the profit/loss account had also been debited with Rs. 1,39,205/- being loss on sale of mutual funds and the same has already been added back by the assessee in the computation of income. It was also pointed out that the profit/loss account also shows in its debit side expenses of Rs. 22,713/- on account of tender fees, Rs. 22,52,929/- on account of difference in exchange rate and Rs. 26,75,000/- on account of compensation for warranty claim. These expenses were purely related to the business income and had no connection with the exempt income. Thus, the balance of other common expenses come to Rs. 6,26,596/- only which includes Rs. 2,86,664 relating to bank charges in respect of tyre business. ....
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....nditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon'ble Supreme Court in case of Commissioner of Income-tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 (SC) that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relationship with the tax exempt income. 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 effect....
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.... it was patently wrong on the part of the Assessing Officer to compute disallowance u/s 14A of the Act by mechanically applying Rule 8D. We find that the audit report on Form 3CB reports that the expenses in respect of exempt income were shown at NIL. The Assessing Officer has presumed that the assessee must have incurred some expenditure for earning the exempt income. The Assessing Officer has adopted the formula for estimating expenditure on the basis of investments but the justification for calculating the disallowance is missing. The assessee had not claimed any expenditure in the profit/loss account, so the onus was on the Assessing Officer to prove that out of the expenditure incurred under various heads, some were related to earning ....
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....enditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Subsection (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure,....