2008 (5) TMI 683

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....ions of section 14A on account of attribution of expenses for earning dividend income which is exempt under section 10(33) of the Act. 3. The assessee carries on business of export and import of iron and steel, their alloys and other allied products and from commission. 4. During the year the assessee earned dividend from mutual fund of Rs. 78,05,351 which was claimed as exempt under section 10(33) of the Act. During the assessment the assessee was asked to explain as to why proportionate expenses for earning exempt income should not be disallowed. The assessee submitted that the expenses incurred are neither directly nor indirectly attributable to the earning of dividend income. No effort has been put to earn the dividend income as o....

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....aised from 'Nil' to Rs. 78 lakhs during the year under appeal. The large scale diversified and studied investments made in the mutual funds connote that considerable time, effort, manpower, resources have been applied. The administrative, selling and other expenses increased from Rs. 3.13 crores in the immediately preceding year to Rs. 2.18 crores for the year under appeal. From the above it can be said that expenditure has been incurred for earning such exempt income and hence provision of section 14A was rightly invoked. Incurring of expenditure has to be inferred from the accounts. If no expenses are debited against exempt income, the Assessing Officer is competent to locate the same. He accordingly upheld the disallowance of 5 per cent ....

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....ction 14A is that the expenditure should have been incurred in relation to income which does not form part of the total income. The assessee has all along been claiming that no expenditure is incurred for earning dividend income. The Assessing Officer has not been able to co-relate any expenditure, which was incurred strictly for earning exempt income. In the circumstances, estimation of expenses is not permissible in law. There has to be a direct nexus between incurring of expenses and earning of exempt income so as to disallowd the same as per section 14A of the Act. Similar is the ratio laid down by ITAT in the case of Wimco Seedlings Ltd. (supra). Even in the case of Citicorp. Finance (India) Ltd. (supra) relied upon by the learned DR, ....