TaxTMI 
TaxTMI 
2026 (6) TMI 228
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....sment Year 2014-15. 2. The sole grievance raised by the assessee in the present appeal relates to the disallowance of Rs.6,23,736 made under section 14A read with Rule 8D of the Income Tax Rules, 1962 and sustained by the learned CIT(A). 3. Briefly stated, the facts borne out from the assessment records are that the assessee is an individual engaged in business activities through two proprietary concerns, namely M/s. Chic Baby and M/s. Duru Realty. The return of income was originally filed on 29.07.2014 declaring total income of Rs.4,90,000. Subsequently, a revised return was filed declaring income of Rs.54,55,448. During the course of scrutiny assessment proceedings, the Assessing Officer observed that the assessee had earned exempt ....
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....he very foundation for invoking section 14A was absent. 5. The assessee had further submitted that the investments generating exempt income were old investments carried forward from earlier years and no fresh investment activity involving deployment of borrowed funds had been undertaken during the relevant previous year. It was also contended that the Assessing Officer had mechanically invoked Rule 8D without recording the mandatory satisfaction contemplated under section 14A(2) and without demonstrating any nexus between the alleged expenditure and the exempt income earned by the assessee. However, the learned CIT(A) was not convinced with the submissions advanced on behalf of the assessee and confirmed the disallowance made by the Asse....
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....ing been incurred in relation to earning exempt income. 9. A careful perusal of the material available on record reveals that the assessee has earned exempt income by way of dividend income of Rs.1,85,455 and long-term capital gains of Rs.6,86,351. However, the crucial fact emerging from the records is that the assessee has consistently maintained that no expenditure relatable to such exempt income has been claimed as a deduction. In respect of M/s. Chic Baby, income has been offered under the presumptive taxation scheme prescribed under section 44AD. Once income is computed under section 44AD, the statute itself deems all allowable business expenditures to have been considered while arriving at the presumptive income and no separate cla....
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....re incurred and claimed by the assessee, is first satisfied. 12. In the present case, neither the assessment order nor the appellate order identifies any specific expenditure claimed by the assessee which can be said to have been incurred for earning the exempt income. The entire disallowance has been made merely on the assumption that because the assessee held investments and earned exempt income, some expenditure must necessarily have been incurred. Such an approach, in our considered opinion, is contrary to the scheme of section 14A. The existence of exempt income by itself cannot automatically justify a disallowance unless there is material to establish that expenditure has actually been incurred and claimed in relation thereto. 1....