INCOME TAX ACT, 1961

--Disallowance under section 14A--Expenditure against exempt income No clear finding given by assessing officer regarding incurring of expenditure--assessing officer observed that assessee had investment in shares from which income being dividends was exempt. assessing officer noted that though the assessee had itself disallowed interest being directly attributable to the investment in shares, but it had not disallowed any expenditure relating to administrative and managerial services and, therefore, he added back an amount being 0.5 per cent of average investment in shares as per provisions of rule 8D. Held: ,/i>Was not justified as from the balance sheet as on 31-3-2008, it was found that no major activity of sale and purchase of shares were done. Similarly, from the analysis of schedules relating to expenditure, it was observed that no direct expenses had been incurred for earning exempt income. Moreover, assessing officer had not specifically pointed out any direct expense and had not given any finding regarding the correctness of claim of the assessee that no expenditure had been incurred for earning exempt income and he had simply relied upon the plain reading of section 14A read with rule 8D without proper analyzing it. Therefore, no disallowance could be made on presumption basis. Held: It is apparent that first the assessing officer has to determine the claim of assessee regarding expenses which neither the assessing officer nor the Commissioner (Appeals) has done in the present case. In fact, the citation cited by the Commissioner (Appeals) goes against the Department itself insofar as when it has held that the assessing officer must in the first instance determine whether the claim of the assessee is correct and determination must be made having regard to the accounts of the assessee. The Legislature directs him to follow rule 8D only where the assessing officer is not satisfied with the claim of assessee. In the present case, the assessing officer has not fulfilled his onus of recording his findings. This point has also been considered in various other judicial pronouncements of Hon'ble High Court specifically in the case of Hero Cycles Ltd.'s case wherein under similar circumstances, it was held that the disallowance under section 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. [Para 10]