INCOME TAX ACT, 1961

Section 14A Rule 8D(2)(iii)

Disallowance under section 14A - Expenditure against exempt income - Invocation of rule 8D(2)(iii) -

Assessee earned substantial tax free dividend income on investments in shares but claimed no disallowance under section 14A. AO invoked section 14A read with rule 8D(2)(iii) and worked out disallowance. Assessee contended that entire dividends on shares and mutual funds was directly credited into designated bank account through Electronic Clearing Services (ECS) mode except dividends received from three companies where cheques were physically deposited into the same bank account. and hence there was no occasion for incurring any expenses for the said purpose. Also, entire investment portfolios was looked after by his father residing in Mumbai to whom no compensation was paid by him and therefore, no disallowance of administrative expenses could be made on an arbitrary basis by applying third limb of rule 8D(2). Held: Merely because no compensation was paid by assessee to his father for managing the investments of assessee, it did not mean that there would be absolutely no expenditure that were incurred by assessee for making said investments. In any case, onus is primarily on assessee to prove that no expenditure was incurred for the purpose of making investments and earning exempt income thereon. Considering the fact that computation of disallowance of indirect expenses in terms of rule 8D(2)(iii) resulting in absurdity in as much as majority of the expenses debited in income and expenditure account getting disallowed thereon, 25% of expenses such as salary, travelling expenses, telephone and mobile expenses and audit fees was to be disallowed.

REFERRED :

FAVOUR : Partly in assessee's favour.

A.Y. : 2008-09

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