INCOME TAX ACT, 1961

Section 14A

Disallowance under section 14A - Expenditure against exempt income - Exempt partnership share income under section 10(2A) -

Assessee company was engaged in the business of leasing the commercial properties to earn lease rentals and for capital appreciations and also maintaining properties. With regard to disallowance under section 14A read with rule 8D, it was explained that the assessee company was a partner in partnership firm namely M/s. Vijay Associates (Wadhwa). The share of profit had been claimed as exempt under section 10(2A). It had not incurred any expenses for making investment in partnership firm and had made the strategic investment with the sole object to expand its business activities. The term 'expenditure' occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. CIT(A) after considering the detailed submission submitted by assessee, sustained the order of AO and rejected the contention of the assessee in respect of disallowance under section 14A read with rule 8D and rental income. Held: Tribunal was noticed that assessee had declared exempt income earned by participating in the partnership firm. The AO invoked rule 8D and disallowed under section 8D(2)(iii), i.e., 0.5% of the average investment for administrative expenses. On appeal, CIT(A) reduced the disallowance of Rs. 147.97 lakhs to Rs. 78.52 lakhs by calculating the ratio of income earned from partnership firm and total non-operating income. Tribunal was, therefore, partly in agreement with CIT(A) that sometimes, the determination of disallowance under rule 8D is absurd. CIT(A) had accepted that the common other administrative expenses were Rs. 78,52,422. Assessee had incurred these other administrative expenses for the whole business and CIT(A) had missed this point and the other administrative expenses incurred for the remaining activities. Tribunal does not agree with him on this aspect. The right way of calculating this share of other administrative expenses are to calculate the portion of exempt income to the total income earned by the assessee. In this case, assessee had earned total income of Rs. 71,53,93,800 and earned exempt income of Rs. 243,71,741. The ratio of exempt income to total income is Rs. 3.41%. Therefore, AO was, therefore, to disallow 3.41% of the other common administrative expenses for the purpose of disallowance under section 14A. Assessee submitted that it had not incurred any expenditure in earning the exempt income, therefore, this contentions was dismissed.

REFERRED :

FAVOUR : Against the assessee.

A.Y. : 2012-13

INCOME TAX ACT, 1961

Section 22 Section 24(b) Section 24(b)

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