INCOME TAX ACT, 1961

Section 14A Rule 8D

Disallowance under section 14A - Expenditure against exempt income - Invocation of rule 8D - Non-recording of dissatisfaction by AO as to correctness of assessee's claim

Assessee earned tax-free dividend income on shares but claimed no disallowance under section 14A. Assessee pleaded that it did not incur any expenditure to earn that dividend. However, AO invoked rule 8D and worked out disallowance.Held: AO only discussed provisions of section 14A(1) but had not justified how the expenditure Assessee incurred expenditure during the relevant year related to income not forming part of its total income. AO straightaway applied rule 8D. The application of section l4A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with exempted income. AO must give a clear finding with reference to assessee's accounts as to how other expenditure claimed by assessee out of non-exempt income was related to the exempt income. As AO failed to do so, disallowance was deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Section 37(1)

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