Korn Ferry International Pvt. Ltd. v. Dy. CIT

INCOME TAX ACT, 1961

--Disallowance under section 14A--Expenditure against exempt incomeDividend income--No expenditure incurred to earn exempt income--AO has to record his satisfaction about invoking the provisions of section 14A and has to decide the issue after obtaining explanation of assessee. Since assessee had not incurred any expenditure to earn tax-free dividend income, AO was not justified in making disallowance under section 14A read with rule 8D.--AO noticed that assessee had claimed dividend income without offering disallowance under section 14A on account of expenses relating to dividend income. He applied rule 8D and made disallowance of 0.5% of average value of investment. Assessee submitted that it had made investment in mutual funds out of its own funds and no expenditure was incurred regarding dividend income. Held: If assessee had not incurred any expenditure to earn tax free income, then AO cannot invoke provisions of section 14A read with rule 8D. First of all, AO has to record his satisfaction about invoking the provisions and had to decide the issue after obtaining the explanation of assessee. Therefore, AO was not justified in making disallowance made by AO under section 14A read with rule 8D.