We find from the audit report that the expenses in respect of exempt income was shown at Rs. Nil,that the assessee had debited direct expenses on account of dematerialisation and STT in the capital account and in the profit and loss account,that AO had presumed that the assessee had must have incurred some expenditure under the heads salary,telephone and other administrative charges for earning the exempt income.
It is further found that the total expenditure claimed by the assessee for the year is about 13 lakhs and the AO had made a disallowance of about Rs.16 lakhs.He has just adopted the formula of estimating expenditure on the basis of investments.But,the justification for calculating the disallowance is missing.The assessee had not claimed any expenditure in its P & L account,so,it the onus was on the AO to prove that out of the expenditure incurred under various heads were related to earning of exempt income.Not only this he had to give the basis of such calculation. In any manner disallowance of Rs.16.35 lakhs,as against the total expenditure of Rs.13 lakhs (app.) claimed by the assessee in P & L account,is not justified. Provisions of Rule 8D cannot and should not be applied in a mechanical way. Facts of the case have to be ananlysed before invoking them. We are of the opinion that the AO had not deliberated upon the facts of the case before making the disallowance,whereas the FAA has decided the issue on merits. Therefore ,confirming his order,we decided the effective ground of appeal against the AO. As a result,appeal filed by the AO stands dismissed.