Disallowance u/s 14A cannot be made on ad-hoc basis

Facts of the case:  Assessee was in the business of giving loans on interest who in spite of earning interest income of Rs 78,09,191/- also earned income by way of dividend. Assessee claimed total expense of Rs 7,11,3013/- in his return of income which was totally disallowed by the AO on adhoc-basis. Later this figure of disallowance was changed to Rs 2 Lakh on ad-hoc basis by CIT(A) because after applying the rule 8D the amount of expense to be disallowed was coming more that the amount of total expense. As the Ld .CIT(A) had to disallow some amount of the expense so he disallowed Rs 2 Lakh.

Contention of the assessee:  Assessee was of the view that as the basis which the authorities adopted lacks genuine calculation and was without any basis so the above said expenses should be allowed. There was no provision in the IT act which allows for the disallowance of expenses on ad-hoc basis.

Contention of the revenue:  Revenue was of the view that after applying sec 14A read with rule 8D which allows for 0.5% of average investment which was coming more than the total expense of the assessee so CIT(A) disallowed Rs 2 Lakh on ad-hoc basis. Moreover the assessee was unable to provide any explanation regarding the expenses for non-taxable income so the revenue disallowed the expense Rs 2 Lakh on ad-hoc basis.

Held by ITAT:  ITAT held that the disallowance lacks basis of computation, moreover the disallowance was also not as per rule 8D so the disallowance on ad-hoc basis would not be acceptable. So the appeal of the assessee was allowed. There could not be any ad-hoc disallowance u/s 14A of the act read with rule 8D of the rules