Brief Facts of the Case
The AO observed that during the year the assessee has received dividend income of Rs.3,10,10,076/-, which is exempt under section 10 of the Act. The AO observed that the assessee is in receipt of considerable amount of exempt income, and no separate accounts have been maintained with regard to the earning of exempt income. The AO observed that the management and maintenance of such investments always entail certain administrative expenditure, such as, telephone expenditure etc. Therefore, he disallowed the proportionate amount of expenditure incurred out of the total expenditure incurred by the assessee during the year amounting to Rs.1,06,372/-.
Question of Fact
Whether disallowance of expenditure can be made on the basis of estimation or assumption, where there is nothing on record to indicate that there has been in fact any actual expenditure incurred by the assessee for earning tax free income?
Contention of the Assesse
The assessee argued that the assessee-company earned dividend income of Rs.3,10,10,076/-, which is exempt under section 10 of the Act. For earning dividend income, the assessee-company had not incurred any expenditure. Hence, no disallowance under section 14A should be made or much less, the disallowance as per rule 8D of the IT Rules. He submitted that the dividend is received from Nirma Ltd. of Rs.3,10,10,076/- which is directly credited in the bank account of the assessee through ECS. This shows that there is no expenditure incurred for earning dividend income.
Cases relied upon:
- CIT Vs. Torrent Power Ltd., (2014) 363 ITR 474 (Guj)
Contention of the Revenue
The AO submitted that it was hard to accept the submissions of authorized representative of the assessee that there are no expenses incurred for earning exempt income. According to the Department Rule 8D itself says that where the AO having regard to the accounts of the assessee of a previous year, is not satisfied with the correctness of the claim of expenditure made by the assessee, or the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. In view of the above, the calculation done by the AO at Rs.1,06,372/-, which provides for an amount equal to one-half percent of the average of the value of investment, the income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year, is more logical and apt, considering the facts and circumstances of the case.
The AO also pointed out that from the balance sheet of the assessee in Schedule 4 it can be observed that the opening balance of the assessee’s quoted investment were of Rs.200.01 lakhs which increased to Rs.225.47 lakhs during the year. Further, the unquoted investment of the assessee at opening balance of Rs.760.03 lakhs which were reduced to Rs.560.03 lakhs which were reduced to Rs.3,000/- during the year. Thus, there was a fluctuation in the investment of the assessee, for which, management, time and cost are incurred, and therefore to say that no expenditure for earning tax free income was incurred by the assessee for earning exempt dividend income of Rs.3,10,10,076/-, cannot be accepted. It was further argued that out of the total income shown in the profit & loss account for the year at Rs.6.32 crores, dividend income was Rs.3.10 crores, which was approximately 50% of the total income of the assessee, and therefore, substantial amount of income of the assessee, which was exempt from tax. Hence, the argument of the assessee that no expenditure was incurred for earning of such dividend income cannot be accepted.
Held by the ITAT
The Revenue has not brought any positive material on record to show that the assessee actually incurred any expenses in relation to earning of exempt income. In our considered view, before making disallowance under section 14A, it was imperative on the part of the Revenue to bring some material on record to show that the assessee actually incurred any expenditure in relation to exempt income. In the absence of the same, in view of the above cited decision of the Hon’ble Gujarat High Court, the disallowance of Rs.1,06,372/- is not sustainable. We, therefore, delete the disallowance of Rs.1,06,372/- made under section 14A and allow the ground of appeal of the assessee.