Expenditure having no nexus with the earning of tax free income can not be disallowed u/s. 14A

The Ld. Counsel relied on the order of Co-ordinate Bench in the case of  Nivi Trading Ltd. Vs DCIT in ITA No. 5455/M/2010 dt. 12.10.2011 to submit that assessee does not have any other expenditure except to maintain day today activity and the expenditure has no nexus with the earning of tax free income, therefore, disallowance u/s. 14A is not warranted. The details of professional fees paid were also placed on record to submit that the expenditure was for business and not for earning exempt income.

We have considered the issue. As seen from the details of the P&L account filed by assessee receipts were to the tune of Rs. 1.79 crores whereas the expenditure was only Rs. 13.69 lakhs, out of which Rs. 10 lakhs was donation. Out of the balance expenditure, the professional fees were to comply with certification charges and ROC matters and only an amount of Rs. 2.75 lakhs was paid for due diligence which has no relation to earning of exempt income. Only an amount of Rs. 55,183/-was paid as bank charges for clearance of various cheques in business activity. AO simply invoked Rule 8D disallowing the amount u/s. 14A without examining whether there is any nexus with the amount claimed as exempt income. Moreover, the disallowance made is more than the expenditure claimed in the P&L account. Therefore, we are unable to uphold the orders of AO and Ld. CIT(A) on this issue. Considering that an amount of Rs. 77,63,301/- was earned by way of dividend, a token amount of Rs. 5,000/- was only considered as expenditure incurred towards earning exempt income, out of the total claim of expenditure in the P&L account. Accordingly, disallowance is restricted to an amount of Rs. 5,000/-. The AO is directed to allow the balance expenditure as claimed. The grounds raised by the assessee are accordingly, partly allowed.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No.3464/Mum/2011 Assessment Year-2007-08

M/s. Search Enviro Ltd. Vs. The ACIT

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