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

Date of pronouncement:02.03.2012

ORDER

PER B. RAMAKOTAIAH. AM:

The issue in assessee’s appeal is with reference to disallowance u/s. 14A.

2. The Assessing Officer noticed that assessee had made certain investments and accordingly invoking Rule 8D made disallowance u/s. 14A of the I.T. Act at Rs. 6,36,513/-. The Ld. CIT(A) confirmed the same by stating as under:

“I have considered the issue. Hon ‘ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT held that though the provisions of Rule 8D which have been notified w.e.f. 24.3.2008 shall apply w.e.f. assessment year 2008-09, even in respect of earlier years the AO would have to apportion the expenditure and disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income. The relevant assessment year in the case in hand is 2007-08. Rule 8D is, therefore, not applicable here. The AO is, however, competent to determine and diallow such  expenditure as may be reasonable having proximate nexus with the exempt income. In the absence of any other parameter or yardstick to arrive at such proximity or reasonableness, the AO rightly used a legally wedded method even though the method per se was not applicable to the current year. I, therefore, confirm the disallowance made of Rs. 6,36,513/-.”

3. It was the submission of the Ld. Counsel that the company did not incur much expenditure while offering the income and filed Profit & Loss account to submit that except donation of Rs. 10,00,000/- and professional fees of Rs. 2,89,575/- the balance of expenditure is very small as under:

 4. 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.

5. Ld. Departmental Representative relied on the order of AO and Ld.  CIT(A).

6. 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.

7. In the result, appeal filed by the assessee is partly allowed.

Order pronounced on this 2nd day of March, 2012