Expense incurred for earning only exempt income is not allowable as deduction

Vishal Diamonds Pvt Ltd Vs ITO (ITAT Mumbai)

ITAT Mumbai held that expenditure claimed by the assessee relating to earning of only exempt income is not allowable as deduction. Accordingly, the whole expenditure incurred for earing exempt income cannot be allowed to carryforward.

Facts- The case of the assessee was selected for complete scrutiny for the purpose that assessee has shown low income in comparison to very high investment and business loss appearing in the balance sheet.

AO noticed that assessee has shown exempt income of ₹.91,39,137/- received as share of profit from partnership firm. The Assessing Officer observed that assessee has not made any disallowance u/s. 14A of the Act. As per the Assessing Officer, Rule 8D of I.T.Rules is applicable for the purpose of computing the disallowance u/s. 14A of the Act.

AO applied the Rule 8D(2) of I.T.Rules and determined the total disallowance adopting the average investments made by the assessee and applied 1% as per Rule 8D(2) and accordingly, he determined the amount of ₹. 1,12,81,778/-. Assessing Officer by referring to total expenses claimed by the assessee during the year is ₹.73,54,549/-. Accordingly, he restricted the same to the extent of ₹.73,54,549/- and accordingly, he disallowed carryforward of business loss claimed by the assessee.

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