If no expenditure has been incurred to exempt income no disallowance under section 14A can be made

In CIT vs. Hero Cycles 323 ITR 518 (P&H) it was held that dis allowance u/s 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance u/s 14A could not stand. On the other hand, in Godrej Boyce Mfg. Co 328 ITR 81 (Bom) it was held that the AO could adopt a reasonable basis to identify the expenses in relation to the earning of exempt income;

Rule 8D does not apply to AY 2006-07. The assessee has urged that no expenditure has been identified to have been incurred to exempt income. Neither the AO nor the CIT (A) has rebutted this submission. The AO has made an adhoc estimate which is not sustainable in the light of Hero Cycles. Accordingly, in view of Vegetable Products 88 ITR 192 where it was held that if two constructions are possible, one favouring the assessee should be adopted, the precedent laid down in Hero Cycles should be followed.

INCOME TAX APPELLATE TRIBUNAL -DELHI , BENCH

Minda Investments Ltd. Vs. DCIT
I.T.A. No. 4046/Del/2009

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