Case Law Details
The Assessing Officer made disallowance by invoking the provisions of Section 14A r.w. Rule 8D of the Income Tax Rules. As per assessee, the AO has not established any nexus between the expenditure disallowed and investment made from which the income denied is exempt from tax. Secondly, the AO has not recorded any proper satisfaction about the correctness of the claim in respect of such expenditure. There is no dispute with regard to the fact that the assessment year under appeal being 2008-2009, therefore, any disallowance u/s. 14A would be in accordance with the method prescribed under Rule 8 D of the Income Tax Rules, 1962. For the sake of clarity, the relevant provisions of section 14A are reproduced hereinbelow:
Section-14A :- Expenditure incurred in relation to income not includible in total income.
[(1)] For the purposes of computing the total income under this Chapter no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act:]
[Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]
[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.]
From the conjoint reading of the above provision, it is evident that making of disallowance by applying Rule 8-D of the Income Tax Rules, 1962 is not automatic. The AO has to first find out what was the expenditure incurred by the assessee in relation to the income which does not form past of the total income under the Act (hereinafter refer to as the exempt income). Therefore, firstly the AO is required to find out the nexus between the expenditure incurred and exempt income. If the expenditure is not related to the exempt income, in our considered view the AO is not empowered to make disallowance u/s. 14A of the Act by applying Rule 8D of the Income Tax Rules. Thus, first requirement of law is that the expenditure should be related to the exempt income. In case, where the assessee makes a claim that ‘x’ amount is related to the exempt income or otherwise no expenditure is related to the exempt income, in that event, the AO has to satisfy himself about the correctness of the claim having regard to the accounts of the assessee before proceeding to apply Rule 8 D of the Income Tax Rules, 1962 for computing disallowance. Hence, another requirement of law is that the AO has to satisfy himself about the correctness of the claim of the assessee having regard to the accounts of the assessee. The provision of section 14A mandates the AO to examine the accounts of the assessee before proceeding to apply Rule 8D of the IT Rules. In the present case, the AO has made disallowance on account of interest expenditure and administrative expenses. Since on both the counts, the AO has failed to record his finding, we are of the considered view that disallowance as made by the AO cannot be sustained. Hence, AO is hereby directed to delete the disallowance. Thus, grounds raised in the cross-objection are allowed.
