Whether disallowance can be made u/s 14A of the Income Tax Act if no expenditure is incurred in relation to the exempt income?

Last updated: 01 August 2014

Court :
ITAT New Delhi

Brief :
Appellantis a NBFC in thebusiness of investments in shares and securities, money lending and finance. 10 companies merged with the assessee company w.e.f. 1.4.2007. The assessee filed its original return declaring loss of Rs.1,90,84,382/- on 30.9.2008. It filed a revised return at an income of Rs.2,43,19,331/- on 30.9.2009. During the year the assessee earned dividend income of Rs.7,81,04,411/- whichs was claimed as exempt u/s 10(34). The assessee made a suo-moto disallowance of Rs.1,73,45,967/- being interest expenditure incurred during the Previous Year on the ground that it is directly attributable to the earning of dividend interest. The assessee did not make any disallowance of administrative expenses. The Assessing Officer applied Rule 8’D’(2)(iii) of the Act and disallowed 0.5% of the average value of investments which came to Rs.88,76,330/-. Aggrieved the assessee carried the matter in appeal. The First Appellate Authority dismissed this appeal.Aggrieved the assessee appealed before ITAT on grounds that the CIT(Appeals) erred in upholding the disallowance of Rs.2,62,22,197/- u/s 14A read with Rule 8D as against disallowance of Rs.1,73,45,967/- offered by the appellant. Held that no disallowance can be made u/s 14A of the Act, if no expenditure is incurred in relation to the exempt income.

Citation :
Bengal & Assam Co. Ltd – Appellant – Versus – Income Tax Officer - Respondent