If no expense incurred in relation to exempt income, no 14A disallowance – Mum ITAT


Justice Sam Bharucha v Addln CIT [ITA No. 3889/Mum/2011 dtd 25/07/2012] (Mum ITAT)

Background:

During the year (AY 2006-07), the assessee has earned dividend of Rs 30,43,306 from mutual funds and Rs 6,71,468 from shares besides interest on RBI ta-free bonds of Rs 13,73,750 which are exempt income. The AO disallowed a sum of Rs2,26,581 under section 14A by applying RUle 8D by following decision of Mumbai ITAT in the case of Daga Capital Management Pvt Ltd.

On appeal, the CIT(A) confirmed the disallowance made by the AO.

Assessee’s contentions:

  • Expenditure incurred by the assessee is only in relation to earning professional income of the assessee.
  • The assessee has not claimed any expenditure in relation to earning exempt income.
  • The assessee maintains separate books of accounts for the purpose of profession and no expenditure of personal nature has been shown in the books maintained for the purpose of business or profession of the assessee.
  • Investments in mutual funds are made in by the assessee in his personal capacity and out of his own capital funds and therefore, no disallowance under section 14A is called for.
  • Reliance is placed on Mumbai ITAT decision in the case of Pawankumar Parmeshwarlal v ACIT [ITA No 530/Mum/2009] and M/s Auchtel Products Ltd v ACIT [22 Taxman.com 99] (Mum)

HELD:

  • S. 14A has within it implicit notion of apportionment in cases where expenditure is incurred for composite/indivisible activities in which taxable and non-taxable income is received.
  • But when it is possible to determine the actual expenditure in relation to exempt income or when no expenditure has been incurred in relation to exempt income, then the principle of apportionment embedded in s. 14 A has no application.
  • For s. 14A to apply, there should be a proximate relationship between the expenditure and the tax-free income.
  • If the assessee claims that no expenditure has been incurred for earning the exempt income, it is for the AO to determine as to whether the assessee had incurred any expenditure in relation to the tax-free income and, if so, to quantify the extent of disallowance.
  • In order to disallow the expenditure u/s 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income.
  • No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the tax-free income. 
  • On facts, from the details of the expenditure, it is clear that the expenditure incurred by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and establishment for earning the exempt income. Consequently, s. 14A disallowance is not permissible

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