No infirmity found in assessee's claim of disallowance u/s 14A(1) (of Income Tax Act, 1961).

Facts in Brief:

1. The assessee, an advocate by profession, earned tax-free income by way of dividend and interest.

2. He made suo motu disallowance under section 14A (of Income Tax Act, 1961) at Rs. 1 lakh.

3. The Assessing Officer disallowed Rs. 9.85 lakh by applying rule 8D (of Income Tax Rules, 1962).

4. On appeal, the Commissioner (Appeals) confirmed the disallowance.

On appeal, ITAT held as under:

5. The assessee's argument supporting his working of the expenditure relatable to income not forming part of total income under the Act on the ground that 'mind' is his principal asset cannot be accepted. So be it, every economic activity, particularly in today's extremely competitive environment, entails some degree of cerebral activity.

6. There is, however, no corresponding expenditure, or claim in its respect, while the issue at hand is the apportionment of such expenditure. Income, which may or may not arise on incurring expenditure, and again with no certainty as to its quantum, cannot, by itself, form the basis of either incurring or allocation of expenditure.

7. So, however, the revenue's reading of rule 8D (of Income Tax Rules, 1962) is equally misplaced. The estimate per rule 8D(2) (of Income Tax Rules, 1962) is only qua expenditure relatable to tax exempt income. The expenditure claimed stands debited in the assessee's accounts, which could be inquired into as to their purpose. The assessee may be managing his investments in instruments yielding tax exempt incomes, which are at a healthy sum of Rs. 21.71 crores, i.e., on an average for the year, on his own, or could also be assisted by personnel, who stand remunerated.

8. No inquiry in this regard stands made, while the assessee has maintained proper accounts, duly audited and, further, bases his claim of having incurred a lower expenditure than that per the statutory prescription of rule 8D (of Income Tax Rules, 1962), thereon. The expenditure observed as relatable to the income not forming part of the total income by the revenue are: salary (Rs. 3.54 lakhs); printing and stationery (Rs. 0.11 lakhs); and bank charges (Rs. 0.10 lakhs), without specifying the relationship, so that the same is inferably casual. Even the claim for depreciation (Rs. 7.26 lakhs) is principally on law books.

9. The ingredients of section 14A(2) (of Income Tax Act, 1961) read with rule 8D(1) (of Income Tax Rules, 1962) are clearly not satisfied in the instant case. Accordingly, there is no infirmity in the assessee's claim of disallowance under section 14A(1) (of Income Tax Act, 1961) at Rs. 1,00,000. 

Case Reference-Fali S. Nariman v. Additional Commissioner of Income-tax, Range-11 (2), Mumbai

IN THE ITAT MUMBAI BENCH 'F'