The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) has held that disallowance under section 14A of the Income Tax Act, 1961 only covers expenses regarding exempt income.
Mr D. Venkatesh, the appellant challenged the order of the Commissioner of Income Tax Appeals in upholding the order of the assessing officer in disallowing foreign travel expenses, Other expenses, security service charges, Swimming pool rent, ad-hoc disallowance under 14A against the principles of justice, the weight of evidence and probabilities of the case.
It was alleged that the Assessing Officer and Commissioner of Income Tax, Appeals erred in disallowing/upholding the disallowance of Rs.50,000/- under section 14A on an ad-hoc basis without any proper satisfaction and have erred to see that the assessee has not incurred any expenditure to earning exempt income.
The assessee is a film artist and doing business in film production and distribution. Assessee filed his return of income electronically on 28.09.2009 for the A.Y. 2009-10 admitting total income of Rs.2,34,65,640/- and the same was processed under section 143(1) of the Act. The case was selected for scrutiny under CASS and notice under section 143(2) of the Act dt.23.08.2010 was issued.
The lower authorities have wrongly made disallowance of Rs.50,000/- under section 14A of the Act on an ad hoc basis without any proper satisfaction and also erred to see that the assessee has not incurred any expenditure about claiming exempt income.
It was submitted that the Assessing Officer has to examine the accounts of the assessee and when he is not satisfied with the correctness of the claim of the assessee and then only, the Assessing Officer can determine the expenditure which should be disallowed as per Rule 8D. Here, the Assessing Officer has invoked Rule 8D without recording her satisfaction with the claim of the assessee.
Further submitted that when no expenditure was incurred which could be attributable to earning of such income, the question of disallowance does not arise and that the Assessing Officer failed to show the nexus between the expenditure incurred and the exempted income earned by giving valid reasons.
A two-member bench comprising of Shri R K Panda, Vice President and Shri Laliet Kumar, Judicial Member found that CIT(A) while passing his order has categorically mentioned that disallowing Rs.50,000/- under section 14A of the Act is fair and reasonable to cover up any expenses as such concerning exempt income and granted part relief to the assessee. While dismissing the appeal, the ITAT upheld the findings of the CIT(A).
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