DCIT vs. Jindal Photo Ltd (ITAT Delhi)

For s. 14A disallowance, even under Rule 8D, onus on AO to show nexus between expenditure & tax-free income

In AY 2007-08 the assessee earned exempt dividend income of Rs. 17,97,010 in respect of mutual fund investments and made a suo moto disallowance of Rs.173038 u/s 14A. The AO applied Rule 8D and computed the disallowance at Rs.32,18,475. The CIT (A) deleted the disallowance made by the AO. On appeal by the department, HELD dismissing the appeal:

(i) The AO applied Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses as adopted by the assessee. The assessee had maintained separate books of account for each unit & HO. Common expenses incurred at the head office and the branches were attributed to all the units including the HO. Investment in mutual funds, which gave rise to exempt dividend income, was done through the HO. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to make investment of surplus amounts in mutual funds. The suo moto disallowance was made keeping in consideration s.14A;

(ii) Rule 8D r.w.s. 14A(2) can be invoked only if the AO “having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred” in relation to tax-free income. However, the assessment order did not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D was not appropriately applied by the AO. The AO merely made an ad hoc disallowance. The onus was on the AO to establish that expenditure was incurred to earn tax-free income. This onus has not been discharged. S. 14A requires a clear finding of incurring of expenditure and no disallowance can be made on the basis of presumptions (CIT vs. Hero Cycles 323 ITR 518 (P&H). The burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s14A (ACIT vs. Eicher Ltd 101 TTJ (Del) 369). Before making any disallowance u/s14A, the onus to establish the nexus of the same with the exempt income, is on the revenue (Maruti Udyog vs. DCIT 92 ITD 119 (Del)). There is be no presumption that the assessee must have incurred expenditure to earn tax free income (Wimco Seedlings vs. DCIT 107 ITD 267 (Del.)(TM)).