|DATE:||(Date of pronouncement)|
|DATE:||December 7, 2010 (Date of publication)|
|Click here to download the judgement (minda_investment_14A_adhoc_disallowance.pdf)|
S. 14A disallowance has to be on basis of nexus between income & expenditure & not on adhoc estimate basis
For AY 2006-07, the assessee earned exempt dividend income of Rs. 70 lakhs and claimed that as no expenditure had been incurred to earn the dividend, s. 14A disallowance was not permissible. The AO held that some expenditure had been incurred to earn the dividend and made a disallowance u/s 14A on an estimated basis. The CIT(A) followed the judgement of the Special Bench in Daga Capital 26 SOT 603 and directed the AO to compute the disallowance under Rule 8D on the basis that Rule 8D was retrospective. On appeal by the assessee, HELD allowing the appeal:
(i) In CIT vs. Hero Cycles 323 ITR 518 (P&H) it was held that disallowance u/s 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance u/s 14A could not stand. On the other hand, in Godrej Boyce Mfg. Co 328 ITR 81 (Bom) it was held that the AO could adopt a reasonable basis to identify the expenses in relation to the earning of exempt income;
(ii) Rule 8D does not apply to AY 2006-07. The assessee has urged that no expenditure has been identified to have been incurred to exempt income. Neither the AO nor the CIT (A) has rebutted this submission. The AO has made an adhoc estimate which is not sustainable in the light of Hero Cycles. Accordingly, in view of Vegetable Products 88 ITR 192 where it was held that if two constructions are possible, one favouring the assessee should be adopted, the precedent laid down in Hero Cycles should be followed.