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January 12, 2011 (Date of publication) |
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No s. 14A disallowance for personal tax-free investments if business expenditure not disallowed on ground of being for personal purposes
The assessee, a stock broker & Member of BSE, earned tax-free income by way of dividend, interest on RBI bonds and PPF interest. The assessee claimed that no disallowance u/s 14A could be made as no expenditure was incurred by him to earn the tax-free income as the shares were in the demat account for a long time and dividend was automatically credited to the bank account. The AO disallowed Rs. 20,000 u/s 14A. In appeal, the CIT (A), instead of examining the issue on factual basis, directed that Rule 8D should be applied. On appeal to the Tribunal, HELD allowing the appeal:
The assessee is maintaining separate books of account for the purpose of business. The tax-free investments are in his personal capacity. As the AO has not disallowed any expenditure of personal nature out of the business income, the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. Accordingly, the estimation of expenditure of Rs. 20,000 out of business expenditure as being incurred for earning tax free income is not acceptable.
Note: Impliedly, this accepts that (i) there is no presumption that some expenditure is always attributable to exempt income and (ii) that the AO must show the nexus between the exempt income & expenditure & (iii) That the AO cannot make an adhoc disallowance. See also DCIT vs. Jindal Photo Ltd (ITAT Delhi)
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