2015 (3) TMI 155 - DELHI HIGH COURT

Disallowance u/s 14A read with Rule 8D - assessee volunteered sum attributable u/s 14A for the purpose of disallowance - AO on the basis of his own understanding of Rule 8D of the Income Tax Rules disallowed the sum - Held that:- In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing disallowance under Section 14A had to be rejected.

In Taikisha [2014 (12) TMI 482 - DELHI HIGH COURT] says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation.

Second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT.

Third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is ₹ 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., ₹ 52,56,197/-.

By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.

Thus the impugned order of the ITAT is set aside. The question of law is answered in favour of the assessee.