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2008 (10) TMI 390 - AT - Income TaxRevision u/s 263 - Expenditure incurred on earning the tax free income - Disallowance of proportionate expenditure u/s 14A - order of the AO is erroneous and prejudicial to the interest of the revenue - Whether CIT has invoking the provisions of section 263 and thereby directing the AO to consider issue of disallowance of proportionate expenditure u/s 14A allegedly relating to the dividend income earned - HELD THAT:- As per the record, AO has categorically asked the assessee the break up of interest and dividend income. The assessee has also filed various details and also demonstrated before us the fact that dividend income was received through a single cheque and no extra expenditure was incurred for earning the same with regard to deployment of funds. Investment in shares was made in earlier years, sufficient own capital reserve was shown in the balance sheet out of which investment was made in the subsidiary company and it was submitted that no interest bearing funds were utilized for the same. A bare reading of provisions of section 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. Not only the incurring of expenditure but also its relationship with the exempted income must be clear and must be capable of being ascertained. There was no specific finding by the CIT to the effect that any particular expenses has been incurred for earning the exempted income, he only asked the AO to make inquiry and find out the proportionate expenses which can be disallowed u/s 14A. While applying section 14A, there is no authority conferred by the section upon the AO to deem or assume certain expenditure to have been incurred in relation to the tax free income. Accordingly, common expenditure incurred cannot be broken artificially to attribute for apportioning a part thereof to the earning of the tax free income on the assumption that such part of the common expenditure was incurred in relation to the tax free income. Therefore, we do not find any merit in the order passed by CIT u/s 263. Appeal filed by the assessee is allowed.
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