2011 (6) TMI 832 - AT - Income Tax

Summary

Issues involved: Disallowance of administrative expenses u/s 14A by invoking Rule 8D of the IT Rules.

Summary:
1. The appeal was filed by the assessee challenging the disallowance of administrative expenses u/s 14A by the AO and the enhancement of the disallowance by the CIT(A).

2. The AO calculated the disallowance based on the ratio of dividend income and capital gain to the total turnover, resulting in a disallowance of &8377; 7,75,201. The CIT(A) further enhanced the disallowance to &8377; 9,17,154.

3. The AR argued that disallowance of administrative expenses cannot be done prior to Asst. Year 2007-08 unless there is a direct nexus established by the AO. Citing relevant case laws, it was contended that expenses without a nexus to the earning of exempted income cannot be disallowed.

4. The Tribunal held that Rule 8D is not retrospective and cannot be applied for Asst. Year 2006-07. Disallowance of administrative expenses can only be made if a direct nexus is established, which was not done in this case. Therefore, the addition made by the AO and enhanced by the CIT(A) was deleted, and the appeal of the assessee was allowed.

5. The decision was pronounced on 3/6/11.