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2022 (12) TMI 552 - AT - Income TaxDisallowance u/s 14A read with rule 8D - assessee has made suo-moto disallowance which includes disallowances of 5% salary expenses paid to 3 employee - HELD THAT:- Percentage of exempted income in relation to the gross total income of the assessee stands at 1.73 % approx - the exempted income in relation to gross total income stands only at 1.73% whereas the proportion of the administrative expenses as calculator by the AO against the exempted income is much greater than the proportion of the income discussed above. Thus, in such facts and circumstances the disallowance cannot be made under the provisions of rule 8D(2) of the income tax rule which will provide absurd result. The basis adopted by the assessee is certainly not proper. It is for the reason that though there was no change in the investment in equity shares but there were transactions in the mutual funds. Admittedly, for the sale, purchase of the mutual funds, there must have been called board meetings, involvement of the supporting staff and likewise certain expenses in the form of stationary, refreshment, building repairs, Misc. expenses etc. must have been incurred by the assessee. However, the assessee has nowhere made any disallowance of such expenses. AO rightly disagreed with the correctness of the claim made by the assessee. But the question arises, if the AO is not satisfied with the correctness of the claim made by the assessee, can he resort to the provisions of rule 8D(2) of income tax rule. The answer stands in affirmative but subject to one caveat, he has to refer the books of accounts of the assessee. But in the given case the AO has certainly pointed out the defects in the claim made by the assessee for the expenses against the exempted income, but he did not consider the accounts of the assessee and directly jumped to the provisions of rule 8D of Income Tax Rule for the purpose of the disallowance which have given absurd amount of disallowance of the administrative expenses as discussed above. Accordingly, we are not convinced with the approach of the AO to make the disallowance as per the provisions of rule 8D of income tax rules in the given facts and circumstances. Administrative expenses as discussed above cannot be allowed to the assessee as deduction in entirety against the taxable income. In our considered view, some part of such expenses should be allocated to the exempted income of the assessee. As we note that there was no infirmity pointed out by the revenue with respect to the basis of the disallowance of the salary expenses of Rs. 17,82,826/- being to the tune of 5% of the salary paid to 3 employees as discussed above, we are of the view that the justice will be served to the revenue and the assessee if 5% disallowances is made of the expenses as discussed above.Appeal of the assessee is partly allowed whereas the appeal of the revenue is dismissed.
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