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2023 (6) TMI 514 - ITAT JODHPURDisallowance u/s 14A - precondition of applicability of Sec 14A - interest paid on loan / borrowed funds - how much expenditure has been incurred in relation to an exempted income? - CIT(A) upheld the applicability of S. 14A but has very categorically held that the disallowance was not correctly worked out by the AO by overlooking Rule 8D - CIT(A) held that the AO was at fault by not having provided an opportunity of being heard to the assessee, because of these reasons, in second round again directed the AO to work out the said disallowance as per rule 8D - HELD THAT:- The provisions of S. 14A empowers the AO to disallow any deduction claimed in respect of the expenditure incurred by the assessee but in relation to such income which does not form part of the total income under the Act. Thus, the claimed expenditure must have been in relation to the income which is exempt and therefore, it was incumbent for the AO to have identified and established that the particular expenditure claimed by the assessee was incurred in relation to such income which was exempt. As per the mandate u/s 14A AO is bound to determine the amount of expenditure incurred in relation to such income which does not form part of the total income. In the present case, however, there is absolutely no finding recorded by the authorities below that which and how much expenditure has been incurred in relation to an exempted income the fact otherwise shows that the total income also included taxable income from house property, which is not contemplated. Claim of interest payment on borrowed funds u/s 36(1)(iii) has not been shown as resulting into some exempted income or was incurred in relation to an exempted income. CIT(A) erred in not considering the challenge raised by the assessee before him. CIT(A) failed to appreciate that the provisions of S. 14A of the Act was wrongly applied. We are, therefore, satisfied that the assessee could have raised the issue of applicability of S. 14A in the peculiar facts of the case. Further coming to grounds of appeal no. 2.2 & 3 wherein the very applicability of S.14A is challenged, we have already held that the precondition of applicability of S. 14A has not been fulfilled in the present case in as much the law never contemplates to apply S. 14A in relation to a taxable income as in the present case. There is absolutely or no discussion as to how interest payment has been incurred to in relation with some exempted income, if any. Disallowance made u/s 14A under challenge is hereby directed to be deleted. Decided in the favour of the assessee.
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