By TIOL News Service

NEW DELHI, JULY 20, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether difficulty in exact qualification & attribution is any basis to delete entire disallowance of expenses incurred for earning of exempt income. YES IS THE VERDICT.

Facts of the case:

The assessee company had earned income Rs. 40,82,586/- which was exempted u/s 10(33). However they did not furnished details of expenditure disallowed u/s 14A, by claiming that no expenditure was incurred during the year under consideration directly relatable to earning of this dividend income. During assessment, the AO attributed 20% of the total dividend income as expenditure relating to dividend income and accordingly disallowance of Rs.8,16,512/- was made.

On appeal, the CIT(A) affirmed the said finding and disallowance observing that the amount or quantum of disallowance was justified as it was less than 0.2% of the total investment of Rs.53.76 crores made by the assessee. On further appeal, the Tribunal deleted the disallowance, observing that expenses attributable to earning of dividend income were not demarkable and could not be connected to the dividend income.

High Court held that,

++ it is apparent that the AO and the FAA have not proceeded on a rational and sound basis, to quantify disallowance u/s 14A. The quantum of investment quoted by the FAA includes investment in bonds, interest income from which was taxable. The assessee would have engaged services and incurred direct and indirect expenses. Difficulty in exact and precise qualification and attribution would not justify deletion of the entire disallowance, as if no expenditure was incurred. Reasonable and fair disallowance could have been made after examining and referring to relevant particulars and details. In these circumstances, we would have remanded the issue of quantum of disallowance to the Tribunal or the AO for the fresh decision. However, keeping in view the quantum of disallowance and that on setting off brought forward losses, income was assessed NIL, we are not inclined to remand the case. Accordingly, the substantial question of law is partly answered in favour of the Revenue but, the order of the Tribunal deleting the addition/disallowance made by AO would consequently remain effective and operate.

(See 2018-TIOL-1398-HC-DEL-IT)