The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) held that the disallowance under Section 14A of the Income Tax Act, 1961 shall not be made when no demonstrable evidence has been shown against the expenditure related to earning of tax-free income. The assessee has filed its return of income, which was revised disclosing a total income of Rs.1,99,51,420/-.
The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) of the Income Tax Act was issued and served upon the assessee. The assessee has suo motu made disallowance of Rs.9,134/- under Section 14A of the Income Tax Act.
The Assessing Officer (AO) has made a detailed analysis of Section 14A of the Income Tax Act read with Rule 8D and referred to the judgment of the Supreme Court in the case of Maxopp Investment Limited –vs.- CIT. He made a disallowance based on Rule 8D(2) and worked out such disallowance at 1% by taking note of the annual average of the monthly averages of the opening and closing balances of the value of the investment. The counsel contended that the assessee has made an investment in the Mutual Funds and took a policy where reinvestment of the dividend received by the assessee was required to be made.
The Two-member bench comprising of Rajpal Yadav (Vice-President) and Girish Agarwal (Accountant member) held that subsection (2) of Section 14A contemplates that expenditures relatable to earning of tax-free income are required to be worked out for making disallowance. In the present case, there are expenditures, but the expenditures relatable to exempt income could not be demonstrable.
The AO had to take the help of the formula under Rule 8D and work out the disallowance. Therefore, the assessee could not buttress its case on the strength of the above decisions. The bench did not find any merit in the grounds of appeal. They were rejected.