Expenditure on exempted income cannot allowed but it can disallowed only to the extent claim by the assessee

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘C’: NEW DELHI

BEFORE SHRI G.D.AGRAWAL, VICE PRESIDENT AND

SHRI A.D.JAIN, JUDICIAL MEMBER

ITA No.267/Del/2012

Assessment Year: 2008-09

M/s Gillette Group India Pvt.Ltd.,

(now known as Wella Haircosmetics India Pvt.Ltd.),

C/o JaiKumar Tejwani & Co.,

Chartered Accountants,

B-50, East of Kailash,

Top Floor,

New Delhi.

PAN: AAACG2468D.

(Appellant)

Vs.

Assistant Commissioner of

Income Tax,

Circle-12(1),

New Delhi.

 (Respondent)

Appellant by: Shri Pradeep Dinodia,

Shri R.K.Kapoor & Ms.Pallavi Dinodia, CAs.

Respondent by: Shri Alok Singh, Sr.DR.

ORDER

PER G.D.AGRAWAL, VP:

This appeal by the assessee is filed against the order of learned CIT (A)-VIII, New Delhi dated 4th November, 2011 for the AY 2008-09.

2. The grounds raised by the assessee read as under:-

“1. That the learned CIT(A) has erred in law and on facts in failing to restrict the disallowance u/s 14A read with rule 8D to Rs.1,78,83,842/- as against the disallowance of Rs.2,37,59,757/- made by the AO on proportionate basis, on wholly erroneous, illegal and untenable grounds.

2. On the facts and in the circumstances of the case, the learned CIT(A) has failed to appreciate that for A.Y. 2008-09, the disallowance u/s 14A has to be worked out only in accordance with rule 8D of the I.T.Rules.”

3. At the time of hearing before us, it is stated by the learned counsel for the assessee that there are various factual errors in computing the disallowance as per Rule 8D. However, he is not arguing in detail with regard to those errors but, his argument is limited to the fact that the disallowance cannot exceed the expenditure claimed by the assessee. He stated that total expenditure claimed by the assessee in the profit & loss account is only Rs.49,04,028/- while the Assessing Officer disallowed Rs.2,37,59,757/-. That apart from dividend income, the assessee has other income to the extent of Rs.97,04,935/-. Therefore, part of the total expenditure incurred by the assessee is certainly attributable to earning of other income. However, even if it is presumed that the entire expenditure was incurred for earning of dividend income, then also, the disallowance cannot be made more than the expenditure actually claimed by the assessee. He stated that Section 14A provides that no deduction shall be allowed in respect of expenditure incurred by the assessee for earning of exempt income. Rule 8D is only a method for determining such expenditure. Therefore, in any case, what has not been claimed by the assessee cannot be disallowed. He stated that the entire expenditure claimed by the assessee was only Rs.49,04,028/- and, therefore, even if it is presumed that the entire expenditure was for earning of dividend income, the disallowance cannot exceed Rs.49,04,028/-.

4. The learned DR, on the other hand, relied upon the orders of the authorities below.

5. We have carefully considered the arguments of both the sides and perused the material placed before us. Section 14A reads as under:-

“Expenditure incurred in relation to income not includible in total income. 14A. [(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]”

6. From the above, it is evident that as per sub-section (1) of Section 14A, no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income. Sub-section (2) of Section 14A provides the procedure for determination of such expenditure by the Assessing Officer. The Board has also prescribed Rule 8D for determining the expenditure incurred by the assessee for earning of exempt income. Thus, the disallowance can be made under sub-section (1) for the expenditure incurred for earning of exempt income. In the case under appeal before us, from the perusal of the assessee’s profit & loss account, it is evident that the total expenditure incurred was Rs.49,04,028/- only. Thus, the assessee claimed the deduction for the expenditure of Rs.49,04,028/- which is debited to the profit & loss account. The disallowance cannot exceed the expenditure actually claimed by the assessee. We, therefore, accept the assessee’s contention that the disallowance made by the Assessing Officer and sustained by the learned CIT(A) in excess of total expenditure debited to profit & loss account was unjustified. Accordingly, we restrict the disallowance to the extent of expenditure actually claimed by the assessee i.e. Rs.49,04,028/-.

7. In the result, the appeal of the assessee is partly allowed.

Decision pronounced in the open Court on 23rd March, 2012.

                                                        Sd/-                             Sd/-

                                                (A.D.JAIN)             (G.D.AGRAWAL)

                                        JUDICIAL MEMBER   VICE PRESIDENT

Dated: 23.03.2012

VK.

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT (A)

5. DR, ITAT

Assistant Registrar