PARITOSH RUNGTA,MUMBAI vs. DCIT CIR 24(2), MUMBAI

The only ground is against the sustenance of disallowance of `49,514 u/s 14A of the Act. Briefly stated the facts of the case are that the assessee earned dividend income of `3,53,890, which was claimed as exempt. The assessee was called upon to show cause as to why disallowance should not be made u/s 14A. As per the assessment

. Shri Paritosh Rungta. order : “In reply, the assessee has not given his explanation. In view of the same, from the details filed by the assessee, it is not possible to examine the correctness of claim of expenditure by assessee under Rule 8D(1)(a) as no specific details of expenditure related to exempted income have been given by the assessee. Further, it is not the claim of assessee that no expenditure has been incurred by him in earning this income as per Rule 8(a)(b). Therefore, undersigned has no option but to proceed to calculate the expenditure disallowance u/s 14A as per Rule 8D(2)”. Resultantly addition of `49,514 was made u/s 14A. The learned CIT(A) sustained the disallowance.

After considering the rival submissions and perusing the relevant material on record, we find from the relevant part of the assessment order as extracted above that the Assessing Officer has stated that the assessee did not give any explanation. It has further been mentioned that: “it is not the claim of the assessee that no expenditure has been incurred by him in earning this income”. Contrary to that, the assessee who appeared in person placed before us copy of reply dated 17.08.2010 furnished to the A.O. specifically stating that no expenditure was incurred for earning the exempt income. Another letter dated 20th August, 2010 was also filed in which the same position was reiterated. Thus it can be seen that the Assessing Officer has simply brushed aside the assessee’s reply and recorded an incorrect finding that the assessee did not substantiate his claim of not incurring any expenditure in relation to exempt income. There can be no doubt from assessment year 2008-2009, the . Shri Paritosh Rungta. disallowance u/s 14A is required to be made as per Rule 8D. However, it is relevant to note that the jurisdiction to make disallowance by invoking sub-sections (2) and (3) of section 14A is activated only when the Assessing Officer is not satisfied as to the claim of the assessee about no disallowance or less disallowance u/s 14A vis-à-vis Rule 8D. The Mumbai Bench of the Tribunal in the case of Auchtel Products Ltd. v. DCIT 2011 order dated 30.04.2012 has held that the correct sequence for making disallowance u/s 14A is to first examine the assessee’s claim of having incurred some expenditure or no expenditure in relation to exempt income. It is only when A.O. is not satisfied with the correctness of the claim of the assessee that the mandate of Rule 8D will operate. In this case the tribunal was pleased to restore the matter to the file of the AO for working out the disallowance u/s 14A afresh.

Adverting to the facts of the instant case, it is observed that the authorities below have computed the disallowance u/s 14A as per Rule 8D without rendering any opinion on the correctness or otherwise of the assessee’s claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of A.O. for re-computing the disallowance, if any, in accordance with our above observations after duly examining the assessee’s claim in this regard.

In the result, the appeal is allowed for statistical purposes.