No disallowance us 14A on presumption when assessee not claimed any exempt income expenditure. No revision us 263 for view taken as per procedure prescribed

No disallowance us 14A on presumption only-If the assessee has not claimed any expenditure on exempt income and there can not be any disallowance under section 14A on mere presumption. This was held by ITAT Kolkata in a recent judgment as under:

Case Law Details:
I.T.A No. 1336/Kol/2013 A.Y. 2008-09
Gautam Kumar Mitra vs. DCIT
Date of Judgment/Order: 27/05/2016

Important Judgment(s)Cited:
CIT Vs. Metalman Auto (P) Ltd (2011)  Punjab & Haryana High Court
Britannia Industries Ltd Vs. DCIT Kolkata-ITA No. 390/Kol/2013

Question before ITAT:
Whether the disallowance made u/s 14A of the Act can be taken into account in absence of actual expenditure but merely on presumption.

Brief Facts of the Case:
The assessee was a Barrister at law and deriving his income by way of legal profession practicing law at various courts in India and abroad. He also derived his income from capital gains and other sources. The return of his income was processed u/s. 143(1) and was later selected for scrutiny under CASS. The assessment was completed by the AO by making various additions/disallowances.

The CIT on perusal of the relevant assessment records found that the assessee had claimed income exempt u/s 10 on account of his investment in mutual funds and the UTI bonds.The CIT by exercising his power of revision u/s 263 issued notice to the assessee. Before the CIT the assessee contended that he had placed certain funds with a scheduled bank that offered portfolio management services. The assessee submitted that it had incurred no expenditure in earning the said exempt income. However CIT disallowed a sum calculated at 0.5% of investment  in pursuance of Rule 8D of the I.T Rules r.w.s 14A of the Act

Important Excerpts from ITAT Judgment:

The Judgment of the Hon’ble Punjab & Haryana High Court supra are very clear that the disallowance under section 14A is not justified when no expenditure has been incurred and claimed to earn exempt income. The disallowance under section 14A requires a finding of expenditure for earning the exempt income and that finding cannot be on presumption that certain expenditure is bound to be incurred for earning the exempt income. In the present case also, we find that the assessee placed certain funds with a scheduled bank offering portfolio management services and that exclusively carried on its own for the benefit of assessee without requiring the assessee’s personal attention and intervention and we see no involvement from the assessee nor any time was required to be devoted by the assessee nor he had to incur any expenditure. Therefore, the law laid down by the the Hon’ble Punjab & Haryana High Court supra are applicable to the case on hand and we hold that since the assessee not claimed any expenditure on exempt income and there can not be any disallowance under section 14A on mere presumption.

…… the assessee has to make a claim including a claim that no expenditure was incurred with regard to expenditure incurred for earning income which is not chargeable to tax. Such a claim has to be examined by the AO and while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In the present case the assessee did not make any claim any expenditure on exempt income, the AO can not make disallowance of expenses as prescribed by Rule 8D(2) of the Rules

Regarding other view whether the CIT can exercise his power under section 263of the Act to declare the assessment order passed by the is erroneous and prejudicial to the interest of the revenue, in our view, the AO has followed the procedure available to him under law and the view taken by following such procedure can not be a subject under review under section 263 of the Act.

No disallowance us 14A on presumption only

download full judgment

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