Whether even if assessee does not claim a particular sum as expenditure, same can still be disallowed as per provisions of Sec 14A - NO: ITAT

THE issues before the Bench are - Whether even if the assessee does not claim a particular sum as expenditure, the same can still be disallowed as per provisions of Sec 14A and Whether the disallowance made by the Revenue can be more than the total expenditure claimed. And the verdict goes in favour of the assessee in part.

Facts of the case
The assessee company had dividend income of Rs.41,82,220/-, which claimed as exempt u/s 10(34). The only other income assessee had was bank interest of Rs.19,941/-. The assessee capitalized the interest expenditure and had not claimed the same as an expense either in the Profit & Loss a/c or in its income tax computation. The AO made a disallowance u/s 14A r/w Rule 8D on an amount of Rs.45 lakhs being interest paid to ICICI bank on purchase of shares of Uflex Ltd. and a further amount of Rs.6,51,918/- being ½% of average investment under Rule 8D(2).The CIT(A) upheld the order of the AO.

On Appeal before the Tribunal the AR submitted that Rs.45 lakhs was added to the income of the assessee, u/s 14A, though the assessee has not claimed the same as an expense. He argued that an amount cannot be disallowed when the

same is not claimed. On the second issue he pointed out that the assessee had incurred and claimed expenditure of Rs.45,977/- being audit fees, general expenses and conveyance and hence the disallowance of a higher amount by applying the Rule 8D(2) was bad in law. The DR submitted that the assessee has wrongly capitalized the interest of Rs.45 lakhs. He argued that the assessee should have claimed the interest on an ‘year to year’ basis, as was held by the Tribunal in a number of cases. On the disallowance by application of Rule 8D, he submitted that the same was mandatory.

Having heard the parties, the Tribunal held that,

++ no amount can be disallowed, when it is not claimed as an expense. The assessee has not claimed Rs.45 lakhs as an expense while computing its income. Under the circumstances, making a disallowance u/s 14A is bad in law. We do not understand how an expenditure can be disallowed, when the same has not been claimed as a deduction;

++ if the Revenue is of the opinion that the assessee has wrongly capitalized the interest expenditure, it should be looked into and examined when the assessee declares capital gains/loss on the transaction. Looking at the issue from any angle, we have to allow this ground of the assessee and delete the disallowance of interest expenditure;

++ the assessee has claimed that it had incurred total expenditure of Rs.45,977/- during the year. While so the AO has disclosed Rs.6,51,918/-. Thus the disallowance is for in excess of the actual expenditure in this case;

++ the disallowance cannot exceed the total actual expenditure incurred and claimed by the assessee. In this case the total expenditure claimed by the assessee in the Profit and Loss account is Rs.45,977/-. Thus the disallowance should be restricted to this amount.