Law:

Section:

Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income - Assessment year 2004-05 - Whether disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand - Held, yes FACTS The assessee-company was engaged in the manufacturing of cycles and parts of two-wheelers in multiple units. It earned dividend income, which was exempted under section 10(34) and (35). The Assessing Officer made an inquiry whether any expenditure was incurred for earning that income and as a result of the said inquiry made certain addition to the income of the assessee by way of disallowance under section 14A(3). On appeal, the Commissioner (Appeals) partly upheld the addition made by the Assessing Officer. On second appeal, the Tribunal found that the entire investment had been made by the assessee out of the dividend proceeds, sale proceeds of shares, debenture redemption, etc., and said funds were ostensibly without any burden of interest expenditure. The Tribunal held that merely because the assessee had incurred interest expenditure on funds borrowed for the main unit, it would not ipso facto invite the disallowance under section 14A, when there was no evidence to show that such interest bearing funds had been invested in the investments which had generated the 'tax exempt dividend income'. It, therefore, deleted the entire addition made by way of disallowance under section 14A. On the revenue's appeal to the High Court : HELD In view of the finding recorded by the Tribunal, it was clear that the expenditure on interest was set off against the interest income and the investment in the shares in question was out of the dividend proceeds. Therefore, the disallowance under section 14A was not sustainable. Whether in the given situation any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the revenue, that directly or indirectly some expenditure is always incurred, which must be disallowed under section 14A, and the impact of expenditure so…

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