CLR Editorial Notes: In the Assessment Year 2009-10, the assessee in this case, had earned a tax-free dividend of Rs. 32 lakhs on an investment that had been made in earlier years. The assessee claimed that as he had not incurred any expenditure to earn the dividend income, no disallowance u/s 14A was permissible. The Assessing Officer rejected the claim and made a disallowance by applying Rule 8D. The CIT(A) deleted the disallowance on the ground that the Assessing Officer had mechanically applied Rule 8D to compute the disallowance. On appeal by the department to the Tribunal, the appeal was dismissed and it was held:
“The AO has not brought on record anything which proves that there is any expenditure incurred towards earning of dividend income. The AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. The AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. This is not permissible (J. K. Investors (Bombay) followed)”
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