No section 14A disallowance where no related expenditure was claimed

The decision turns on the threshold requirement under section 14A. The assessee maintained that no expenditure relatable to exempt income had been claimed as a deduction, and the record did not identify any specific expenditure against taxable income that could be linked to earning the exempt income. On that footing, the assessee also disputed the invocation of Rule 8D, contending that the presumptive or mechanical working under the rule could not stand without the statutory foundation first being established.

Accepting that position, the adjudicatory body held that section 14A cannot be used to create a hypothetical disallowance in the absence of an actual claim of expenditure. It noted that Rule 8D is only a machinery provision and can operate only after the basic requirement of section 14A is met, namely, the existence of expenditure incurred and claimed by the assessee in relation to exempt income. The assessment order and appellate order failed to point to any identifiable expenditure of that kind, and no objective satisfaction under section 14A(2) was recorded before applying Rule 8D.

The material also supported the assessee’s case that the investments were old, borrowed funds had been deployed in the real estate business, and the corresponding interest had been capitalized to work-in-progress rather than claimed as a deduction. Likewise, administrative expenses had not been claimed as revenue expenditure, so the components under Rule 8D(2)(ii) and Rule 8D(2)(iii) had no foundation.

Finding the invocation of section 14A unsustainable, the decision deleted the disallowance.