Professional Documents
Culture Documents
TOPICS COVERED
Background of Section 14A Rationale of Section 14A Objective Method of Allocating Expenditure relating to Exempt Income Computation of Disallowance Judicial Decisions (Rule 8D) Decision to Section 14A Recent Developments Special Bench Decision (SB) Implication of SB
Brought
2001 Provides for disallowance of expenditure incurred in relation to income which is not included in the total income of the assessee Proviso to the Section was added by the Finance Act, 2002 w.e.f. 11-5-2001.
Assessing officer is
The claim made by the assessee that no expenditure has been incurred
For that Rule 8D lays down the computation mechanism for this purpose
Introduction of RULE 8D Formula laid down in the said Rule is Highly unfair and does not take into cognizance the facts of any case. It merely lays down an arithmetical method of arriving at a disallowance. This disallowance often comes to much more than the entire expenses debited to the Profit and Loss Account by the tax payer.
COMPUTATION OF DISALLOWANCE
aggregate of
(i) amount of expenditure
directly relating to income which does not form part of total income
COMPUTATION OF DISALLOWANCE
aggregate of
(ii) interest on borrowed funds
not directly attributable to any particular income or receipt
=AXB C
directly
B C
average of value of investment income from which does not or shall not form part of the total income
average of total assets as appearing in the balance sheet on the first day and the last day of the relevant accounting year
COMPUTATION OF DISALLOWANCE
aggregate of
(iii) % of the average of the value of investment
income from which does not or shall not form part of the total income as appearing in the balance sheet on the first day and the last day of the relevant accounting year
RULE 8D PROVIDES
Rule 8D shall not be applicable for assessment year prior to assessment year 2008-09
[Godrej & Boyce Manufacturing Company Limited vs. DCIT (2010) 194 Taxman 203 (Bom.)]
Special Provision
Special Law
[ K.V. Trading Co. Limited vs. DCIT (supra) ]
NEXUS
Tax free investment
Disallowance of
Gross Interest
Net Interest
or
Morgan Stanley India Securities (P) Limited vs. ACIT (2011) 55 DTYR (Mub) (Trib) 177
Separate Disallowance under Presumptive Tax Scheme? - All the expenses allowed in relation to taxable income
for
[ Varun Shipping Company Limited vs. Addl CIT (2012) 134 ITD 339 (Mum) ]
Consequences where composite expenditure is incurred on earning income, which is partly taxable and Partly exempt
Where assessee maintain composite account of expenditure For both the exempted income and non exempted income Non exempted income as it is the assessee which is claiming deduction
Investment in Tax free Bonds by Bank Assessee Not for Earning Tax free Income but for
Meeting The Statutory Obligation of Maintaining SLR Ratio No Disallowance u/s 14A
State Bank of Travancore vs. ACIT (2009) 318 ITR (AT) 171 (Coach)
Rule 8D
Not Applicable
StockinTrade
CIT vs. New India Investment Corporation Limited (1978) 113 ITR 778 (Cal.)
No disallowance
Disallowance
under
TO
SECTION 14A
No Disallowance
Exemption is granted
Not as an incentive
TO
SECTION 14A
TO
SECTION 14A
Disallowance u/s.14A
Dividend on shares and units of mutual funds Share of Profit from Firm
Agricultural Income
Haryana Land Reclamation & Development Corp. v. CIT, 159 Taxman 271 (P & H)
Wallfort Shares & Stock Brokers Ltd. v. ITO, 96 ITD 1 (Mum.) (SB)
Punjab State Co-operative Milk Producers Federation Ltd. v. ITO, 104 ITD 408 (Chand)
TO
SECTION 14A
RECENT DEVELOPMENTS
Once
the Rule 8D was notified sometime in early 2008, the tax officers have been mechanically applying the said Rule to all pending assessments. In most cases, they have been rejecting the working prepared by the tax payer and huge disallowances have been made under section 14A based on the irrational computational mechanism laid down in the Rule.
RECENT DEVELOPMENTS
However, the latest development has made matters even worse now. Recently, the Income-tax Appellate Tribunal had occasion to decide on the issue of applicability of the section in those cases, Where a tax payer had invested money in investments, the income from which, as and when received, would be tax free in the hands of the tax payer. In view of conflicting decisions of various Tribunals in the matter, it was decided to constitute a SPECIAL BENCH. This Special Bench at Delhi has given its decision vide its consolidated order dated 5th August, 2009 in the case of ITA Nos. 87/Del/2008, 4788/Del/2007 and 233/Ahd/2006
Relevance was
Work out the expenditure In relation to the exempt income & Not to examine whether the expenditure incurred by the assessee Has resulted into exempt income or taxable income
Disallowance
Irrespective of Whether the income is Earned by the assessee or not
Decisions of the Supreme Court in the case of Maharashtra Sugar Mills and Rajasthan State Warehousing
IMPLICATIONS OF THE
DECISION
Even if the investments are long term and/or strategic ones & No income actually accruing or received during a year Disallowance of part of the interest paid
IMPLICATIONS OF THE
DECISION
IMPLICATIONS OF THE
DECISION