Section 14A of I Tax Act

7/28/2019 Section 14A of I Tax Act

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By Deepika Mevadi(CA Final)


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TOPICS COVERED Background of Section 14ARationale of Section 14A

ObjectiveMethod of Allocating Expenditure relatingto Exempt IncomeComputation of DisallowanceJudicial Decisions (Rule 8D)Decision to Section 14ARecent DevelopmentsSpecial Bench Decision (SB)Implication of SB


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Brought onto the statute by the Finance Act,2001Provides for disallowance of expenditureincurred in relation to income which is notincluded in the total income of the assesseeProviso to the Section was added by theFinance Act, 2002 w.e.f. 11-5-2001.


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No deduc t ion fo r expend i tu re

Incurr ed in respect of exempt

i n c o m e

Agains t taxable

i n c o m e

Tax inc ent ive given by way of

Exempt ions tocertain categoriesof income

Used to reducealso the tax

payable on thenon-exempt

income

Incurred to earnthe exempt income

against taxableincome.

Exemp t ion i s a l so in respec t o f

the net incom e

Expenses incurred can be

a l lowed

Only to the extent

they are relatable

To the earning o f taxable incom e


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To prevent taxpayers from

setting off expenses

To earn taxfree income

Against other income which

is taxable


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To earn suchtax freeincome

Tax payer must

Have tax freeincome &

Have actuallyincurred

expenses

To quantifysuch expenses

ensure that thesame

are notclaimed byassessee

as a deductionagainst any

other income


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METHOD FOR ALLOCATING EXPENDITURE IN RELATION TO EXEMPT INCOME

Assessingofficer is

satisfied

with the correctness of claim

not satisfiedwith the correctnessof claim


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Noexpenditurehas beenincurred for Such exempt

income

No further

action isrequired By the Assessing

Officer in this

regard


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Correctness of the claim of expenditure

The claim made by the assesseethat no expenditure has beenincurred

For thatRule 8D lays down the computationmechanism for this purpose


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Introduction of RULE 8DFormula laid down in thesaid Rule is

Highly unfair and doesnot take intocognizance the facts of any case .

It merely lays down anarithmetical method of arriving at adisallowance.

This disallowance oftencomes to much more thanthe entire expensesdebited to the Profit andLoss Account by the taxpayer.


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COMPUTATION OF DISALLOWANCE

aggregate of

(i) amount of expenditure

directly relatingto income

which does notform part of total

income


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aggregate of

(ii) interest on borrowed funds

not directlyattributable to

any particular income or

receipt


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FORMULA FOR DISALLOWANCE

= A X BC

Amount of interest other than directlyattributable to the exempt income A

average of value of investment income from which does no t o r sha ll no t

fo rm pa rt of the total incomeB

average of total assets as appearing in the balance sheet on the first day and the last day of the relevant

accounting year C


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aggregate of (iii) % of the average of the value of

investment

income from which does n o t or sha l l no t fo rm p ar t

of the total income

as appearing in thebalance sheet on the first

day and the last day of therelevant accounting year


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RULE 8D PROVIDES


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[Godre j & B oyce Manufac tu r ing Com pany L im i ted vs .DCIT (2010) 194 Taxm an 203 (Bo m .)]

Rule 8D shall not be applicablefor assessment year prior toassessment year 2008-09

Applicable to allpending cases evenprior to notificationof rule 8D


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[ K.V. Trading Co. Limited vs. DCIT (supra) ]

Section 14A prevails over other general law due to

Special Provision

SpecialLaw


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[CIT vs . Hero Cy cl es L im ited 323(2010) ITR 518 (P&H )]


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[Dy. CIT vs . Maharas ht ra Seam less L im ited (2011) 16 Taxm an.co m 97 (Del .)

No Disallowance of Interest onborrowed funds

if Assessing officer does not show

BetweenBorrowedfunds &

NEXUS

Tax freeinvestment


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Morgan Stanley India Securities (P) Limited vs. ACIT(2011) 55 DTYR (Mub) (Trib) 177

Disallowanceof

NetInterest

or

GrossInterest


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[ Varun Shipping Company Limited vs. Addl CIT (2012) 134

ITD 339 (Mum) ]

Separate Disallowance under Presumptive Tax Scheme?

- All the expensesallowed in relation totaxable income

No scope for separatedisallowance


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K. V. Trading Co. Limited vs. DCIT(supra)

Consequences where composite expenditure isincurred on earning income, which is partly

taxable and Partly exempt

Where assessee maintain compositeaccount of expenditure

Assessee have to

prove that

Expenditure incurredby him is in relation

to

For both theexempted incomeand non exempted

income

Non exemptedincome as it is the

assessee which isclaiming deduction


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State Bank of Travancore vs. ACIT (2009) 318 ITR (AT) 171(Coach)

Investment in Tax free Bonds byBank Assessee

Not for Earning Tax free Incomebut for Meeting The Statutory Obligationof Maintaining SLR Ratio

No Disal low ance u /s 14A


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Daga Capital Management P Ltd [312 ITR 1 ]&

ACIT vs Cheminvest Ltd case [124 TTJ 577]

No Disallowance u/s14A

if Dividend Incidentalto Business


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CIT vs. New India Investment Corporation Limited(1978) 113 ITR 778 (Cal.)

Rule8D

Stock-in-

Trade

NotApplicable


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[CIT vs. Kribhco (2012) 75 DTR 265 (Del.)

Income entitled to deductionunder section 80P(2)(d)

Relating to co-operativesociety

Nodisallowance

Exempt income Deduction under

chapter VI-A Disallowance


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Gillette Group India (P.) Limited vs. ACIT 12(1)


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TO S ECTION 14A

No Disallowance Exemption isgranted

Exemption isgiven u/s.10(38)

Not as anincentive

In respect of long term capitalgains on which

STT is paid

But becausethe tax islevied atsource


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TO S ECTION 14A

e.g. Dividend Distribution tax, Tax payableby firms, etc


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TO S ECTION 14A

Disal low anc e u/s .14A

Agricul tura l Income

Haryana Land Reclamation &Development Corp. v. CIT, 159 Taxman271 (P & H)

Dividend on shares and

un i t s o f mutua l funds

Wallfort Shares &

Stock BrokersLtd. v. ITO, 96ITD 1 (Mum.)

(SB)

Share of Prof i t f rom

Firm

SudhirDattaramPatil v. DCIT,

2 SOT 678(Mum.)

Tax Free B o n d s

PunjabNational Bank v.

DCIT, 103TTJ 908

(Del.)

Chap ter VIAIncome

Punjab StateCo-operativeMilk

ProducersFederationLtd. v. ITO,

104 ITD 408(Chand)


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TO S ECTION 14A

New Rule 8Dprescribed by CBDT

working of theamount disallowable

u/s.14A

adhoc basis wasbeing adopted

notional amount willbe disallowed


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RECENT DEVELOPMENTS

Once the Rule 8D was notified sometime inearly 2008, the tax officers have beenmechanically applying the said Rule to all

pending assessments.In most cases, they have been rejecting theworking prepared by the tax payer and hugedisallowances have been made under section 14A based on the irrational computationalmechanism laid down in the Rule.


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RECENT DEVELOPMENTS

However, the latest development has made matters evenworse now.Recently, the Income-tax Appellate Tribunal had occasionto decide on the issue of applicability of the section inthose cases,

Where a tax payer had invested money in investments,the income from which, as and when received, would betax free in the hands of the tax payer.In view of conflicting decisions of various Tribunals in thematter, it was decided to constitute a SPECIAL BENCH .

This Special Bench at Delhi has given its decisionvide its consolidated order dated 5th August, 2009 in thecase of ITA Nos. 87/Del/2008, 4788/Del/2007 and 233/Ahd/2006


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S PECIAL BENCH DECISION

Relevance was

Work out the expenditure

In relation to the exempt income &

Not to examine whether the expenditureincurred by the assessee

Has resulted into exempt income or taxable income


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Gist of the SpecialBench decision

Section 14A would be applicable

Where the tax payer has not earnedany income which is tax free

But has invested funds ininvestments which

When they start yielding income

Such income would be tax free


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Disallowance

Irrespective of

Whether the inco m e i s

Earned b y the ass essee or n ot


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Decisions of the Supreme Court in the case of Maharashtra Sugar Mills and Rajasthan StateWarehousing

One indivisiblebusiness

Entire expenditure is allowable

No application after the introduction of section 14A


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DECISION OF SPECIAL BENCH


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IMPLICATIONS OF THE DECISION

Even if the investments arelong term and/or strategic ones

&

No income actually accruingor received during a year

Disallowance of part of theinterest paid


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Documents

Section 14A of I Tax Act