2. Topics Covered Background of Section 14A Method of
Allocating Expenditure relating to Exempt Income Computation of
Disallowance Judicial Decisions (Rule 8D) Decision to Section 14A
Recent Developments
3. Brought onto the statute by the Finance Act, 2001 with with
retrospective effect from 1st April 1962 in Chapter IV of the
Income Tax Act 1961 Provides for disallowance of expenditure
incurred in relation to income which is not included in the total
income of the assessee Subsequently, Rule 8D was introduced by the
Income Tax (Fifth Amendment) Rules 2008 with prospective effect
from 24th March 2008 vide NOTIFICATION NO-45/2008, Dated: 24 March
2008 for computation of disallowance by the Assessing Officer
subject to his satisfaction with the correctness of claim or no
claim by an assessee.
4. SEC 14 A (BARE ACT) For the purposes of computing the total
income under this Chapter, no deduction shall be allowed in respect
of expenditure incurred by the assessee in relation to income which
does not form part of the total income under this Act. The
Assessing Officer shall determine the amount of expenditure
incurred in relation to such income which does not form part of the
total income under this Act in accordance with such method as may
be prescribed, if the Assessing Officer, having regard to the
accounts of the assessee, is not satisfied with the correctness of
the claim of the assessee in respect of such expenditure in
relation to income which does not form part of the total income
under this Act. The provisions of sub-section (2) shall also apply
in relation to a case where an assessee claims that no expenditure
has been incurred by him in relation to income which does not form
part of
5. Incurred in respect of exempt income Against taxable income
No deduction for expenditure Exemptions to certain categories of
income Used to reduce the tax payable on the non- exempt income
Incurred to earn the exempt income against taxable income. Tax
incentive given by way of Expenses incurred can be allowed Only to
the extent they are relatable To the earning of taxable income
Exemption is also in respect of the net income
6. No expenditure has been incurred for Such exempt income No
further action is required By the Assessing Officer in this
regard
7. Correctness of the claim of expenditure The claim made by
the assessee that no expenditure has been incurred For that Rule 8D
lays down the computation mechanism for this purpose
8. 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.
9. Computation of Disallowance aggregate of (i) amount of
expenditure directly relating to income which does not form part of
total income
10. Computation of Disallowance aggregate of (ii) interest on
borrowed funds not directly attributable to any particular income
or receipt
11. Formula for Disallowance = A x B C Amount of interest other
than directly attributable to the exempt incomeA average of value
of investment income from which does not or shall not form part of
the total income B average of total assets as appearing in the
balance sheet on the first day and the last day of the relevant
accounting year C
12. 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
13. Rule 8D provides
14. [ K.V. Trading Co. Limited vs. DCIT (supra) ] Section 14A
prevails over other general law due to Special Provision Special
Law
15. [CIT vs. Hero Cycles Limited 323(2010) ITR 518
16. [Dy. CIT vs. Maharashtra Seamless Limited (2011) 16
Taxman.com 97 (Del.) No Disallowance of Interest on borrowed funds
if Assessing officer does not show Between Borrowed funds &
NEXUS Tax free investment
17. Morgan Stanley India Securities (P) Limited vs. ACIT (2011)
55 DTYR (Mub) (Trib) 177
18. [ Varun Shipping Company Limited vs. Addl CIT (2012) 134
ITD 339 (Mum) ] Separate Disallowance under Presumptive Tax Scheme?
- All the expenses allowed in relation to taxable income No scope
for separate disallowance
19. K. V. Trading Co. Limited vs. DCIT (supra) Consequences
where composite expenditure is incurred on earning income, which is
partly taxable and Partly exempt Where assessee maintain composite
account of expenditure Assessee have to prove that Expenditure
incurred by him is in relation to For both the exempted income and
non exempted income Non exempted income as it is the assessee which
is claiming deduction
20. Daga Capital Management P Ltd [312 ITR 1 ] & ACIT vs
Cheminvest Ltd case [124 TTJ 577] No Disallowance u/s 14A if
Dividend Incidental to Business
21. [CIT vs. Kribhco (2012) 75 DTR 265 (Del.) Income entitled
to deduction under section 80P(2)(d) Relating to co-operative
society No disallowance Exempt income Deduction under chapter VI-A
Disallowance
22. Gillette Group India (P.) Limited vs. ACIT 12(1)
23. to Section 14A No Disallowance Exemption is granted
Exemption is given u/s.10(38) Not as an incentive In respect of
long term capital gains on which STT is paid But because the tax is
levied at source
24. to Section 14A e.g. Dividend Distribution tax, Tax payable
by firms, etc
25. to Section 14A Disallowance u/s.14A Agricultural Income
Haryana Land Reclamation & Development Corp. v. CIT, 159 Taxman
271 (P & H) Dividend on shares and units of mutual funds
Wallfort Shares & Stock Brokers Ltd. v. ITO, 96 ITD 1 (Mum.)
(SB) Share of Profit from Firm SudhirDattara mPatil v. DCIT, 2 SOT
678 (Mum.) Tax Free Bonds Punjab National Bank v. DCIT, 103 TTJ 908
(Del.) Chapter VIA Income Punjab State Co-operative Milk Producers
Federation Ltd. v. ITO, 104 ITD 408 (Chand)
26. 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.
27. 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
