expense disallowed in relation to exempt income (section 14a)
TRANSCRIPT
Expense disallowed in
relation to
Exempt Income
(Section 14A)
by
CA. PRAMOD JAINFCA, FCS, FCMA, DISA, MIMA
LUNAWAT & CO.
Lunawat & Co
Periods
Before 14A Original 14A
Lunawat & Co
Amended 14A
Rule 8D
Background
• Rajasthan State Warehousing Corporation vs. CIT
(2000) 242 ITR 450 (SC)
• S. 14A inserted by Finance Act, 2001 w.r.e.f. 1.4.1962.
• Memorandum explaining the introduction says:
“………exemptions to certain categories of income are
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“………exemptions to certain categories of income are
used to reduce the tax payable on non‐exempt
income by debiting expenses incurred to earn the
exempt income against taxable income. This is
against the basic principle of taxation whereby only
net income is taxed….Expenses incurred can be
allowed only to the extent they are relatable to the
earning of taxable income.”
Section - 14A
• For purposes of computing TI 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 TI under this Act.
• Provided that nothing contained in this section shall
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• Provided that nothing contained in this section shall
empower the AO either to reassess u/s 147 or pass an
order enhancing the assessment or reducing a refund
already made or otherwise increasing the liability of
the assessee u/s 154, for any AY beginning on or
before 1.4.2001.
The Proviso• Circular No. 11/2001, dated 23-7-2001 was converted
into statutory provision by Finance Act 2002 w.r.e.f.
11.5.2001
• The proviso to sec 14A bars reassessment but not
original assessment - assessment done after insertion
of section 14A- Honda Siel Power Products Ltd. Vs. Dy. CIT
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of section 14A- Honda Siel Power Products Ltd. Vs. Dy. CIT
[2011‐ITRV‐SC‐181]; (2011) 197 Taxman 415 (Delhi). AY 2000‐01
• Bar under Circular No.11 on reopening of concluded
assessment would not operate where assessment was
pending finalization after remand by first appellate
authority in appeal filed by assessee - Catholic Syrian
Bank Ltd. V. CIT [2011‐ITRV‐HC‐KER‐023]; (2010) 187 Taxman
185(Ker.)
The Proviso
• Where order of CIT under section 263 was passed
earlier i.e. on 29/12/1999, the protection under the
proviso is not available ‐ Mahesh G. Shetty & Ors. V. CIT
[2011-ITRV-HC-KAR-053]
• Issue to invoke section 14A cannot be raised before the
ITAT for the first time ‐
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ITAT for the first time ‐ ACIT v. Delite Enterprises (P.) Ltd.
(2011)50 DTR 193 (MUM.) (Trib.)
Heads of Income
• The provisions of section 14A will apply to all
income which is exempt whether the income is
assessed under the head “Other sources’ or
under the head “Business” because there is
nothing in Section 14A which restricts the
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nothing in Section 14A which restricts the
operation of section to income of a particular
nature only - Insaallah Investments Ltd. V. ITO
(2008) 23 SOT 130 (DEL‐ Trib)
Expenditure Incurred
• Covers all forms of expenditure regardless of whether it is fixed, variable, direct, indirect, administrative, managerial or financial.
– Kalpataru Construction Overseas (P.) Ltd. v. Dy. CIT [2007] 13 SOT 194 (Mum. ‐ Trib.)
– Parry Agro Industries v. Asst. CIT 314 ITR (AT) 181(2009) (Cochin)
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(Cochin)
• Expenditure to be incurred actually and not notionally. AO should be in a position to pinpoint, with an acceptable degree of accuracy, the expenditure which was incurred by assessee to produce non-taxable income
– Asstt. CIT v. Eicher Ltd. [2006] 101 TTJ (Delhi ‐ Trib.) 369
– Wimco Seedlings Ltd. vDy. CIT[2007] 107 ITD 267 (Del)(TM)
Expenditure in relation to
• Only expenditure which has been proved to be
incurred in relation to earning of tax free income
can be disallowed and section cannot be extended
to disallow even expenditure which is assumed to
have been incurred for earning tax free income.
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• Common expenditure incurred cannot be broken
artificially to apportion a part thereof to earning of
tax‐free income on assumption that such part of
common expenditure was incurred in relation to
tax‐free income.
DLF Ltd. v. CIT [2009] 27 SOT 22 (DELHI)
Allowances & Deductions
• Is depreciation covered u/s 14A??
• Is 14A applicable on deductions under
Chapter VIA??– Hoshang D. Nanavati vs. ACIT [2011-ITRV-ITAT-MUM-082]
– Vishnu Anant Mahajan vs. ACIT [2012-ITRV-ITAT-AHD-115] –
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– Vishnu Anant Mahajan vs. ACIT [2012-ITRV-ITAT-AHD-115] –
SB
• Applies to Partnership profits too
– Vishnu Anant Mahajan vs. ACIT [2012-ITRV-ITAT-AHD-115] –
SB
– CIT v. Popular Vehicles & Services Ltd. [2010] 189 Taxman 14
(Ker)
Nexus• Nexus of interest expenditure directly or indirectly
attributing to earn dividend income is necessary
– CIT vs. K. Raheja Corporation Pvt. Ltd. [2011-ITRV-HC-MUM-184]
– Minda Investments Ltd. vs. DCIT [2010-ITRV-ITAT-DEL-097]
– ACIT vs. SIL Investment Ltd [2012-ITRV-ITAT-DEL-087]
– Justice Sam P Bharucha vs. Addl. CIT [2012-ITRV-ITAT-MUM-255]
• Ground that assessee ought not to have used own funds
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• Ground that assessee ought not to have used own funds
for tax-free investments is invalid. It was the prerogative of
the assessee to use its own fund in the manner in which it
considers proper and the Revenue cannot dictate how the
funds should be used
– CIT vs. Gujarat Power Corporation Ltd. [2011-ITRV-HC-GUJ-066]
– Godrej Industries Ltd. v. DCIT , [2011-ITRV-ITAT-MUM-096 ]
– Godrej Agrovet Ltd vs. ACIT [2010-ITRV-ITAT-MUM-086 ]
Mixed Funds
• Even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in and, therefore, disallowance u/s 14A was
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u/s 14A was
– Justified - CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H)
– Not justified - CIT vs. Lubi Submersibles Ltd. [2011-ITRV-HC-GUJ-191 ] AY 2001-02
– Not Justified - Dy. CIT vs. Maharashtra Seamless Ltd. [2011-ITRV-ITAT-DEL-004]
Existence of exempt income
• No disallowance if no exempt income during yr
– Jt. CIT v. Holland Equipment Co. B.V. [2005] 3 SOT 810 (Mum.)
AY 1995-96
– ACIT v. Lafarge India Holding (P.) Ltd. [2008] 19 SOT 121 (Mum.)
• Disallowance even if no exempt income during yr
– Cheminvest Ltd. V. ITO 121 ITD 318 (2009) ITAT (Del)(SB)]
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– Cheminvest Ltd. V. ITO 121 ITD 318 (2009) ITAT (Del)(SB)]
• No disallowance if tax-free investments are capable of
taxable income
– Avshesh Mercantile P. Ltd. vs. DCIT [2012-ITRV-ITAT-MUM-140]
• Partnership Firm – loss during the year – interest paid.
Disallowance u/s 14A?
– No – CIT vs. Delite Enterprises [2012-ITRV-HC-MUM-138]
Statutory Compliances
• The expenses, if at all were expenses, they were
incurred not for earning tax-free income but for
maintaining the required SLR.
• The tax-free interest is only an incidence on
fulfillment of SLR requirements. Then, section
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fulfillment of SLR requirements. Then, section
14A has no application in this case.
– State Bank of Travancore Vs. Assit. CIT [2009] 318
ITR (AT) 171- (ITAT-COCHIN )
Interest capitalized
• Where the interest on borrowings made for investment in shares is capitalised, since in such a case interest paid is not in relation to exempt income, but as part of cost of share, such interest could not be disallowed u/s 14A – S. Balan V. Dy. CIT 120 ITD 469 (2009) ITAT(Pune)
Interest paid on borrowed funds utilized for the
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• Interest paid on borrowed funds utilized for the purpose of investment in shares was not to be allowed as either an expenditure or as part of cost of acquisition of the shares, in view of the provisions of section 14A as the shares were not sold during the year– Harish Krishnakant Bhatt v. ITO [2004] 85 TTJ 872
Personal Tax Free Income• Would personal Tax Free income like PPF Interest,
dividend, etc come under 14A purview?
• The assessee is maintaining separate books of account for the purpose of business. The tax-free investments are in his personal capacity. As the Assessing Officer has not disallowed any expenditure of personal nature out of the business income, the expenditure claimed in the business of share dealings cannot be correlated to the
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business income, the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds
• Accordingly, the estimation of expenditure out of business expenditure as being incurred for earning tax free income is not acceptable.– Pawan Kumar Parmeshwarlal vs. ACIT [2011-ITRV-ITAT-
MUM-006]
Applicability in case of Chapter VIA
• Expenditure incurred for earning of export income which is
exempt u/s80HHC, cannot be held to be income which does not
form part of total income. Such expenses cannot be disallowed
u/s14A - CIT v. Kings exports 318 ITR 100 (2009) (Punj. & Har.)
• Section 14A could not be applied to provisions of Chapter VI-A
where deductions are to be made in computing the total income
and in no way that can be compared with the exempted income
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and in no way that can be compared with the exempted income
which does not form part of the total income- ACIT v. Tamil
Nadu Silk Producers Federation Ltd. [2006] 103 TTJ (Chennai)
716]; ACIT vs. Bank of Madura [2011] 007 ITR (Trib) 139 ITAT
[chen]
• Deduction of income derived by a co-operative society u/s 80P is
not a case of “exempt income” but of “deduction from income”.
Therefore provisions of sec.14A are not applicable in this case ‐
ACIT Vs. Kribhco 6 ITR 686 (2010) (ITAT‐Del)
Investment company
• In case of an investment company, where the business of the company is to invest its funds in the share of sister concerns and other companies and also deposit the money with group concerns on which interest is received, the infrastructure of the company is utilized for the purpose of carrying out its objects, i.e., investment in other concerns and
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its objects, i.e., investment in other concerns and also earning income on such investments. In such a case, assessee is required to furnish details of expenditure incurred on salary of staff utilized for the object of assessee‐company, which would be disallowed otherwise it would be disallowed under section14A on estimate basis – Dy. CIT V. Tata Investment Corporation Ltd. (2007) 295 ITR
330(Mum‐Trib)
Separate books?
• Section 14A authorises AO to make disallowance of expenditure incurred for earning tax free income, irrespective of whether assessee maintained separate accounts or not with regard to expenditure incurred for earning non-taxable income. – CIT v. The Catholic Syrian Bank Ltd. [ 2011-ITRV-HC-KER-023 ]
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– CIT v. The Catholic Syrian Bank Ltd. [ 2011-ITRV-HC-KER-023 ]
• Non maintenance of separate accounts by assesseewith regard to expenditure incurred for earning non‐taxable income was not justification to claim immunity from operation of section14A.
– CIT v. Dhanalakshmy Bank Ltd, [2011] 10 taxmann.com 213(Ker.)
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Section - 14AFinance Act 2006 inserted s.ss (2) & (3) w.e.f. AY 2007‐08:
1. For purposes of computing TI 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 TI under this Act.
2. The AO shall determine the amount of expenditure
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2. The AO shall determine the amount of expenditure
incurred in relation to such income which does not
form part of the TI under this Act in accordance with
such method as may be prescribed, if the AO, 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 TI under this Act
Section - 14A3. 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 the total income
under this Act
4. Provided that nothing contained in this section shall
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4. Provided that nothing contained in this section shall
empower the AO either to reassess u/s 147 or pass an
order enhancing the assessment or reducing a refund
already made or otherwise increasing the liability of
the assessee u/s 154, for any AY beginning on or before
1.4.2001.
Rule 8 D• Inserted vide notification No. S.O. 547(E) on 24-3-2008
• Total 3 sub-rules.
• Sub-rule (1)
Where the AO, having regard to the accounts of the
assessee of a P.Y., is not satisfied with—
(a) correctness of the claim of expenditure made by the assessee; or
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(a) correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been
incurred,
in relation to income which does not form part of the total
income under the Act for such P. Y., he shall determine the
amount of expenditure in relation to such income in
accordance with the provisions of sub-rule (2).
Rule 8 D• Sub-rule (2). The expenditure shall be aggregate of following
amounts (i.e., 1+2+3) namely:
1. Expenditure directly relating to income which does not form
part of total income
2. In a case where the assessee has incurred expenditure by way
of interest during the P.Y., which is not directly attributable to
any particular income or receipt, an amount computed in
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any particular income or receipt, an amount computed in
accordance with the following formula, namely:‐
A = amount of expenditure by way of interest other than amount of interest
included in clause (1) incurred during P.Y.
B = average of 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 P. Y.
C = average of total assets as appearing in the balance sheet, on the first day
and the last day of the previous year.
A X B / C
Rule 8 D
3. An amount equal to 1/2% 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 of
the assessee, on the first day and the last day of the P.Y.
• Sub-rule (3). Total assets shall mean total assets as
appearing in the balance sheet excluding the increase
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appearing in the balance sheet excluding the increase
on account of revaluation of assets but including the
decrease on account of revaluation of assets.
Example of calculation u/r 8D
Liabilities 31.3.13 31.3.12 Assets 31.3.13 31.3.12
Eq. Share capital 125 100 Fixed Assets 150 100
Loans for Investment
in Shares & MF
100 50 Shares 150 100
Other loans 400 350 Trade Receivable 60 50
Trade payables 200 150 Mutual Funds 190 150
Balance Sheet as on 31st March 2013
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Trade payables 200 150 Mutual Funds 190 150
Inventories 225 200
Cash and Bank 50 50
Total 825 650 Total 825 650
•For the year ending 31-03-2013, assessee earned dividend income
-Rs. 10 lacs, & interest on MF -Rs. 15 Lacs.
•Interest paid on loans:
•For Investment in shares & MF - Rs. 6 Lacs
•For other loans - Rs. 28 Lacs
Example of calculation u/r 8D
1. Exp. directly related to exempt income= int. paid on
loan for investment in shares & MF= 6 Lacs
2. Proportionate exp. of int.= exp by way of interest not
directly related to exempt income X average value of
invt. / average value of total assets
• A = 28
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• A = 28
• B = (150 + 100 + 190 + 150) / 2 = 295
• C = (825 + 650) / 2 = 737.5
i.e ( AX B/C)= 28 X 295 / 737.5 = 11.2 Lacs
3. ½% of avg value of invt. = 295 X ½% = 1.475 Lacs
4. Total Disallowance = 1+2+3 i.e., 6 + 11.2 + 1.475 =
18.675
Is 14A & 8D constitutionally valid?• Special Bench in Daga Capital 117 ITD 169 (Mum)
held that s. 14A(2) & (3) & Rule 8D are procedural in nature and have retrospective effect
• Several controversies settled in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010-ITRV-HC-MUM-077] / [2010] 328 ITR 81 (BOM.)– The argument that dividend on shares / units is not tax‐
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– The argument that dividend on shares / units is not tax‐free in view of the dividend‐distribution tax paid by the payer u/s 115‐O is not acceptable because such tax is not paid on behalf of the shareholder but is paid in respect of the payer’s own liability.
– Once a proximate cause for disallowance is established –which is the relationship of the expenditure with income which does not form part of the total income – a disallowance u/s 14A has to be effected.
Is 14A & 8D constitutionally valid?– S 14A is founded on a valid rationale that the basic principle of
taxation is to tax net income i.e gross income minus expenditure
– The AO cannot ipso facto apply Rule 8D but can do so only
where he records satisfaction on an objective basis that the
assessee is unable to establish the correctness of its claim
– Rule 8D inserted w.e.f 24.3.2008 cannot be regarded as
retrospective because it enacts an artificial method of estimating
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retrospective because it enacts an artificial method of estimating
expenditure relatable to tax‐free income. Applies w.e.f AY 2008-9
– For the AYs where Rule 8D does not apply, the AO will have to
determine the quantum of disallowable expenditure by a
reasonable method having regard to all facts and circumstances
– Even though Rule 8D did not apply to AY 02-03, the AO had to
consider whether disallowance could be made u/s 14A(1). Also,
the principle of consistency would not apply as s. 14A had
introduced a material change in the law
Nexus between expenditure & income
• After Rule 8D of S. 14A, is actual nexus between tax‐free income and expenditure required to be proved??
• CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P &H); [2009‐ITRV‐HC‐P&H‐11] Y
• CIT vs. Walfort Share and Stock Private Limited [2010] 326 ITR 1(SC); [2010‐ITRV‐SC‐070]
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ITR 1(SC); [2010‐ITRV‐SC‐070]
• DCIT vs. Allied Investments Housing P. Ltd. [2013‐ITRV‐ITAT‐CHN‐164]
• Justice Sam P Bharucha vs. Addl. CIT [2012‐ITRV‐ITAT‐MUM‐255]
• ACIT vs. Punjab State Co‐op & Marketing Ltd. [2011‐ITRV‐ITAT‐CHD‐230] – AY 2007‐08 ‐ S. 14A disallowance cannot exceed exempt income
Satisfaction of AO• It is a pre‐requisite that before invoking Rule 8D, the AO
must record his satisfaction on how the assessee’s
calculation is incorrect. AO cannot apply Rule 8D
without pointing out any inaccuracy in method of
apportionment or allocation of expenses. Onus is on AO
to show that expenditure has been incurred by assessee
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to show that expenditure has been incurred by assessee
for earning tax‐free income. Without discharging the
onus, AO is not entitled to make an ad hoc disallowance
– DCIT vs. Jindal Photo Ltd. [2011‐ITRV‐ITAT‐DEL‐229] AY 2008-09
– AY 2007-08 followed
• AO has to show how assessee is wrong even if he claims
no expenditure was incurred
– DCIT vs. Ashish Jhunjhunwala [2013‐ITRV‐ITAT‐KOL‐071]
Maxxop Investment Ltd. vs. CIT• Batch of 21 appeals decided on 14A read with Rule 8D
[2011-ITRV-HC-DEL-253]
• The argument that if the dominant and main objective
of the expenditure was not the earning of ‘exempt’
income then, the expenditure cannot be disallowed
u/s 14A is not acceptable. The expression “in relation
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u/s 14A is not acceptable. The expression “in relation
to” cannot be given a narrow meaning and simply
means “in connection with” or “pertaining to”.
• The expression “expenditure incurred” in s. 14A refers
to actual expenditure and not to some imagined
expenditure. If no expenditure is incurred in relation to
exempt income, no disallowance can be made u/s 14A
Maxxop Investment• The AO cannot proceed to determine the amount of
expenditure incurred in relation to exempt income without
recording a finding that he is not satisfied with the
correctness of the claim of the assessee. This is a condition
precedent.
• Rule 8D comes into play only when the AO records a finding
that he is not satisfied with the assessee’s method. Though s.
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that he is not satisfied with the assessee’s method. Though s.
14A(2) & (3) were inserted w.e.f. 1.4.1962, Rule 8D was
inserted on 24.03.2008. Accordingly, Rule 8D would operate
prospectively.
• For periods prior to Rule 8D, the AO will have to adopt a
reasonable method on the basis of objective criteria to
determine the expenditure. However, here also, he will have
to show why he is not satisfied with the correctness of the
assessee’s claim
When can Rule 8D be applied?• The satisfaction of AO as to incorrect claim made by
the assessee is sine qua non for invoking the
applicability of Rule 8D. The satisfaction can be
reached only when claim of the assessee is verified.
• If the assessee proves before AO that it incurred a
particular expenditure in respect of earning the
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particular expenditure in respect of earning the
exempt income and the AO is satisfied, then there is no
requirement to proceed with the computation under
Rule 8D. Rule 8D is not automatic.
• The correct sequence for making any disallowance
u/s14A is to, firstly, examine the assessee’s claim of
having incurred some expenditure or no expenditure in
relation to exempt income.
When can Rule 8D be applied?
• If the AO is satisfied with the same, then there is no
need to compute disallowance as per Rule 8D.
• It is only when the AO is not satisfied with the
correctness of the claim of the assessee in respect of
such expenditure or no expenditure having been
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such expenditure or no expenditure having been
incurred in relation to exempt income, that the
mandate of Rule 8D will operate.
• Auchtel Products Ltd vs. ACIT [2012-ITRV-ITAT-MUM-109]
Extent of disallowance• Dividend Income – 1 Cr;
• Exempt LTCG – 5 Cr
• Expenses – 25 Lacs; including interest 2 L
• Average investments – 100 Cr
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• Average investments – 100 Cr
• How much should be disallowance?
• Gillette Group India Pvt. Ltd. vs. ACIT - [2012-
ITRV-ITAT-DEL-66] – Not exceeding exp
incurred
• ACIT vs. Passionate Investments Management
P. Ltd. (2013) 36 CCH 113 MumTrib
Rule 8D(ii)• ABC P. Ltd. engaged in business of running
vehicles on hire:
• Investment in shares – 100 L;
• Total Assets – 1000 L
• Interest paid on borrowing for investments
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• Interest paid on borrowing for investments
(income being tax free) - 1L
• Interest paid on borrowing for vehicles put on
hiring business – 9 L.
• Total interest -10 L
• How much is interest disallowable u/r 8D(ii)?
Rule 8D(ii)• In Godrej & Boyce Mfg Co Ltd 328 ITR 81 (Bom) / [ 2010‐
ITRV‐HC‐MUM‐077 ], the department took the stand, to
defend the constitutional validity of Rule 8 D, that both,
interest directly attributable to tax exempt income as well
as interest directly relatable to taxable income would be
excluded from the definition of variable ‘A’ in Rule 8D(ii)
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excluded from the definition of variable ‘A’ in Rule 8D(ii)
formula. Accordingly, correct application of formula set
out in Rule 8D(2)(ii) is, that interest expenses directly
attributable to tax exempt income as also directly
attributable to taxable income have to be excluded from
the computation of common interest expenses to be
allocated u/r 8D(2)(ii)
– ACIT vs. Champion Commercial Co. Ltd. [2012‐ITRV‐ITAT‐KOL‐243]
Specific Expenditure
• Can expenditure specifically incurred for taxable
income disallowed??
• JCIT (OSD) vs. Pilani Investment & Industries Corpn. Ltd.
[2013-ITRV-ITAT-KOL-026] – N
• ACIT vs. Best & Crompton Engineering Ltd [2013-ITRV-ITAT-
CHN-100]
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CHN-100]
• REI Agro Ltd. vs. DCIT [2013-ITRV-ITAT-KOL-088]
• Can Rule 8D be applied if assessee says that no
expenditure was incurred by him?
• CIT vs. Deepak Mittal (2013) 86 CCH 051 PHHC - AO can not
apply Rule 8D unless he proves that certain expenditure was
incurred by the assessee.
No exempt income during year• Rule 8D(2)(ii) -numerator B - average value of invest., income
from which does not form or shall not form part of TI as appearing
in the balance‐sheet as on first day and in last day of previous yr“.
• It is not total investment at beginning and at end of year, which is
to be considered but it is average of the value of investments
which has given rise to income which does not form part of total
income which is to be considered.
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income which is to be considered.
• Rule 8D(2)(iii), what is disallowable is an amount equal to ½
percentage of the average value of investment the income from
which does not or shall not form part of the total income
• The disallowance u/s 14A read with rule 8D is to be in relation to
the income which does not form part of total income and this can
be done only by taking into consideration invest. which has given
rise to this income which does not form part of the total income.
• REI Agro Ltd. vs. DCIT [2013-ITRV-ITAT-KOL-088]
Stock-in-trade• Is s. 14A / R 8D applicable on invest. held as stock in trade??
• Yes
• D. H. Securities P. Ltd. vs. DCIT [2013-ITRV-ITAT-MUM-160]
• Daga Capital 117 ITD 169 (Mum) (SB)
• Esquire Pvt. Ltd. vs. DCIT [2012-ITRV-ITAT-MUM-204]
• JCIT vs. American Express Bank Ltd. [2012-ITRV-ITAT-MUM-174]
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• JCIT vs. American Express Bank Ltd. [2012-ITRV-ITAT-MUM-174]
– No
• CCI Ltd 71 DTR (Kar) 141 [2012-ITRV-HC-KAR-075] ,
• Smt. Apporva Patni vs. Addl. CIT [2012- ITRV-ITAT-PUNE-282]
• Ethio Plastic Pvt. Ltd. vs. DCIT [2012-ITRV-ITAT-AHD-283]
• DCIT vs. Gulshan Investment Co. Ltd. [2013-ITRV-ITAT-KOL-032]
• Esquire Pvt. Ltd. vs. DCIT [2012-ITRVITAT-MUM-204]
• Yatish Trading vs. ACIT [2011-ITRV-ITAT-MUM-071]
Stock-in-trade• The argument that all expenditure has been incurred for share
trading business and that there is no additional expenditure
incurred for earning dividend is not acceptable because though
the expenditure is incurred for purpose of the business of share
trading, the said business yields taxable and non-taxable income
• If Rule 8D(2)(ii) which quantifies the interest on investments,
income from which is not taxable, on a proportionate basis, is
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income from which is not taxable, on a proportionate basis, is
applied literally, it will lead to absurd results.
• Rule 8D(2)(ii) needs to be scaled down by bifurcating the
expenditure so arrived at between the tax-free and the taxable
incomes. Given that the dominant objective of the share holding
is to earn share trading income, an ad hoc ratio of 20% toward
tax-exempt dividend income will be reasonable.
• DCIT vs. Damani Estates & Finance Pvt. Ltd [2013-ITRV-ITAT-
MUM-106]
Other points
• Can expenditure on acquiring shares out of commercial
expediency disallowed??
• CIT vs. Oriental Structural Engineers P. Ltd.[2013‐ITRV‐HC‐DEL‐
163] – N
• Does S. 14A/ Rule 8D apply to short-term investments?
• Sundaram Asset Management Co. Ltd. vs. DCIT [2013‐ITRV‐
Lunawat & Co
• Sundaram Asset Management Co. Ltd. vs. DCIT [2013‐ITRV‐
ITAT‐CHN‐099] –N
• Cheminvest Ltd. V. ITO 121 ITD 318 (2009) ITAT (Del)(SB)]
• Interest paid 5 L, interest received 2 L. How much to be
considered for Rule 8D?
• ITO vs. Karnavati Petrochmem Pvt. Ltd. [2013‐ITRV‐ITAT‐AHD‐
105] ‐ net
271 (1) (c) Penalty
• By applying the prescribed method under rule 8D, addition by way of disallowance of expenditure under section 14A is made, we have to ascertain whether or not the assessee has furnished inaccurate particulars in the course of assessment proceedings. If the assessee offers an explanation
Lunawat & Co
proceedings. If the assessee offers an explanation which is not found by the AO to be false there is no need to invoke this penal provision.
• No Penalty if no disallowance is made in tax audit report also as there is difference of opinion.
– Dy. CIT vs. Nalwa Investments Ltd. [2011-ITRV-ITAT-DEL-114]
Lunawat & Co
Financial Statements
• True and fair view
Lunawat & Co
• Provision of tax
MAT
• Section 115 JB provides for increasing the book profit by the amount of expenditure relatable to any income to which section 10 [other than 10(38)] applies and reducing the book profit by the amount of income to which section 10 [other than sec. 10(38)] applies.
Lunawat & Co
[other than sec. 10(38)] applies.
• Disallowance u/s 14A to be added back for MAT purposes
– ITO vs. RBK Share Broking P. Ltd. (2013) 36 CCH 295 MumTrib
• Certification under Form 29B
AMT
• Section 115 JC provides for calculation of
adjusted total income.
• Now that the “method” is in place, the
rigmarole of determining the amount of
expenditure to be added and year of
Lunawat & Co
expenditure to be added and year of
applicability of the “prescribed method” has to
be undergone.
• Certification under Form 29C
Tax Audit
• Para 17(l) of Form 3CD
• Amounts debited to the P & L A/c being ..
Amount of deduction inadmissible in terms of
section 14A in respect of the expenditure
Lunawat & Co
section 14A in respect of the expenditure
incurred in relation to income which does not
form part of the total income
CA. Pramod JainCA. Pramod [email protected]
+91 9811073867
© © 2014 2014 CA. Pramod Jain, Lunawat & CoCA. Pramod Jain, Lunawat & Co