Important aspects of Section14A

Report
Important aspects of
Section14A
 1 Tax
 Act, 1961
of the Income
By : CA Sanjay Agarwal
Mb: 9811080342
Email id: agarwal.s.ca@gmail.com
 Inserted by Finance Act, 2001, w.r.e.f 1-4-1962
 Expenditure incurred in Relation to Income Not
includible in Total Income.
2
• “………exemptions to certain categories of income are used to
reduce also 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.”
• The intention of the legislature is not to allow the
expenses which are incurred to earn the income exempt
from tax.
3
Sub-Sec. 1
• For 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.
AO shall determine the amount of Expenditure incurred in relation to
exempt income in accordance with such method as may be prescribed
under Rule 8D in following cases……
Sub-Sec. 2
If 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.
Sub-Sec. 3
where an assessee claims that no
expenditure has been incurred by
him in relation to income not
forming the part of the total income
under this Act.
4
 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 made or otherwise
increasing the liability of the assessee u/s 154, for any A.Y.
beginning on or before the 1st day of April, 2001.
Circular No. 11/2001, dated 23-7-2001, was inserted so as to direct that the
assessments where the proceedings have become final before the first day of
April, 2001 should not be re-opened under section 147 of the Act to disallow
expenditure incurred to earn exempt income by applying the provisions of
newly inserted section 14A of the Act.
The same view has been expressed in CIT vs PNB Finance & Industries Ltd [2010] TIOL 801-HC –DEL –IT.
5
 The proviso to sec14A bars reassessment but not original assessment on the
basis of retrospective amendment. [Honda Siel Power Products Ltd. Vs. Dy. CIT (2011)
197 Taxman415 (Delhi) & Mohair Investment & Trading (P) Ltd. v. Dy. CIT [2012] 21
Taxmann.com 480(ITAT-Delhi)]
 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
(2010) 187 Taxman 185(Ker.)
 Where order of CIT u/s 263 was passed earlier i.e. on 29/12/1999, the
protection under the proviso is to available. [Mahesh G. Shetty & Ors. V. CIT (2011)
51 DTR 104 (Kar.)]
 Whether issue to invoke section 14A be raised before the ITAT for the first
time?
• Held No. [ACIT v. Delite Enterprises (P.) Ltd. (2011)50DTR193 (MUM.) (Trib.)]
6
Rule 8D of Income Tax Rules, 1962 ….
Method for determining amount of expenditure in relation to
Exempt Income
(Inserted vide notification No. S.O. 547(E) on 24-3-2008)
7
 Where the AO, having regard to the accounts of the
assessee of a P.Y., is not satisfied with—
(a) the 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 subrule (2).
8
 The expenditure shall be the aggregate of following amounts namely:
i.
Expenditure directly relating to income (which does not form part of
total income)
ii.
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 accordance
with the following formula, namely:A*(B/C)
iii.
an amount equal to 0.5% 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.
9
A
B
C
= amount of expenditure by way of interest other than the
amount of interest included in clause (i) incurred during
the P.Y.
= 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.
=
average of total assets as appearing in the balance
sheet, on the first day and the last day of the previous
year
10
 Total assets shall means total assets as appearing in the
balance sheet [excluding the increase on account of
revaluation of assets but including the decrease on
account of revaluation of assets.]
11
Balance sheet as on….
Liab.
31-03-2010
31-03-2011
Assets
31-03-2010
31-03-2011
Eq. sh capital
Loans
for inv in bonds &
Mutual funds
General Loans
100
100
Fixed assets
Investments
140
100
80
60
shares(L.T)
150
120
160
140
60
45
for trading activities
220
200
160
160
s. creditors
210
165
shares (S.T)
Mutual funds (s.
10(23D))
Bonds (other
than tax free)
stock in trade
40
40
220
200
770
665
Total
770
665
During the year ending on 31-03-2011, assessee earned dividend income of Rs.
12 lacs, & int. on mutual funds of Rs. 15 Lacs.
Interest paid on loans:
For inv. In bonds & M.F (50 Lacs inv in M.F)
Rs. 6 Lacs
For General loans
Rs. 8 Lacs
For trading activities
Rs. 20 Lacs
12
Contd…
i.
Exp. directly related to exempt income= int. paid on loan for inv in M.F=
6* 50/60= Rs. 5 Lacs
ii.
Proportionate exp. of int.= exp by way of int. not directly related to
exempt
inc. * (avg value of inv./ avg value of
total
assets)
i.e ( A*B/C)= 8 * (150+60+160+120+45+160)/2= 347.5 =Rs. 3.8745Lacs
(770+665)/2 = 717.5
iii. ½% of avg value of investment
= 347.5 * ½% = Rs. 1.7375 Lacs
Total disallowance= 5 Lacs + 3.8745 Lacs + 1.7375 Lacs
= Rs. 10.612 Lacs
13
14
Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 194 TAXMAN 203/
328 ITR 81 (BOM.) SLP pending with Supreme Court,[No. 36516 of
2010]
Held:
 Provisions of sub-sections (2) and (3) of section 14A and Rule
8D are constitutionally valid having a retrospective effect.
 The power of the AO to apply Rule 8D is not automatic and the
AO is bound to give an opportunity to the taxpayer to prove the
correctness of his claim. It is only where the AO is not satisfied
with the claim of the taxpayer he can apply Rule 8D after
recording reasons.
• The Hon’ble Bom HC has overruled the decision of the Mum.
ITAT(SB) in case of ITO v. Daga Capital Management (P.) Ltd.
[2009] 117 ITD 169.
15
 Even prior to the assessment year 2008-09, when rule 8D was
not applicable, the Assessing Officer has to enforce the
provisions of sub-section (1) of Section 14A by adopting a
reasonable basis or method consistent with all relevant facts and
circumstances.
[Also see Maxopp Investment Ltd. Vs. CIT [2011] 15 taxmann.com
390 (Delhi), Continental Carriers (P.) Ltd. Vs. ACIT [2012] 18
taxmann.com 298 (Delhi), ACIT Vs. M/s Hexa Securities & Finance
Co. Ltd. I.T.A. No. 977/Del/2012 (Delhi-ITAT), Sterling Re-rolling
Mills (P.) Ltd. v. Asstt. CIT [2012] 23 taxmann.com 394 (ITAT-Mum.)
16
17
 Nexus between the expenditure incurred and exempt
income- whether direct and indirect.
[i.e. the expenditure should be incurred in relation to
exempt income]
 Satisfaction of the AO- important aspect.
Expenditures disallowed in view of s.14A are disclosed in clause 17(L) of Form 3CD (Tax
audit report)
18
Held:Yes. [CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P & H)]
CIT vs. Walfort Share and Stock Private Limited [2010] 326 ITR
1(SC): held, For attracting section 14A, there has to be a
proximate cause for disallowance, which is its relationship with
tax exempt income and since pay-back or return of investment
is not such proximate cause, section 14A is not applicable in such
cases.
Space Financial Services v.Asst. CIT [2008] 115 TTJ 165(Del)
addition was deleted holding as under:
“lower authorities were not correct in disallowing
proportionate expenditure against the dividend income without
establishing the nexus thereto.”
19
Contd…
 Onus is on the revenue to establish the nexus. [DCIT vs. Jindal Photo Ltd., [2011TIOL-25-ITAT-DEL] I.T.A. No. 4539/Del./2010, K.J. Arora v. Dy. CIT 180 Taxman 131
(2009) (Delhi) (Mag.) and CIT Vs Kasturbhai Mayabhai Pvt. Ltd. (Gujarat)]
“In the absence of any specific finding that any particular expenditure was incurred by
the assessee in relation to exempted dividend income, no artificial disallowance can
be made invoking section 14A of the Act”
CIT v. Hindustan Co-op. Society Services Co. Ltd.” [2008] 170 TAXMAN 458
(DELHI), ACIT v. Sun Investments P. Ltd Ltd [2011]008 ITR(Trib)0033 ITAT(del)
 There need be some evidence to establish the nexus. [Minda Investments
Ltd. vs. DCIT, ITA No. 4046/Del-2009 (ITAT- Delhi)
 Also see Asstt. CIT v. SIL Investment Ltd. [2012] 26 taxmann.com 78 (ITAT-Delhi)
20
Contd…
DCIT Vs. M/s Allied Investments Housing P. Ltd.,
305/Mad/2013, Date of Order: 07.11.2013, ITAT-Chennai
ITA
No.
S. 14A & Rule 8D: Onus is on AO to show how assessee’s claim is incorrect. AO has
to show direct nexus between expenditure & exempt income. Disallowance cannot
be made on presumptions
i.
No disallowance can be made on the basis of presumptions.
ii.
The mere fact that some interest expenses were incurred cannot be the reason
for disallowance unless the nexus between the expense and the exempt income
is established.
iii.
The assessee did not make any fresh investment during the year which could
generate exempt income in forthcoming years.
iv.
The exempt income earned during the year comprised of dividend received
from an investment made in an earlier year.
v.
The interest expenditure of the year is not directly related to the earning of
exempt income.
vi.
The AO has not pointed out any direct nexus between the interest expenditure
incurred and the exempt income earnd during the year.
Contd…
REI Agro Ltd. Vs. DCIT 144 ITD 141 (ITAT - Kolkata)
•
It is an admitted position in law that expenditure can be disallowed U/s.14A of the
Act if and only if it is incurred in relation to income which does not form part of total
income.
•
The assessee has explained that the share capital and reserves, that is its own funds,
were utilised for the purpose of investment in shares for earning dividend income
and this has not been negated by lower authorities i.e. neither CIT(A) nor AO. The
assessee has also explained each and every investment with sources of funds and its
utilization as well as opening application of funds and closing application of funds.
Thus, it is clear that the investment in shares was made out of own capital employed
and not from borrowed funds and there is no link with expenditure for earning of
dividend income incurred by the assessee and once the facts are clear, no
disallowance can be made by invoking rule 8D. Further, neither the AO nor CIT(A)
has recorded any finding that having regard to the account of assessee, they are not
satisfied with the correctness of the claim of expenditure made by assessee or the
claim made by assessee that no expenditure has been incurred in relation to income
which do not form part of the total income under the Act for the relevant A.Y. In the
absence of any such finding, no disallowance on account of interest expenditure can
be made by invoking rule 8D of the Rules. Accordingly, in the given facts and
circumstances, we delete the addition and allow this issue of assessee’s appeal.
Contd…
Justice Sam P. Bharucha v. Add. CIT [2012] 25 taxmann.com 381 (ITAT-
Mum.)
• Section 14A has within it implicit notion of apportionment in the cases where the
expenditure is incurred for the composite/indivisible activities in respect of which
taxable and non-taxable income is received. But when it is possible to determine
the actual expenditure in relation to the exempt income or when no expenditure
has been incurred in relation to the exempt income, then principle of
apportionment embedded in section 14A has no application.
• In order to disallow the expenditure under section 14A, there must be a live nexus
between the expenditure incurred and the income not forming part of total
income. A notional expenditure cannot be apportioned for the purpose of earning
exempt income unless there is an actual expenditure in relation to
earning the income not forming part of total income. If the expenditure is
incurred with an aim to earn taxable income and there is apparent
dominant and immediate connection between the expenditure incurred
and taxable income, then no disallowance can be made under section 14A
merely because some tax exempt income is received by the assessee.
23
 The term ‘expenditure’ occurring in section 14A would take
in its sweep not only direct expenditure but also 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.)]
 Direct & indirect expenses have to be considered as per the
rules framed in this regard.
[Parry Agro Industries v. Asst. CIT 314 ITR (AT) 181(2009)
(Cochin)]
24
Priya Exhibitors (P.) Ltd. v. Asstt. CIT [2012] 27 taxmann.com 88
(ITAT-Delhi)
Disallowance u/s 14A requires a clear finding of incurring of
expenditure and, hence, in absence of same, no disallowance
could be made in instant case
25
• The words ‘in relation to income which is exempt under
the Act’, no doubt, appear to be broad at first impression,
but on deeper examination, and read in conjunction with
the word ‘incurred’, it seems that these are respective
words, restricting the power of the AO to estimate a part of
the expenditure incurred by the assessee as relatable to
the exempted income. It seems that implicit in the
expression ‘in relation to’ is the concept that the AO should
be in a position to pinpoint, with an acceptable degree of
accuracy, the expenditure which was incurred by the
assessee to produce non-taxable income.
ACIT v. Eicher Ltd. [2006] 101 TTJ (Delhi - Trib.) 369
CIT v. Wimco Seedlings Ltd. [2012] 17 taxmann.com 83 (Del)
26
• As per provisions of section 14A, 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.
• 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)
27
• Satisfaction of AO as to the incorrect claim made by the
assessee is sine qua non for invoking the applicability of
Rule 8D.
• Without rendering any opinion on correctness of assessee's
claim of not spending any amount for earning exempt
income, AO cannot propose to make disallowance by
applying rule 8D of 1962 Rules.
Auchtel Products Ltd. Vs. ACIT [2012] 22 taxmann.com 99
(Mum.-ITAT) and DCIT Vs. Orient Craft Ltd. ITA No.
3864/Del/2009 (Del-ITAT)]
28
• In the absence of error in computation of disallowance for
the purpose of section 14A by the assessee, the AO is
debarred from re-computing the amount for the purpose of
disallowance.
The onus is on the AO to show that the
computation of the assessee is incorrect for assuming
jurisdiction and re-computing the amount liable for
disallowance.
AIA Engineering Ltd. v. Addl. CIT [2012] 18 taxmann.com
307 (Ahd.-ITAT)]
29
• Section 14A deals only with expenditure and not with
any admissible statutory allowance
 Section 14A permits a disallowance of “expenditure incurred by
the assessee” and not of “allowance admissible” to him.
The expression “expenditure” does not include allowances such
as depreciation allowance. Accordingly, depreciation cannot be
the subject matter of disallowance under section 14A .
Vishnu Anant Mahajan Vs. ACIT [2012] 22 taxmann.com 88
(Ahd.- ITAT) (SB)
Hoshang D. Nanavati vs. ACIT [ITA No. 3567/Mum/07] (ITATMumbai) (Trib)
30
Asstt. CIT v. Torrent Pharmaceuticals Ltd. [2012] 23
taxmann.com 55 (Ahd.)
• The Kerala High Court in Catholic Syrian Bank Ltd., [2012] 207 Taxman
2 (Ker.) (Mag.) had held that so far as disallowance of administrative
expense was concerned, there was no precious formula or
proportionate disallowance, no disallowance called for, for
proportionate administrative cost, attributable to earning of
tax free income until rule 8D came into force.
It was further held that the proportionate disallowance u/s 14A
should be limited to only interest liability and not overhead or
administrative expenditure, which should be considered for
disallowance under rule 8D from 2007-08.
 Administrative expenditure is disallowable u/s 14A in accordance with
rule 8D where the assessee has earned income from dividend and
debentures which is exempt under section 10(23G) and Section 10(33).
ITO v. Sanatan Textrade Ltd. (2010) 35 DTR (Mum.)
31
Held: Yes
• Proportionate interest pertaining to investment for earning
of dividend was disallowable even though exempt income
was not earned during the year.
Cheminvest Ltd. V. ITO 121ITD 318 (2009)
ITAT(Delhi)(SB) and Siva Industries & Holdings Ltd. v.
ACIT [2012] 26 taxmann.com 96 (ITAT-Chennai)
32
Issue - No s. 14A & Rule 8D disallowance if there is no tax-free
income
CIT vs. Shivam Motors (P) Ltd (Allahabad High Court)
• In AY 2008-09, the assessee claimed that no s. 14A & Rule 8D disallowance could be made
on the ground that (i) the assessee had not earned any tax-free income during the year and
(ii) the assessee had sufficient surplus fund and borrowed funds were not utilized for
making the tax-free investments. The AO rejected the claim and made a disallowance
though the CIT(A) and Tribunal (included in file) deleted it on the basis that no s. 14A
disallowance could be made in the absence of tax-free income. The Tribunal noted the
judgement in Cheminvest 121 ITD 318 (Delhi) (SB) (which holds that s. 14A
disallowance has to be made even if there is no tax-free income) but followed Siva
Industries (Che). On appeal by the department to the High Court HELD dismissing the
appeal:
• S. 14A of the Act provides that for the purposes of computing the total income under the
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 the Act. Hence,
what s. 14A provides is that if there is any income which does not form part of the income
under the Act, the expenditure which is incurred for earning the income is not an
allowable deduction. For the year in question, the finding of fact is that the assessee had
not earned any tax free income. Hence, in the absence of any tax free income, the
corresponding expenditure could not be worked out for disallowance. The view of the
CIT(A) & Tribunal does not give rise to any substantial question of law.
• See also CIT vs. M/s.Delite Enterprises (Bombay High Court) where the same view
was taken
The CBDT has recently clarified the situation
34
• The legislative intent is to allow only that expenditure which is relatable to earning of
income and it therefore follows that the expenses which are relatable to earning of exempt
income have to be considered for disallowance, irrespective’of the fact whether any
such income has been earned during the financial-year or not.
• The above position is further clarified by the usage of term ‘includible’ in the Heading to
section 14A of the Act and also the Heading to Rule 8D of I.T.Rules, 1962 which indicates
that it is not necessary that exempt income should necessarily be included in a particular
year’s income, for disallowance to be triggered. Also, section 14A of the Act does not use
the word “income of the year” but “income under the Act”. This also indicates that for
invoking disallowance u/s 14A, it is not material that assessee should have earned such
exempt income during the financial year under consideration.
Taj Sats Air Catering Ltd. v. Dy. CIT 2012] 20 taxmann.com 80 (Mum.) & Visual Graphics
Computing Services (India) (P.) Ltd. v Asst. CIT [2012] 21 taxmann.com 145 (ITAT-Chennai)
35
 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)]
 However as per Mohananlal M. Shah V. DCIT [2007] 105 ITD
669 (ITAT-Mum.), Harish Krishnakant Bhatt v. ITO [2004]
91 ITD 311 (ITAT-Ahm.)
the 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.
36
• The disallowance cannot exceed the expenditure actually
claimed by the assessee.
 Gillette Group India (P.) Ltd. Vs. ACIT [2012] 22
taxmann.com 61 (Delhi)
State bank of Mauritius ltd. Dy. DIT (International
Taxation) [2012] 19 ITR(Trb.) 675 (Mum.)
37
Issue-Recording of satisfaction is pre-requisite
for invoking rule 8D
• Kalyani Steels Ltd. vs. Addl. CIT, ITA No.1733/PN/2012 (ITATPune), Dated: 30-01-2014
• the Assessing Officer has not recorded any objective satisfaction in regard
to the correctness of the claim of the assessee, which is mandatorily
required in terms of section 14A(2) of the Act and therefore his action of
invoking rule 8D of the Rules to compute the impugned disallowance is
untenable. Disallowance as per section 14A(2) is required to be made, even
if assessee claims that it did not incur any expenditure in earning dividend
income
Issue-Recording of satisfaction is pre-requisite
for invoking rule 8D
CIT vs. M/S. R.E.I. AGRO LTD. GA 3022 OF 2013, ITAT 161 OF
2013 (High Court of Calcutta)
• Disallowance of expenditure u/s 14A without first recording the
dissatisfaction that AO was not satisfied with the correctness of the claim as
regards the claim that “no expenditure” was made by the assessee, is
plainly contrary to the provisions of the statute.
JCIT v. American Express Bank Ltd. [2012] 24 taxmann.com 50 (ITAT-Mum.)
•
Whether relevant criterion for making disallowance of expenditure under section 14A is exempt
income and not whether such exempt income arises intentionally or just incidentally - Held,
yes - Whether, therefore, it cannot be concluded that where dividend income is only incidental to
shares held as stock-in-trade, operation of section 14A shall cease - Held, yes [In favour of
revenue]
•
Whether section 14A does not provide that if income is liable to tax at a lower rate
then also proportionate expenditure should not be allowed as deduction against
other business income - Held, yes - Whether, therefore, expenses incurred by
assessee in respect of income liable to tax at special rate under section 115A can be
allowed as deduction against income chargeable to tax at normal rate - Held, yes
[In favour of assessee]
40
41
Yatish Trading Co. (P.) Ltd. v. ACIT, 9 taxmann.com 164
(2011) (MUM. – ITAT)
 Sec. 14A can be invoked even if income is received
incidentally ,
If the expenditure is incurred with a view to earn taxable
income and there is apparent dominant and immediate
connection between the expenditure incurred and taxable
income then as such no disallowance can be made under
section 14A merely because some tax exempt income is received
incidentally.
42
• 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”
There is nothing in Section 14A which restricts the operation of
section to income of a particular nature only.
Insaallah Investments Ltd. V. ITO (2008) 23 SOT130
(DEL-Trib)
43
Contd….
CIT vs D.C.M Ltd. 320 ITR 307[Del] SLP dismissed on 27-112009.
That the Tribunal had found that the assessee in order to ensure
that the employees in accordance with the approval granted by the
Regional Provident Fund Commissioner, would be paid a rate of
interest equivalent to that paid by the Central Government had
incurred expenditure. This was an expense incurred by the
assessee towards its employees. The loss on sale of securities was
only a trigger based on which these expenses had to be incurred by
the assessee. Therefore, the provisions of section 14A had no
application.
G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594 (SC)
followed.
44
The fact must be established that borrowed funds are
invested to earn the exempt income and only the expenses
to that extent will be disallowed under section 14A.
CIT vs. Ms. Sushma Kapoor[2009] 319 ITR 299(Del)
When there is no evidence that the borrowed amount is
utilised for investment in tax free security, and the major
investment was made before the date of borrowings.- section
14A cannot be applied.
CIT V. Gujarat Power Corporation Ltd. [2011-TIOL-219HC-Ahm-IT]
45
Contd….
M/s Dhanuka & Sons v. CIT (2011) 12 taxmann.com 227
(Cal.)
• It is for the assessee to show the source of acquisition of tax free
securities those shares by production of materials that those were
acquired from the funds available in the hands of the assessee at
the relevant point of time without taking benefit of any loan.
• In the absence of any such materials placed by the assessee, in,
the authorities below rightly held that proportionate amount
should be disallowed having regard to the total income and the
income from the exempt source.
46
Contd….
• Assessing officer held that the diversion of borrowed funds
by assessee to other firms was not for business purpose and
so much so, the interest paid on borrowed capital advanced
to other firms was not an allowable deduction under section
36(1)(iii).
• It was held that the share income from the partnership
firm which is the only consideration for advancing loan
to the firm did not constitute income of the assessee u/s
10(2A).
• Since the share income from the firm did not constitute part
of the taxable income of assessee, section 14A applied
which prohibited deduction of any expenditure incurred in
relation to income not includible in total income.
CIT v. Popular Vehicles & Services Ltd. [2010] 189 Taxman 14 (Ker).
47
ACIT vs Novel Enterprises [2012] 22 taxmann.com 116 (ITAT-Mum.)
Facts:
 Assessee had raised interest bearing loan and for making loan/capital
contribution to firm in which it was a partner. Assessee received interest
income and profits from firm. AO with the an opinion that interest
expenditure incurred by assessee had resulted into taxable as well as tax
free income and, hence, that portion of interest expenditure which related
to share of profit liable to disallowed u/s 14A.
Held_ that where sharing of profit of a firm was not dependent on contribution
of funds by partners, interest paid by a partner on capital borrowed to be
utilized for making loan/ capital contribution to firm, could not be
disallowed u/s 14A.
48
• However, contrary view has been taken by
• The ITAT- Chandigarh in the case of Asstt. CIT v. Vinay
Singal [2012] 27 taxmann.com 136, Where assessee had
received share of profit not taxable in his hands from
partnership firm by investing borrowed funds, then the
interest paid is to be disallowed u/s 14A. And
• Hoshang D. Nanavati vs. ACIT (2012) 16 ITR(Trib.) 614
(ITAT-Mum.)
The assessee has earned income from profit share as also
from remuneration from same firm, expenses incurred by
assessee in ratio which profit share in firm bore to total
receipts from firm, i.e., on account of profit share as also
remuneration, were to be disallowed u/s 14A
49
Avshesh Mercantile (P.) Ltd. v. Dy. CIT [2012] 26
taxmann.com 43 (ITAT-Mum.)
• Profits derived from a partnership firm is exempt from tax
u/s 10(2A), the interest expense related to such tax-free
profits is to be disallowed u/s 14A of the Income Tax Act.
However, when there was no share of profit from the Firm
which otherwise would be exempt for the relevant year, the
question of disallowance would not arise.
50
51
• Object or purpose of investment does not affect
operation of section 14A inasmuch as any
expenditure incurred for earning tax free
income is not an allowable deduction by virtue of
operation of section 14A.
Even though purchase of tax free bonds was for meeting SLR
requirements, interest and other expenditure incurred on borrowing
for investment in tax free bonds was to be disallowed.
CIT vs. State Bank of Travancore [2011] 16 taxmann.com
289 (Ker.)
52
 Chapter VI-A does not postulate or state that the incomes which
qualify for the said deduction will be excluded and not form part
of the total income. They form part of the total income but are
allowed as a deduction and reduced.
 Provisions of Section 14A are not applicable.





CIT Vs. Kribhco [2012] 23 taxmann.com 312 (Delhi)
Hoshang D. Nanavati vs. ACIT (2012) 16 ITR(Trib.) 614 (ITAT-Mum.)
ACIT v. Bank of Madura [2011] 007 ITR (Trib) 0139 ITAT [Chen.
CIT v. Kings exports 318 ITR 100 (2009) (Punj. & Har.)
ACIT v. Tamil Nadu Silk Producers Federation Ltd. [2006] 103 TTJ
(Chennai) 716]
53
• Section 115 JB provides for increasing the
book profit by the amount of expenditure
relatable to any income to which section
10 [other than section 10(38)] applies and
reducing the book profit by the amount of
income to which section 10 [other than
section 10(38)] applies.
54
Contd
•
…
Hon’ble Delhi High Court in the case of CIT v. Goetze (India) Ltd. [2014] 44
taxmann.com 138 (Delhi)
• Held that disallowance U/s. 14A is to be made for computing book profits
u/s. 115JB
• Clause (i) of proviso of Explanation to section 115JA operates when an
amount is withdrawn from reserve created but as per proviso adjustment
could be made only when at time of creation of reserve or provision, such
amount was duly accounted for by increasing book profits by said reserve or
provision
Reverse the Goetze (India) Ltd. vs CIT (2009) 32 SOT 101 (ITAT-Del) and the same
is relied in Quippo Telecom Infrastructure Ltd. vs. ACIT, I.T. A. No.4931/Del/2010
and Essar Teleholdings Ltd. vs. DCIT ITA Nos. 3850 /Mum/2010.
55
Prior to the decision of the Hon’ble
High Court………
Contd
…
In Goetze (India) Ltd. vs CIT (2009) 32 SOT 101 , ITAT held that
• Clause (f) of the Explanation to section 115JA requires the expenditure
relatable to any income to which any of the provisions of Chapter III
(Incomes which do not form part of total income) apply, has to be added
to the book profit.
• Clause (f) uses the words ‘expenditure relatable to any income’, while
section 14A uses the words ‘expenditure incurred by the assessee in
relation to income’. These words have the same meaning. Further,
section 14A contains two more sub-sections, sub-section (2) and (3),
which do not find a place in clause (f).
• Insofar as computation of adjusted book profit is concerned, provisions
of sub-section (2) and (3) of section 14A cannot be imported into clause
(f) of the Explanation to section 115JA.
• Therefore, no addition to the book profit can be made on account of
alleged expenditure incurred to earn exempt income while computing
income u/s 115JB.
56
Contd
Meditap Specialities (P.) Ltd. v. Add. CIT [2012] 25 taxmann.com
399 (ITAT- Mum.)
• Section 14A disallowance only in respect of exempt income and not
income eligible for deduction.
• Section 14A contemplates disallowance in respect of exempt income
and not in respect of income which is eligible for deduction under any
relevant provision
57
…
• 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 which is not found by
the AO to be false there is no need to invoke this penal
provision.
58
Where the disallowance is made for proportionate expenses
claimed in respect of exempted income, no penalty can be
levied u/s 271(1)(c) as prior to insertion of Rule 8D by the
Finance Act 2008, the question of disallowance and its
quantification was contentious.
ACIT vs M/s Jindal Equipment Leasing & Consultancy
Services Ltd. (2011) 11 taxmann.com 309(ITAT-Delhi)
 No Penalty if no disallowance is made in tax audit report and
Rule 8D was enacted latter that, segregation of expenditure
relatable to tax-free income would be disputable and lead to
bona fide difference in opinion. So, penalty u/s 271(1)(c)
cannot be levied.
Nalwa Investments Ltd.: ITA No. 3805(Del)/2010.
59
• 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 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
section 14A on estimate basis.
Dy.CIT vs Tata Investment Corporation Ltd. (2008) 113 TTJ
512 (ITAT-Mum.)
60
• Section 14A authorizes 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
taxmann.com148(KER.)
Syrian
Bank
Ltd.
[2011]
9
Non maintenance of separate accounts by assessee with 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.)
61
• Facts:
• Assessee claimed that as no shares were allotted and money invested
was lying as share application money, there should not be any
disallowance u/s 14A on interest paid on borrowed capital used to
make such investment. AO, however, held that since this
investment was made for allotment of shares to earn dividend,
disallowance u/s 14A was to be made.
• The intention of assessee for earning dividend income could not be
attributed to amounts invested in share application money unless
and until there was a commitment on part of company 'N' for
allotment of shares - Held, yes
Aban Investments (P.) Ltd. v. Dy. CIT [2012] 22 taxmann.com 44
(ITAT-Chennai)
62
• Business income vs. capital gains
• Assessee maintains separate D-mat account for investment
and for trading and the shares are duly recorded in the books
of account under the head investments and stock in trade. It
had maintained the investment portfolio separately, income
for which was liable to be taxed as capital gains.
• As the intention in respect of this was to hold the investment
as investment only,the income will be treated as capital
gain
• Asstt. CIT v. M/s Bull & Bears Portfolios Ltd., 2011-TIOL109-ITAT-DEL
63
•
Asian PPG Industries Ltd. v. Deputy CIT [2010] 004 ITR(Tri) 017- Mum
• Held_ that the Assessing Officer had disallowed 10 per cent. of
the dividend as expenses incurred for earning the dividend under
the provisions of section 14A of the Act. While estimating the
expenses he had also noticed that the assessee was having loan
fund and investment was made for Rs. 150.83 million to earn
dividend income. Since disallowance under ground relating to
section 14A was not pressed, the addition to that extent was
confirmed. No separate disallowance was required under section
36(1)(iii) ) on the same reason that the assessee had invested
borrowed funds in investment of Rs. 150.83 million. The addition
of Rs. 20,60,000 was to be deleted.
64
• Investments out of Mix funds
• Assessee made investment for earning tax free income
from mix funds and it is not possible to ascertain as to
whether the investment in tax free was out of assessee’s
own funds and the Assessing having not established the
nexus between the borrowed funds and investment in tax
free funds disallowance on pro rata basis was not proper.
• Dy. CIT vs. Maharashtra Seamless Ltd. (2011) 52 DTR 5
(Delhi)(Trib.)
65
• If, in a particular year, there is an investment which might
yield exempt income in future, there can be no
disallowance under section 14A as there is no exempt
income forming part of the total income.
• The view expressed in Jt. CIT v. Holland Equipment Co.
B.V. [2005] 3 SOT 810 (Mum.),if there is no such
exempted income during the year, no disallowance can be
made under section 14A.
• In Asstt. CIT v. Lafarge India Holding (P.) Ltd. [2008]
19 SOT 121 (Mum.), the assessee had
• made investment in shares of various companies out of
interest bearing borrowed capital which had yielded no
dividend income. It was held that provisions of section 14A
could not be applied as there was no exempted income.
66
• 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 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, ITA No. 530/Mum/2009, dt. 111-2011, ITAT Mumbai ‘C’
67
Issue - Mere incorporation & receipt of share application money cannot be said to
be commencement of the business for claiming expenses in view of S. 14A.
Holcim (India) Pvt. Ltd. vs DCIT
139 ITD 542 (ITAT – Delhi)
Facts:
That mere incorporation and receipt of share application money cannot be
said to be commencement of the business. Neither any interest income has
been earned from against advances nor any goods or services been
obtained. Moreover, the assessee has also not disclosed any dividend
income from its investment . Therefore, he disallowed the expenses
amounting to Rs. 8,75,35,452/- claimed in the P&L A/c.
Held that disallowances made u/s 14A were unwarranted as assessee has
not invested in shares for earning of dividend but acquired the controlling
interest in the respective companies for doing the business. Ld. CIT(A)
himself has admitted that assessee is doing the business and the business of
the assessee company has been set up, therefore, there is no question that
assessee has invested the funds for earning of dividend.
Issues•
Where assessee is able to show near proximity of availability of own funds, may be
exactly not on date of investment or advancement of loan but in a very near future date
or within a reasonable short period of time, even then presumption will be that
investment was made by assessee from his own funds or in anticipation of availability of
its own funds within a short period of time
Binayak Tex Processors Ltd. vs. Asstt. CIT [2014] 44 taxmann.com 179
(Mumbai - Trib.)
•
Where assessee had also used loan funds for making investments that earned tax free
dividend, part of interest expenditure was to be disallowed in terms of rule 8D(2)(ii)
read with section 14A
Sitsons India (P.) Ltd. vs. Asstt. CIT [2014] 44 taxmann.com 340
(Mumbai - Trib.)
Issues•
Rule 8D is prospective in nature and would apply from assessment year 2008-09
Birla Corporation Ltd. vs. CIT [2014] 43 taxmann.com 267 (Calcutta)
•
Where it was apparent from records that assessee had sufficient funds for making
investments in shares and interest free bonds and it had not used borrowed funds for
such purpose, Assessing Officer was not justified in invoking provisions of section
14A in order to disallow one per cent of interest expenses incurred for earning
exempt income.
CIT vs. Torrent Power Ltd. [2014] 44 taxmann.com 441 (Gujarat)
Issues•
Where assessee claimed that no expenditure was incurred towards exempt income but it
was found that major part of available funds was invested in shares of various companies,
proportionate disallowance was called for.
J.H. Fin-vest (P.) Ltd. vs. Dy. CIT [2014] 43 taxmann.com 210 (Delhi Trib.)
•
Once Assessing Officer records satisfaction that he is not satisfied with claim of assessee of
incurring of no expenditure or amount of expenditure specified by assessee, he is required
to determine expenditure incurred by assessee in relation to exempt income as per rule
8D,Disallowance under section 14A on or before year 2007-08 could not be computed as
per rule 8D.
Asstt. CIT vs. ACB (India) Ltd. [2014] 43 taxmann.com 109 (Delhi Trib.)
Issues•
For purposes of disallowance under section 14A, what is to be seen is whether there is
any investment which has potential to yield exempt income and once it is so,
provisions of section 14A would apply, irrespective of fact as to whether investment is
made by assessee in normal course of business or in compliance to directions of RBI.
Sahara
India
Financial
Corpn.
Ltd.
Vs.
Dy.
CIT
[2014]
41
taxmann.com 251 (Delhi - Trib.)
•
Where assessee-company received dividend on UTI and shares and investment in
same was made in earlier years and interest free funds available with assessee were
much larger as compared to investment, disallowance of assessee's claim for interest
expenditure by applying section 14A was wrong
CIT
vs.
Gujarat
Narmada
taxmann.com 270 (Gujarat)
Valley
Fertilizers
Co.
Ltd.
[2014]
42
Issues• Disallowance under section 14A can be made even in cases where
dividend income has been earned on shares held as stock-in-trade.
D.H. Securities (P.) Ltd. vs. Dy. CIT [2014] 41 taxmann.com 352
(Mumbai - Trib.)
• Disallowance as per section 14A(2) is required to be made, even if assessee
claims that it did not incur any expenditure in earning dividend income
Asstt. CIT vs. Kerala State Industrial Development Corporation
Ltd. [2014] 41 taxmann.com 267 (Cochin - Trib.)

Expenses related to Keyman insurance policy
Dy. CIT v. Noble Enclave & Towers (P.) Ltd. [2012] 18 taxmann.com 288 (Kol.)
The proceeds of Keyman insurance policy are fully taxable u/s 28(vi), expenditure
relating to same cannot come within ambit of section 14A
Disallowance u/s 14A in case of Amalgamation
Greaves Leasing Finance Ltd. v. ITO [2012] 54 SOT 22 (URO) (ITAT-Mum.)
No disallowance where assessee acquired shares of two companies on their
amalgamation and earn dividend as assessee has not incurred any expenses to
earn such dividend income. Further assessee disallowed certain % of dividend
income itself.
74
By : CA Sanjay Agarwal
Mb: 9811080342
Email id: agarwal.s.ca@gmail.com
75

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