Query :- Whether for the purpose of disallowance under Section 14A of the Act:-
(a) Rule 8D is to be considered as retrospective;
Whether before application of Rule 8D the Assessing Officer should give a holding that he is not satisfied for the basis or quantum of expenses disallowed by the Assessee;
b) Whether disallowance is to be made if Investment is held as stock-in-trade?
Whether Rule can be applied for disallowance of interest on proportionate basis in case assessee provide details of direct nexus between investments and borrowings;
Whether total administrative expenses incurred can be disallowed if disallowance as per Rule works out to be higher?
Answer
(a) Since, sub – Section (2) of Section 14A was inserted w.e.f. 1-4-2007 and pursuant thereto Rule 8D has been notified on 24-3-2008, same should apply prospectively since it effects the quantum of expenditure. (ITAT (TM) (Del) in the case of Wimco Seedlings vs. CIT (107 ITD 267). Special Bench Mumbai however, in the case of ITO vs. Daga Capital Management (P) Ltd. (2008) 26 SOT 603 (Mum.) has held otherwise. Issue is yet to be settled.
(b) As per provisions of sub-Section(2) of Section 14A as well as Rule 8D method provided in Rule 8D is to be applied by the Assessing Officer only if he is not satisfied with the correctness of the basis and the quantum of expenditure disallowed by an Assessee. Accordingly, the Assessing Officer cannot straight away adopt Rule 8D without giving a holding that the basis adopted by the Assessee is not correct.
(c) It is a matter of controversy at present whether interest as well as other expenses should be disallowed by applying Rule 8D to the investments held as stock-in-trade. ITAT Mumbai in the case of Daga Capital Management (P) Ltd. (2008) 26 SOT 603 (Mum.) has held that Rule will apply. It is, however, stated in this regard that earning of dividend on stock-in-trade cannot be said to be a separate venture than the business of trading of shares and therefore no disallowance can be made as per Rule in view of decisions of Supreme Court in the cases of CIT vs. Indian Bank Ltd 56 ITR 77 and Rajasthan State Warehousing Corporation vs. CIT, 242 ITR 450.
(d) Clause (i) of Sub Rule (2) provides for disallowance of expenditure directly relating to exempt income. Other clauses provides for disallowance on proportionate/ad-hoc basis. Accordingly, in case the assessee has calculated disallowance on direct nexus basis the AO should accept the disallowance and proportionate / ad-hoc basis cannot be applied.
(e) In case disallowance calculated at one-half percent of average investment, works out to be higher than the actual expenses incurred by the company and the company is also carrying on some other business, Rule 8 D becomes inapplicable and, therefore, reasonable basis should be adopted by the AO to make disallowance of the expenses relating to the exempt income.
