Sec 14A Expenditure incurred in relation to income not included in total income rw Rule 8D

CA Motichand Gupta

Section 14A was introduced by the Finance Act, 2001 w.e.f. 1^st April 1962 and will, accordingly apply to the assessment year 1962-63 and subsequent years.  Till the assessment year 2008-09, there was no standard rule prescribed by the department. Therefore, assessing officers were applying various methods to disallow the expenditure under this section. Various methods include percentage of exempt income or exempt income divide by total revenue into administrative expenditure. Since these methods were not scientifically proved and were not based on any legal provision so Application of these methods lead to litigation by the assessee at various levels.

To overcome the different method of disallowance adopted by assessing officers, department has prescribed the Rule 8D vide Income Tax Notification No. 45/2008 Dated – March 24, 2008. As held by Bombay High Court in the case of Godrej & Boyce Manufacturing Company limited v/s DCIT  that Rule 8D is applicable from  prospective  i.e.  from assessment year 2008-09 and onward.

Till the issuance of Income Tax Circular No. 5/2014 dated 11^th February, 2014, many companies were calculating disallowance by taking the figures  in numerator under  Rule 8D (2)(ii) of only those tax free investment where dividend incomes are declared during the year ie tax free investment where no tax free income are generated are excluded from  numerator part.

Also, under Rule 8D(2)(iii) to calculate average investment only those investment are considered where tax free incomes are generated during the year i.e. those tax free investments where no tax free income are generated are excluded while calculating the average investment.

However, with issuance of Income Tax Circular No. 5/2014 dated 11^th February, 2014 for the purpose of Rule 8D(2)(iii) & (iii)  all tax free investment are to be considered whether dividend are declared or not. This will lead to substantial increase in disallowance. From the financial year 2013-14 onward company has to make income tax provision in the books after taking into account this circular so that after the assessment there is no short provision in the books.