Introduction
The time for completion of Income Tax assessments for A.Y 2016-17 is coming and Sec- 14A is one of the reason of scrutiny assessment of assesse, therefore here I am discussing some topics relating to sec – 14A read with rule 8D to resolve issues.
Normally assessee’s earn taxable as well as non-taxable incomes and there is normal phenomenon of incurring expenses to earn the above mentioned taxable and non- taxable incomes. For E.g interest incurred on borrowings taken for investment in tax free bonds, de-mat expenses incurred in respect of dividend income. Section – 14A of Income Tax Act, 1961, provides that no deduction shall be made in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the act. In case of composite income, expenditure relating to exempt income shall be determined as per Rule 8D.
Rule 8D – The expenditure in relation to income which does not form part of total income shall be the aggregate of the following:-
a. Expenditure directly to such income
b. An amount in equal to 1 % of the annual avg. of the monthly avg. of the opening and closing balances of the value of investments income from which is exempt from tax.
However, the total amount (a+b) shall not exceed the total expenditure claimed by the assesse.
Crux: Proximate relationship between expenditure (direct & indirect) is required to invoke disallowance u/s 14A.
Page Contents
- Analysis of Section 14A (Read with Rule 8D)
- 1. Constitutional Validity of Sec – 14A & Rule – 8D
- 2. Investment in Partnership Firm
- 3. No Exempt Income earned during the year – Disallowance u/s 14A?
- 4. Investments held as SIT/Strategic Investments
- 5. Applicability of Sec – 115JB
- 6. Nexus Between exempt income & related expenditure
- 7. No-disallowance u/s 14A if satisfaction not recorded with reference to accounts
- 8. Dividend From Foreign Subsidiaries
Analysis of Section 14A (Read with Rule 8D)
1. Constitutional Validity of Sec – 14A & Rule – 8D
Godrej & Boyce Mfg. Co. Ltd. (Bombay HC) [(2010) 328 ITR 81] – Sec – 14A & Rule – 8D are constitutionally valid.
Essar Teleholding Ltd. [(2018) 90 Taxmann.com 2(SC)] – Rule – 8D is prospective in operation & cannot be applied to any A.Y prior to A.Y 2008-09.
2. Investment in Partnership Firm
ACIT v/s Delite Enterprises (P) Ltd. [2011] 128 ITD 146 Mum
(i) Assessee invested borrowed funds into partnership firm as capital contribution & loan as well in the capacity of partner.
(ii) Interest income received was taxable as Business Profit
(iii) Interest paid allowed/s 36(1) (ii) and no disallowance u/s 14A
3. No Exempt Income earned during the year – Disallowance u/s 14A?
Cases in Favor of Assessee
(i) CIT vs Winsome Textile Industries Ltd. [2009] 319 ITR 2014 (P&H)
(ii) CIT vs Corrtech Energy Pvt. Ltd. (ITA No. 239/2014)
(iii) Alliance Infrastructure projects Pvt. Ltd. Vs DCIT (ITA No. 220 & 1043 (Bang.)/2013)
(iv) Cheminvest Ltd. Vs ITO [(2015) 61 Taxmann.com 118]
4. Investments held as SIT/Strategic Investments
CCI Ltd (ITA No. 359/2011) (Karnataka High Court) – Sec- 14A cannot be applied to disallow expenditure incurred on shares purchased for trading purpose from interest free funds merely because such shares give rise to incidental exempt income.
However, SC held in favor of revenue in Maxopp Investments vs CIT 91 Taxmann.com 154(SC). Disallowance be made even if shares are held as SIT or as strategic investments.
DCIT vs Gulshan Investment Co. Ltd (ITAT Kolkata) – Rule 8D (2) (ii) & (iii) cannot be applied to stock in trade because its applicable only on investments and if there is no investment then its applicability cannot be raised.
5. Applicability of Sec – 115JB
Rule – 8D cannot be invoked for computing book profits u/s 115JB – Goetze (India) Ltd. [32 SOT 101 (Del)]
However, contrary judgements were passed in case of Sobha Developers (ITA No. 140/Bang. 2013) & Godrej Consumer Products Ltd. (48 Taxmann.com 293 (Mum ITAT)
(i) DCIT vs Subramanya Constructions & Development Co. Ltd. [TS-100-ITAT-2015 (Bang.) – When funds had gone out of common pool and assesse had interest free funds in excess of investments, it could take valid pleas that investments are out of interest free loans.
(ii) Interglobe Enterprise Ltd. Vs DCIT (ITA No. 1362 & 1032/DEL/20113) – Interest free funds utilized to make investments Rule – 8D cannot be applied.
7. No-disallowance u/s 14A if satisfaction not recorded with reference to accounts
Under Rule – 8D loans for specific business purposes cannot be included and investments which have not yielded income cannot be included.
Ref: Balrampur Chini Mills 140 TTJ (Kol) 73
REI Agro Ltd. Vs DCIT ITA No. 1331/Kol/2011
8. Dividend From Foreign Subsidiaries
Amount borrowed for investment in foreign subsidiaries will not attract section 14A for the reason that the dividend from foreign companies are chargeable to tax and not being an exempt income, the disallowance of interest on monies borrowed will not apply – CIT vs Suzlon Energy Ltd [2013] 215 Taxmann 272(Guj.) .
However this will not apply to dividend received from Indian company on which CDT u/s 115 – O has been paid by the company.
(Please feel free to reach at ca.sohilrana@hotmail.com for queries & suggestions)
Author Bio
If we have not borrowed any money from any outside agency and investment has been Direct equity + Equity Mutual fund ( growth oriented) + Dividendedn yieling Mtual fund then can AO raise objection and ask us to pay according to 8D
Very Helpful.
Grt sir