Disallowance under Section 14A of Income TAx Act, 1961
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The object behind the introduction of Section 14A of the Act by the Finance Act of 2001 is clear and unambiguous. The legislature intended to check the claim of allowance of expenditure incurred towards earning exempted income in a situation where an assessee has both exempted and non-exempted income or includible or non-includible income.
Since, no specific format is provided under the Act for recording satisfaction for making dis allowance under section 14A, AO was not required to give detailed reasons for invocation of rule 8D(2) in view of the fact that assessee failed to discharge its primary onus of proving nexus between interest-free funds and the investments yielding tax- free income.
In this case basic issue to be decided was about the interest payment made by the partnership firm to the partners in light of the provisions of section 14A read with rule 8D of the Rules.
Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration.
ITAT followed Delhi High Court in Cheminvest and held that, unless during the relevant previous year, assessee earns any exempt income no disallowance under section 14A r/w rule 8D can be made.
Under sub-section (2) of Section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income,
If tax exempted income was earned without interference of any employee but rather through solicitation and advertisement of bank the question of attributing any expenditure cannot arise at all.
AO held that it had entered into derivative transaction by swapping the loan, that the liability was paid in the subsequent year, that the notional loss of Rs.4.74 crores could not be allowed.
Section 14A applies also to strategic investments in subsidiaries.Section 40A(2) is not applicable to co-operative societies. No disallowance under section 40A(2) should be made if the tax effect is neutral i.e. the recipient is paying tax at the same rate as the payer
Assessing Officer had treated the claim of long term capital gain as business income. The assessee did not object to that. In such situation there could be no application of Section 14A for disallowance of expenditure incurred to earn exempt income.
