Disallowance under Section 14A of Income TAx Act, 1961
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Godrej & Boyce Mfg. Co. Ltd. Vs DCIT,, ITA 626/2010 and W.P. 758/2010 dated 12 August 2010, – Bombay High Court rules on prospective operation of Rule 8D and upholds the constitutional validity of sub-sections (2) and (3) of section 14A and Rule 8D.
CIT vs. Leena Ramachandran (Kerala High Court):-I-T- Sec 14A – assessee can claim deduction of interest paid on borrowed funds utilised for acquisition of shares only if shares are held as stock-in-trade and not investment: HC
Godrej & Boyce vs. DCIT (Bombay High Court) Bombay HC held Rule 8D r.w. S. 14A (2) is not arbitrary or unreasonable and Rule 8D is not retrospective and applies from AY 2008-09, for earlier disallowance can be worked on reasonable basis
Wallfort Shares & Stock Brokers, a Five Member Special Bench of the Tribunal (96 ITD 1 (Mum) (SB)) and the Bombay High Court (310 ITR 421 (Bom)) held that the ‘loss’ incurred by an assessee in ‘dividend-stripping’ transactions cannot be disallowed on the ground that it was ‘tax-planning‘. The department’s SLP against the said judgement has been dismissed by the Supreme Court today, 6th July 2010.
ACIT Vs. Kribhco (ITAT Delhi) – Terms ‘exempt income’ and ‘deduction from income’ are two different propositions and, therefore, where assessee’s income was not exempt under section 10 rather same was eligible for deduction under section 80P, assessee’s case was not hit by provisions of section 14A.
Section 14A and Daga Capital can not put assessee in worse position. In other words section 14A disallowance under Rule 8D can not exceed original disallowance made at the time of assessment.
As earlier intimated to you, Writ Petition bearing No. 50 of 2010 (Indian Exporters Grievances Forum & Other vs. CIT) challenging the constitutional validity of Rule 8D has been admitted on 12.1.2010 by Hon’ble Shri Justice Dr. D.Y. Chandrachud and Hon’ble Shri Justice J.P. Devadhar of the Bombay High Court.
It was held in this case that where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In view of the finding of the Tribunal, it is clear that the expenditure on interest was set-off against the income from interest and the investment in the share and funds was out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable.
Section 14A was introduced in the Income Tax Act, 1961 by the Finance Act 2001 with retrospective effect from 1st April 1962. The intent of introducing this section was reiteration of the well settled legal principle that when an assessee incurs any expenditure in relation to income which is not liable to tax under the Act, he would ideally not be allowed the benefit of claiming such expenditure. The need for introduction of this section had arisen to negate the decision of Supreme Court in Rajasthan State Warehousing Corporation vs. CIT [2000] ITR 450.
As per well settled law and also according to canons of taxation only that expenditure which is relatable to taxable income should be deducted in computing the total income. Expenditure which has a bearing on exempt income should not be considered in the computation of total income as otherwise this would result in double advantage to the assessee.
