Disallowance under Section 14A of Income TAx Act, 1961
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Learned AR argued that tax free securities were held by the assessee as stock-in-trade and hence the provisions of section 14A cannot apply to disallow any expenditure notwithstanding the fact that the interest income is exempt.
The issue whether any disallowance of expenditure could be made under section 14A of the Income-Tax Act, 1961 (the Act), in respect of exempt in income by way of dividend earned by an assessee engaged in the business of dealing in shares and securities; has come up for consideration before various judicial fora.
Interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii).
Section 14A has within it implicit notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible activities in respect of which taxable and non-taxable income is received.
From the facts of the present case, it is clear that there is no link with expenditure for earning of dividend income incurred by the assessee and once the facts are clear, no disallowance can be made by invoking rule 8D of the Rules. Neither the AO nor CIT(A) has recorded any finding that having regard to the account of the assessee, they are not satisfied with the correctness of the claim of expenditure made by assessee or the claim made by assessee that no expenditure has been incurred in relation to income which do not form part of the total income under the Act for the relevant assessment year. In the absence of any such finding, facts of the present case shows that the investment in shares was made out of own capital employed and not from borrowed funds, no disallowance on account of interest expenditure can be made by invoking rule 8D of the Rules.
Explanation-I to section 37(1) provides inter-alia that any expenditure incurred for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business and no deduction or allowance shall be made in respect of such expenditure. This provision is clearly applicable to the case of the assessee. In a nutshell, it is held that misuse charges and interest on misuse charges are not deductible in computing the total income of the assessee.
in the instant case, the assessee denied incurring any expenditure for earning income, which did not form part of total income during the course of assessment proceedings even when huge investments were made by the assessee in securities .
It is evident from the record that the assessee has earned dividend mainly from shares of a and ‘C’ Ltd. which was acquired through amalgamation of two companies. Further, it is also noticed that most of the expenses are directly attributable to assessee’s business.
The Assessing Officer has observed that the bank has claimed the set off of carried forward losses of earlier years of Rs. 2,39,37,185/-. In the opinion of the Assessing Officer, provisions of section 14A are applicable. The Assessing Officer has observed that up to A.Y. 2006-07, income of cooperative bank was wholly exempt u/s.80P and hence, loss was incurred because of expenditure for earning the wholly exempt income and hence, no benefit of set off can be given. The Assessing Officer made the disallowance of entire loss of Rs. 2,39,37,185/-.
The assessee claims deduction for expenses incurred to earn amounts which are exempted from tax. The case involves the interpretation of Section 14A of the Income Tax Act, 1961 . The Kolkata High Court has said that no substantial question of law arises in this case. There is no judgment of the Kolkata High Court on the interpretation of Section 14A of the Act. Section 14A has been introduced in the Act to say that expenses incurred to earn the amount, which is exempted from tax, would not be entitled to a deduction. This point has not been considered in the impugned judgment of the Kolkata High Court.
