Ever since
the advent of section 14A in the statute, it has evoked squall of controversy.
While the purpose of the section was to compute taxable income by whisking away
the expenses attributable to exempt income, the tax department always tried to
use it for fetching some more fortunes. In this article attempt has been made
to look into real objective of statutory provisions through latest judicial
pronouncements.
Judicial Pronouncements before Inserting section 14A
1. Supreme
Court in Indian Bank Limited
[1965] 56 ITR 77 (SC): Asessee
carrying on business of banking, borrowed money and purchased securities in
normal course of business .Of these, interest income from some types of
securities were exempt from income-tax as per Government notification . It was
held that proportionate interest which
would be payable on money borrowed for purchase of securities exempt from tax,
would even be allowed as deduction.
2. Again in Maharashtra Sugar Mills Ltd [1971] 82 ITR 452 (SC)
it was held that full commission paid to managing agent for cultivation of
sugar cane as well for manufacture of sugar was allowable as deduction, though
income from cultivation of sugar cane is exempt.
3. Similar decision was rendered by Supreme Court in Water fall
Estates [1996] 85 TAXMAN 689 (SC) in respect of business of cultivating and
curing tea and coffee.
4.
Rajasthan State Warehousing Corpn [2000] 109 TAXMAN 145 (SC) FEBRUARY
23, 2000
The appellant, a State Government Corporation,
derived its income from interest, letting out warehouses and administrative
charges for procurement of foodgrains while working for the Food Corporation of
India as well as the State Government. It claimed deduction under section 37 in
computing its income under the head ‘Profits and gains of business or
profession’. The ITO allowed only so much of the expenditure as could be
allocated to the taxable income and disallowed the rest of it which was
referable to the non-taxable income, being exempt under section 10(29).Held
by apex Court that allow ability of
expenditure will depend on fact whether all ventures carried on by him
constituted one indivisible business or not; if they do, entire expenditure
would be permissible deduction but if they do not, principle of apportionment
of expenditure will apply. In Present case, where income derived by assessee
from various ventures was found to be earned in course of one and indivisible
business though part of income was exempt under section 10(29), apportionment
of expenditure and allowing deduction of only that portion of income which was
referable to taxable income was unsustainable.
Statutory Developments in Law on Section 14A
a) As a fall
out of Rajasthan Warehousing Corpn (supra) Section 14A was inserted
retrospectively by Finance Act 2001 w.e.f. AY 1962-63 as under:
For the purposes of computing the total income
under this Chapter, no deduction shall be allowed in respect of expenditure
incurred by the assessee in relation to income which does not form part of the
total income under this Act
Provided that nothing contained in this section shall empower the
Assessing Officer either to reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise increasing the
liability of the assessee under section 154, for any assessment year beginning
on or before the 1st day of April, 2001
The Memorandum explaining the provisions of the Finance Bill,
2001 stated the following reasons for insertion of the provision :
“Certain incomes are not includible while computing the total
income as these are exempt under various provisions of the Act. There have been
cases where deductions have been claimed in respect of such exempt income. This
in effect means that the tax incentive given by way of exemptions to certain
categories of income is being used to reduce also the tax payable on the non
exempt income by debiting the expenses incurred to earn the exempt income
against taxable income. This is against the basic principles of taxation
whereby only the net income, that is, gross income minus the expenditure, is
taxed. On the same analogy, the exemption is also in respect of the net
income. Expenses incurred can be allowed only to the extent they are relatable
to the earning of taxable income.
It is proposed to insert a new section 14A so as to clarify the
intention of the Legislature since the inception of the Income-tax Act, 1961,
that no deduction shall be made in respect of any expenditure incurred by the
assessee in relation to income which does not form part of the total income
under the Income-tax Act”
b) There after Finance Act
2006 further expanded section 14A to include following further clauses w.e.f.
AY 2007-08 as under :
(2) The Assessing Officer shall
determine the amount of expenditure incurred in relation to such income which
does not form part of the total income under this Act in accordance with such
method as may be prescribed90, if the AssessingOfficer, having regard to the accounts of the
assessee, is not satisfied with the correctness of the claim of the assessee in
respect of such expenditure in relation to income which does not form part of
the total income under this Act.
(3) The provisions of
sub-section (2) shall also apply in relation to a case where an assessee claims
that no expenditure has been incurred by him in relation to income which does
not form part of the total income under this Act
The
above sections were not inserted retrospective from AY 1962-63 unlike the
earlier law on the subject
c) There after Rule 8D was inserted w.e.f.
24-03-2008 as under:
(1)
Where the Assessing Officer, having regard to the accounts of the assessee of a
previous year, is not satisfied with—
(a)
|
the
correctness of the claim of expenditure made by the assessee; or
|
|
(b)
|
the claim
made by the assessee that no expenditure has been incurred,
|
in
relation to income which does not form part of the total income under the Act
for such previous year, he shall determine the amount of expenditure in
relation to such income in accordance with the provisions of sub-rule (2).
(2)
The expenditure in relation to income which does not form part of the total
income shall be the aggregate of following amounts, namely :—
(i)
|
the amount
of expenditure directly relating to income which does not form part of total
income;
|
|
(ii)
|
in a case
where the assessee has incurred expenditure by way of interest during the
previous year which is not directly attributable to any particular income or
receipt, an amount computed in accordance with the following formula, namely
:—
|
A ×
|
B
|
||
C
|
Where
|
A =
|
amount of
expenditure by way of interest other than the amount of interest included in
clause (i) incurred during the previous year ;
|
|
B =
|
the average
of value of investment, income from which does not or shall not form part of
the total income, as appearing in the balance sheet of the assessee, on the
first day and the last day of the previous year ;
|
||
C =
|
the average
of total assets as appearing in the balance sheet of the assessee, on the
first day and the last day of the previous year ;
|
(iii)
|
an amount
equal to one-half per cent of the average of the value of investment, income
from which does not or shall not form part of the total income, as appearing
in the balance sheet of the assessee, on the first day and the last day of
the previous year.
|
(3)
For the purposes of this rule, the “total assets” shall mean, total assets as
appearing in the balance sheet excluding the increase on account of revaluation
of assets but including the decrease on account of revaluation of assets.]
Judicial
Pronouncements for applicability on
period prior to introduction of R. 8D:
a) Held by ITAT Delhi that since rule 8D was not applicable to
years prior to 2008-09, Held that Assessing Officer was not justified in
invoking provisions of rule 8D for assessment year 2005-06- GDA Finvest &
Trade (P.) Ltd [2015] 57 taxmann.com 62 (Delhi - Trib.) OCTOBER 10, 2014
b) Where assessee's case belonged to Assessment year 2007-08,
when rule 8D was not applicable, disallowance under section 14A could not be
computed as per rule 8D- Consolidated Finvest & Holdings Ltd. SEPTEMBER
10, 2014 [2014] 51 taxmann.com 187 (Delhi - Trib.)
Judicial Interpretation of Section 14A
1
|
Where there is no actual
receipt of exempt income
a)
CBDT
in Circular 5/2014 dtd 11-02-2014 has stated that disallowance u/s 14A to be
made even if no exempt income is earned by the taxpayer
b)
However
respective High Courts have held that the expression ‘does not form part of
the total income’ in section 14A of the Act implies that there should be an
actual receipt of income which is not includible in total income during the
previous year for the purpose of disallowing expenditure under section 14A of
the Act and therefore that section 14A of the Act would not apply if no
exempt income was received or was receivable during the relevant previous
year.
[ Punjab
and Haryana High Court in CIT vs. M/s. Lakhani Marketing Inc; CIT Vs. Hero Cycles Limited, 323 ITR 518 and CIT Vs. Winsome Textile Industries Ltd 319
ITR 204 ; Gujarat High Court in CIT vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj);
Allahabad High Court in CIT vs. Shivam Motors (P) Ltd; Delhi High Court in Holcim
India and Cheminvest]
|
2
|
Dissatisfaction of Assessing
Officer regarding claim of the assessee regarding expenditure in respect of
exempt income
a)
It
is only if the Assessing Officer is not satisfied with the correctness of the
claim of the assessee, in both cases, that the Assessing Officer gets
jurisdiction to determine the amount of expenditure incurred in relation to
such income which does not form part of the total income under the said Act
in accordance with the prescribed method.
Maxopp
Investment (P) Ltd. v. CIT (2012) 347 ITR 272 (Del); Taikisha Engineering
India Ltd. 370 ITR 338 (Del.); I.P.SUPPORT SERVICES INDIA (P)
LTD[24-09-2015](Del HC)
b)
If
the AO does not deal with the assessee's submissions and merely says
"not acceptable" it means he has not recorded proper
satisfaction-U. P. Electronics Corporation Ltd vs. DCIT (ITAT
Lucknow)[23-01-2015]
c) Section 14A requires Assessing Officer to
record satisfaction that interest bearing funds have been used to earn tax
free income based upon credible and relevant evidence. Abhishek Industries
Ltd [2015] 56 taxmann.com 391 (Punjab & Haryana) JANUARY 27, 2015.
d)
Supreme Court has
admitted SLP of the department against this decision
e)
Once assessee makes claim before Assessing Officer that
no expenditure is attributable to earning of dividend income, Assessing
Officer is required under statute to satisfy himself having regard to
accounts of assessee about correctness of claim of assessee; otherwise he
cannot proceed to make disallowance under section 14A(2)- Raptakos Brett & Co. Ltd. [2015] 58 taxmann.com
115 (Mumbai - Trib.) JUNE 10, 2015
|
3
|
Extent of Expenditure to be
disallowed
a)
Disallowance
u/s 14A requires a finding of incurring of expenditure. If it is found that
for earning exempted income no expenditure has been incurred, disallowance
u/s 14A cannot stand. -Hero Cycles (P & H High Court)[07-11-2009]
b)
Where
the entire tax exempt income is Rs. 48,90,000/-, the disallowance ultimately
directed works out to nearly 110% of that sum, i.e., Rs. 52,56,197/-. By no
stretch of imagination can Section 14A or Rule 8D be interpreted so as to
mean that the entire tax exempt income is to be disallowed. The window for
disallowance is indicated in Section 14A, and is only to the extent of
disallowing expenditure “incurred by the assessee in relation to the tax
exempt income”. This proportion or portion of the tax exempt income surely
cannot swallow the entire amount as has happened in this case. -Joint
Investments Pvt. Ltd vs. CIT (Delhi High Court)
February
25, 2015
c)
Disallowance
u/s.14A cannot exceed the amount of exempt income DCM Ltd vs. DCIT (ITAT
Delhi)September 1, 2015
d)
The
assessee only received Rs.1,82,362 as dividend income, therefore, there is no
question of disallowance of Rs.14,58,412 by invoking section 14A r.w. Rule
8D. At best, if any disallowance could be made that can be restricted to Rs.
1,485 which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D
cannot exceed the exempt income. Daga Global Chemicals Pvt. Ltd vs. ACIT
(ITAT Mumbai)[01-01-2015]
e)
Expenditure
(like audit fees) required to be incurred irrespective of income cannot be
disallowed- ITO vs. Pioneer Radio Training Services Pvt. Ltd (ITAT Delhi)[19-01-2015]
|
3
|
Impact of use of owned and
borrowed funds for subscribing tax free income yielding investments
a) Even if assessee
had utilized its own funds for making investments which had resulted in income which did
not form part of total income under
Act, expenditure incurred in earning of that income would have to be
disallowed under section 14A, read with rule 8D which was to be determined by
Assessing Officer. HDFC Bank Ltd. [2015] 61 taxmann.com 361 (Mumbai -
Trib.) SEPTEMBER 23, 2015
b) If Rule 8D applies, assessee's claim that interest is not
disallowable on ground of "own funds" is not acceptable- Taikisha
Engineering India Ltd. 370 ITR 338 (Del.)
c)
Where assessee
invested its own funds in shares resulting in earning of dividend income
exempt from tax, impugned disallowance made by Assessing Officer by invoking
provisions of section 14A, read with Rule 8D was not sustainable- Bandekar
Brothers (P.) Ltd [2015] 63 taxmann.com 198 (Panaji - Trib.) JUNE 9,
2015
d)
Where assessee claimed that interest bearing borrowed funds
were utilized entirely for purpose of business and investment in tax free
bonds had been made out of its own funds and Assessing Officer having noticed
that assessee had kept all funds in one common pool partly disallowed
interest paid on borrowed funds applying section 14A, disallowance of
interest paid not justified- SBI DHFL Ltd [2015] 63 taxmann.com 345 (Bombay)
APRIL 8, 2015
e)
Since assessee's
share capital with reserves and surplus was far in excess of amount invested
in securities fetching exempt income, interest could not be disallowed T And T Motors Ltd [2015] 58
taxmann.com 295 (Delhi - Trib.) JANUARY 7, 2015
f)
Where it was apparent from records that assessee had
sufficient funds for making investments in shares and interest free bonds and
it had not used borrowed funds for such purpose, Assessing Officer was not
justified in invoking provisions of section 14A in order to disallow one per
cent of interest expenses incurred for earning exempt income
Torrent Power Ltd [2014] 44 taxmann.com 441 (Gujarat) FEB 4, 2014
g)
Where investment
put in shares was fully financed out of sale proceeds of shares held as long
term capital investment and income earned on sale of those shares was also
offered as long term capital gains, there was no reason for disallowance of
interest expenditure by invoking provisions of section 14A read with rule 8D-
Sanjay Kumar J. Poddar [2015] 54 taxmann.com 260 (Mumbai - Trib.) NOVEMBER
26, 2014
h)
If
the investment in the shares is out of the non-interest bearing funds,
disallowance u/s 14A is not sustainable; [Hero Cycles (P&H)]
|
4
|
Impact of disallowance u/s
36(1)(iii):
Payment
of interest which was already disallowed under section 36(1)(iii), could not
be considered again for section 14A disallowance as it would result in double
addition- Snowtex Investment Ltd [2015] 64
taxmann.com 157 (Kolkata - Trib.) NOVEMBER 6, 2015
|
5
|
Impact on calculation of book
profits u/s 115JB
a) As
per ITAT Mumbai in Viraj Profiles, ITA 4439/2013 addition u/s 115JB, with
respect to disallowance u/s 14A has to be made even if assessee has no exempt
income and no amount of expenditure relatable to exempt income is debited for
the reason that S. 115JB starts with
non obstanate clause.
b) Where expenditure was disallowed by Assessing Officer by
invoking provisions of section 14A while computing total income under normal
provisions, said disallowance would be adopted while arriving at book profits
under section 115JB- Sobha Developers [2015] 58 taxmann.com 107 (Bangalore -
Trib.) JANUARY 9, 2015
c)
As per Chennai Tribunal in Beach Minerals Company (P.) Ltd. [2015] 64
taxmann.com 218 (Chennai - Trib.) AUGUST 6, 2015. Section
14A of the Act is a provision with fiction disallowing the deemed expenditure
attributable to exempt income viz., dividend income U/s. 10 of the Act and
Section 115JB of the Act is also a provision with fiction for payment of tax
in respect of deemed income. Therefore while computing the profit for the
purpose of Section 115JB of the Act another provision with fiction cannot be
superimposed. Hence the question of increasing the 'Book Profit' due to the
disallowance U/s. 14A of the Act will not arise.
d)
In
the absence of exempt income, s. 14A disallowance cannot be added to s. 115JB
book profits. There is no estoppel against the law. The mere fact that the
assessee has accepted this disallowance affects that disallowance only and
nothing more than that; it does not clothe such an adjustment, in computation
of book profit under section 115JB, with legality. -Minda Sai
Limited vs. ITO (ITAT Delhi)[09-01-2015]
|
6
|
Where investment held for
trading/control
a)
S.
14A Rule 8D does not apply to shares held as stock-in-trade; India
Advantage Securities (Bom High Court) 14-04-15
b) Where assessee had earned dividend from shares held as
stock-in-trade, rule 8D would not be applicable so as to disallow related
expenditure- Baljit Securities (P.) Ltd. [2015] 55 taxmann.com 191
(Kolkata - Trib.) OCTOBER 21, 2014
c) Section 14A is attracted even in case of dividend income
arising from shares held as stock in trade- Doubledot Finance Ltd. [2014]
49 taxmann.com 291 (Mumbai - Trib.) JULY 31, 2014
d)
Investments
in subsidiaries & joint ventures are for strategic purposes and not for
earning dividend and so the expenditure cannot be disallowed-U. P.
Electronics Corporation Ltd vs. DCIT (ITAT Lucknow)
e) Where primary object of investment was to
acquire controlling stake in group concerns and not for earning an income out
of that investment, provisions of section 14A could not be invoked- Selvel
Advertising (P.) Ltd [2015] 58 taxmann.com 196 (Kolkata - Trib.) JANUARY
1, 2015
f)
Growth mutual funds do not yield dividend and so s. 14A/ Rule 8D
does not apply, -Manugraph India Ltd vs. DCIT (ITAT Mumbai)
[25-03-2015]
|
7
|
Whether Rule 8D computation can be dispensed
with :
a) Tribunal in assessee's own case had held that
expenditure incurred towards two months salary for officers and staff in
investment division could be considered as disallowance to be made under
section 14A Since assessee in terms with aforesaid direction of Tribunal had
already disallowed certain expenditure, impugned disallowance made by Assessing
Officer by invoking provisions of section 14A was to be deleted- State Bank
of Hyderabad [2015] 63 taxmann.com 322 (Hyderabad - Trib.) AUGUST 14,
2015
b) Where Tribunal found that only administrative expenditure
was incurred and that was estimated at 5 per cent of dividend earned, it was
justified in restricting disallowance under section 14A at 5 per cent of
dividend income- Teletronics Dealing Systems (P.) Ltd SEPTEMBER 25,
2014 [2015] 53 taxmann.com 20 (Bombay)
c) When
assessee itself admitted that a disallowance had to be made with regard to
expenditure for earning of income which was exempted from taxation under Act,
such expenditure had to be computed not on ad hoc basis by estimating same
but as per method prescribed under rule 8D(2)-
K.H. Arind (P.) Ltd. [2015] 64 taxmann.com 409 (Chennai - Trib.) JUNE
26, 2015
d) Since assessee had maintained proper
accounts, duly audited and based his claim of having incurred lower
expenditure than that as per statutory prescription of rule 8D and revenue
had not made any inquiry regarding expenditure stood debited in assessee's
account books, assessee's claim of disallowance of Rs. 1 lakh under section
14A was to be allowed- Fali S. Nariman [2015] 56 taxmann.com 155 (Mumbai -
Trib.) JANUARY 30, 2015
|
8
|
Penalty for Disallowance u/s 14A:
No penalty could be levied under section
271(1)(c) on account of disallowance of expenses incurred on earning exempt
income where assessee had disclosed both figures of expenses as well as
income in its profit and loss account filed along with return of income-
Aarge Drugs (P.) Ltd. [2015] 61 taxmann.com 254 (Chandigarh - Trib.) JULY
23, 2015
|
9
|
Calculation aspects:
a) In computing the “average value of
investment”, only the investments yielding non-taxable income have to be
considered and not all investments- ACB India Ltd vs. ACIT (Delhi High
Court)[24-03-2015]
b) The Tribunal held that if investments were
made in mutual funds out of non-interest bearing funds then such investments
in mutual funds had to be excluded from the total tax free investments as
well as total assets for the purpose of calculation of interest disallowable
under Rule 8D(2)(ii) of the Rules.
ACIT v Ashapura Minechem Ltd – (2015) 44 CCH 0576 Mum Trib |
10
|
Interest incurred on taxable income has also
to be excluded while computing the disallowance to avoid incongruity
Bharti Overseas Pvt. Ltd (Delhi High Court)
December 17, 2015
·
In Godrej &
Boyce Mfg. Co. when constitutional validity of R.8D was under challenge,
department filed an affidavit saying that “…………….. amount of expenditure
by way of interest that will be taken will exclude any expenditure by way of
interest which is directly attributable to any particular income or receipt
(for example- any aspect of the assessee’s business such as plant/machinery
et.)…………..”
•
On the basis of
department’s undertaking in Godrej & Boyce Mfg Co. , ITAT Delhi in
Champion Commercial and ITAT Cochin in Geojit Investment Services Ltd vs. ACIT held that Interest incurred on
taxable income has also to be excluded to avoid incongruity & in view of
Department’s stand before High Court.
•
Now held by Delhi
High Court that there fore ITAT in present case was correct in holding that common
interest expenses’ that was required to be allocated would have to exclude
both expenditures, i.e., interest attributable to tax exempt income as well
as that attributable to taxable income.
•
For Rule 8 D (2)
(ii) to apply there has to be some expenditure by way of interest “which is
not directly attributable to any particular income or receipt.” If there is
no such expenditure, as has been found factually by the ITAT in the present
case, then the question of applying the formula there under will not arise.
|
Conclusion: The purpose
of section 14A was to set right a situation where tax incentive given by way of exemptions to certain categories
of income were being used to reduce also the tax payable on the non exempt
income by debiting the expenses incurred to earn the exempt income against
taxable income. From the judicial pronouncements stated above although there
are opinions on both sides of the law, by and large the judiciary has adopted
an interpretation which meets the ends of logic and is equitable and takes away
the sting and stigma of incongruent approach of calculating taxable income.
No comments:
Post a Comment