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Applicability of Section 14A

Applicability of Section 14A

Expenditure incurred

• Expenditure incurred refers to actual expenditure and not to some imagined expenditures [If no expenditure is incurred in relation to the exempt income, no disallowance can be made under Section14A of the Act]

– Maxopp Investment Ltd. vs CIT (2012) (347 ITR 272) (Delhi HC) (2011)

– CIT v. Hero Cycles Ltd. (323 ITR 518) (P&H HC) (2010)

– Yatish Trading Co. (P.) Ltd. v. ACIT (129 ITD 237) (Mum ITAT) (2011)

– Justice Sam P. Bharucha v. ACIT (53 SOT 192) (Mum ITAT) (2012)

• Entire expenditure to be considered irrespective of whether it is fixed, variable, direct, indirect, administrative, managerial or financial

– Kalpataru Construction Overseas (P.) Ltd. v. Dy. CIT (13 SOT 194) (Mum ITAT) (2007)

• Whether Section 14A of the Act applicable to depreciation? – Nector Beverages Private Limited (314 ITR 314) (SC) (2009)

– Hoshang Nanavati v. ACIT (16 ITR(T) 614) (Mum ITAT) (2012)

– Vishnu Anant Mahajan v. ACIT (16 ITR 621) (Ambd ITAT) (SB) (2012)

• Is Donation an expenditure?

– Infosys Technologies Ltd. v. JCIT (19 SOT 7) (Bangalore ITAT) (2008)

Satisfaction of the AO for invoking Rule 8D

• Memorandum to the Finance Act 2006 explaining introduction of Section 14A(2) and (3) of the Act:

– “However, the Assessing Officer shall be required to adopt the prescribed method if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income”

• AO must record his dissatisfaction with the correctness of the claim of expenditure

– Maxopp Investment Ltd. v. CIT (347 ITR 272) (Delhi HC) (2011)

– Godrej & Boyce Mfg. Co. Ltd. v. DCIT (328 ITR 81) (Bom HC) (2010)

– CIT .v. Abhishek Industries Ltd. (2015) 231 Taxman 85 (P&H)(HC)

The recording of satisfaction as to why “the voluntary disallowance made by the assessee was unreasonable and unsatisfactory” is a mandatory re-quirement of the law.

Issues relating to Scope of and Computation under Rule 8D

Retrospective v. Prospective

• Prospective – Applicable from AY 2008-09

• Prior to introduction of Rule 8D of the Rules, AO to adopt a reasonable method • Rulings – Godrej & Boyce Mfg. Co. Ltd. v. DCIT (328 ITR 81) (Bom HC) (2010)

– Maxopp Investment Ltd (347 ITR 272) (Delhi HC) (2011)

– CIT vs. Gujarat State fertilizers & chemicals Ltd. (36 taxmann.com 557) (Guj HC) (2013)

Scope of Rule 8 (D)(2)(ii)

• If the payment of interest is directly attributable to the taxable business activity, it cannot be considered under Rule 8D(2)(íi) of the Rules

− Godrej & Boyce Mfg Co Ltd. v. DCIT (328 ITR 81) (Bombay HC) (2010)

− ACIT .v. Best & Crompton Engineering Ltd (60 SOT 53) (Chennai ITAT) (2013)

− ITO .v. Narain Prasad Dalamia (ITA No.1180/Kol/2011) (Kolkata ITAT) (2014)

− REI Agro Ltd .v. DCIT (144 ITD 141) (Kolkata ITAT) (2013)

− Asstt. CIT v. Champion Commercial Co. Ltd. (139 ITD 108) (Kolkata ITAT) (2012)

Applicability of Section 14A

Applicability of Section 14A

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