Taxation

Section 14A

Section14A is really a boon for the Assessing Officer. You have to only see a connection between expenses claimed by the assessee and investment, income from which does not or shall not form part of total income. Even though there is only a remote connection, the AO has every reason to be satisfied that the assessee has claimed expenses which pertain to exempt income. In that case, Rule 8D will easily apply and disallowance will be automatic.

Now, it is nobody’s case that expenses should be restricted to income. As held by ITAT Mumbai Special Bench in Daga Capitals (P.) Ltd, there is no requirement for actual exempt income. So, even though there is actually no income, still if you have invested in instruments, income from which does not or shall not form part of total income, then expenses thereon will have to be disallowed under rule 8D.

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8 thoughts on “Section 14A”

  1. There is a writ pending on Daga Capital case in the Bombay High Court. 8d can be applied only if the AO is not satisfied with assesse’s claim. Even if AO disallows an additional portion under 14A, 8D aplies completely.

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  2. Sir, this is latest of 14 A
    CIT vs. Hero Cycles (P & H High Court)

    Even under Rule 8D of S. 14A, disallowance can be made only if there is actual nexus between tax-free income and expenditur

    (i) If the investment in the shares is out of the non-interest bearing funds, disallowance u/s 14A is not sustainable;

    (ii) The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted;

    (iii) 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;

    (iv) The contention of the revenue even if the assessee has made investments in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, disallowance u/s 14A can be made is also justified.

    The basic condition which must be fulfilled at first instance by the revenue is that it has to establish the nexus with evidence to show that the interest – bearing funds had been invested in the tax – free investments

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  3. Sir, this is latest on 14 A
    CIT vs. Hero Cycles (P & H High Court)

    Even under Rule 8D of S. 14A, disallowance can be made only if there is actual nexus between tax-free income and expenditur

    (i) If the investment in the shares is out of the non-interest bearing funds, disallowance u/s 14A is not sustainable;

    (ii) The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted;

    (iii) 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;

    (iv) The contention of the revenue even if the assessee has made investments in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, disallowance u/s 14A can be made is also justified.

    The basic condition which must be fulfilled at first instance by the revenue is that it has to establish the nexus with evidence to show that the interest – bearing funds had been invested in the tax – free investments

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