1. The Institute of Chartered Accountants of India
The E - Learning Series
Direct Taxes Committee &
Continuing Professional Education Committee
The Institute of Chartered Accountants of India

2. Disallowance Under Section 14A
Nihar Jambusaria

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4. Section 14A
CIT v. Rajasthan State Warehousing Corporation [2001] 117 Taxman 598 (Raj.)
Income of marketing societies from letting of godowns exempt u/s 10(29). 1
It exempts only such income which is derived from letting of godowns or warehouses and not whole of the income. 2
Artificial apportionment of common expenditure between taxable and non-taxable income not possible. 3

5. Section 14A Inserted by the Finance Act, 2001, w.r.e.f. 1-4-1962.
It provides for disallowance of expenditure incurred in relation to income which is not includible in the total income of the assesse.
Inserted by the Finance Act, 2001, w.r.e.f
The operative part of the Section reads as under :
“(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assesse in relation to income which does not form part of the total income under this Act.”

6. Section 14A
The proviso was inserted by the Finance Act, 2002, w.e.f
“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 assesse under section 154, for any assessment year beginning on or before the 1st day of April, 2001.”

7. Section 14A
Subsection (2) and (3) were inserted by the Finance Act, 2006, w.e.f to provide that AO shall determine the amount of expenditure incurred in relation to the exempt income in accordance with such method as may be prescribed by Rules if the AO, having regard to the accounts of the assesse, is not satisfied with –
the correctness of the claim of the assesse in respect of such expenditure in relation to income which does not form part of the total income, or
the assesse’s claim that no expenditure has been incurred by him in relation to income which does not form part of the total income.

8. Issues arising in section 14A
Constitutional validity of Section 14A and Rule 8D
Investments held as stock-in-trade
Establishment of nexus between the exempt income and related expenditure
Interest income exceeded interest expense
Investment in subsidiaries
Applicability of Section 14A while computing MAT
Misc. issues
Investment in partnership firm
No exempt income earned during the relevant AY

9. Constitutional validity of Section 14A & Rule 8D
Essar Teleholdings Ltd [(2018) 90 taxmann.com 2 (SC)]
Rule 8D is prospective in operation and cannot be applied to any assessment year prior to assessment year
Godrej & Boyce Mfg. Co. Ltd. [(2010) 328 ITR 81 (Bom HC)]
Section 14A and Rule 8D are constitutionally valid
Rule 8D will apply from AY For earlier years, the tax authority has to apply reasonable method for quantifying section 14A expenditure
Proximate relationship between expenditure (direct and indirect) is required to invoke disallowance under section 14A

10. Godrej & Boyce Mfg. Co. Ltd. [(2010) 328 ITR 81 (Bom HC)]
Constitutional validity of Section 14A & Rule 8D
Godrej & Boyce Mfg. Co. Ltd. [(2010) 328 ITR 81 (Bom HC)]
Rule 8D cannot be invoked mechanically by the Tax Authority. The provisions require satisfaction of the Tax Authority having regard to the accounts of the taxpayer that the claim made by the taxpayer is not correct. Such satisfaction must be an objective satisfaction arrived at in good faith and on relevant consideration of all facts and circumstances. Also, the Tax Authority must record reasons for non-satisfaction with the claim of the taxpayer [Delhi ITAT upheld this principle in the case of Jindal Photo Limited – ITA No.4539/Del./2010 date 7 January 2011]

11. Godrej & Boyce Mfg. Co. Ltd. [(2017) 81 taxmann.com 111 (SC)]
Whether Section 14A would apply to dividend income on which tax is payable under section 115-O?
Godrej & Boyce Mfg. Co. Ltd. [(2017) 81 taxmann.com 111 (SC)]
SC held that the provisions of section 14A would apply to dividend income on which tax is payable under section 115-O.

12. Establishment of nexus between the exempt income and related expenditure
Whether the disallowance can be made where the investment in tax-free securities are made out of only own funds (No loans at all) ?
Hero Cycles Ltd. - Punjab & Haryana High Court [323 ITR 518]
Section 14A cannot be invoked to disallow interest expenditure, where it is factually found that no interest bearing funds are utilized for making investments which give rise to exempt dividend income.
Similar View - GMR Power Corporation Ltd vs DCIT [TS-720-ITAT-2013(Bang.)]
Also Held that management of investments requires expertise, upholds Sec 14A disallowance for indirect expenditure worked 0.5%of average value of investments as per Rule 8D.

13. Sintex Industries Limited [(2018) 93 taxmann.com 24 (SC]
Surplus Funds
Sintex Industries Limited [(2018) 93 taxmann.com 24 (SC]
Where assesse had its surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A arose and therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D

14. Interglobe Enterprises Ltd. v. DCIT (ITA No. 1362 & 1032/DEL /2013)
Establishment of nexus between the exempt income and related expenditure – (interest free loan)
Interglobe Enterprises Ltd. v. DCIT (ITA No & 1032/DEL /2013)
Assesse had utilized interest free funds for making fresh investments and that too into its subsidiaries. No disallowance of interest is required to be made under rule 8D (i) & 8D (ii) as no direct or indirect interest expenditure has incurred for making investments.
DCIT vs Subramanya Constructions & Development Co.Ltd. [TS-100-ITAT-2015 (Bang.)]
Not necessary to draw a one to one nexus between investments and interest free loans. When the funds had gone out of a common pool and the assesse had interest free funds in excess of the investments, it could take a valid plea that such investments were made out of interest free loans.

15. Investment in partnership firm
ACIT v. Delite Enterprises (P.) Ltd. [2011] 128 ITD 146 (Mum.)
There was nexus between borrowings and investments
Interest paid allowed u/s 36(1)(iii)
No disallowance u/s 14A
Assesse invested borrowed funds into partnership firm as a capital contribution and loan as well in the capacity of a partner.
Interest income received was taxable as ‘business profits’.

16. In favour of Assesseee:]
No exempt income earned during the relevant AY
Whether there can be disallowance u/s 14A where no income is earned during the relevant AY?
Alliance Infrastructure Projects Pvt Ltd v. DCIT [ITA No.220 &1043(Bang)/2013]
CIT v. Shivam Motors P. Ltd. (ITA No. 88/2014, 5 May 2014)
CIT v. Corrtech Energy Pvt. Ltd. (ITA No. 239/2014, 24 March 2014) (Guj)
CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 2014 (P&H)
CIT v. Delite Enterprises (ITA No. 110/2009, 26 February 2009)
In favour of Assesseee:]

17. CBDT issued a circular no.05/2014
No exempt income earned during the relevant AY
Against:
Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Del). However, the case is reversed by Delhi HC [(2015) 61 taxmann.com 118 (Delhi HC)]
CBDT issued a circular no.05/2014
Disallowance of expenses under section 14A would be applicable even where taxpayer has not earned exempt income in that particular year.

18. CCI Ltd (ITA No. 359/2011, 28 February 2012) (Karnataka HC) –
Investments held as stock-in-trade/strategic investment
CCI Ltd (ITA No. 359/2011, 28 February 2012) (Karnataka HC) –
Section 14A cannot be applied to disallow expenditure incurred on shares purchased for trading purposes from interest-free funds merely because such shares give rise to incidental exempt dividend income.
Contrary view- Maxopp Taxmann 364(Del) and Catholic Syrian Bank CTR 164(Kar) have held in favour of the Revenue.
Finally SC held in favor of Revenue in Maxopp Investment Ltd. v CIT 91 Taxmann.com154(SC) Disallowance be made even if shares are held as stock in trade or as strategic investments

19. DCIT vs. M/s. Trade Apartment Ltd [ITA No. 1277/Kol./2011]
Interest income exceeded interest expense
DCIT vs. M/s. Trade Apartment Ltd  [ITA No. 1277/Kol./2011]
No interest expenditure remains after adjusting the interest credited to the Profit and Loss Account.
Sec 14A disallowance on interest expense not attracted since interest income exceeded interest expense.

20. 1 2 3 Amounts inadmissible u/s 40(a)
Whether formula based disallowance under section 14A read with Rule 8D needs to be added back while computing book profit for determining MAT liability under section 115JB of the Act?
Rule 8D cannot be invoked while computing book profit under section 115JB of the Act, only adjustments permissible u/s section 115JB can be made - Goetze (India) Ltd [32 SOT 101 (Del)] 1
Contrary view DCIT v. Sobha Developers (ITA No. 1410/Bang./2013) and Godrej Consumer Products Limited (48 taxmann.com 293 (Mum ITAT) 2
In computing book profits under section 115JA/JB, if actual expenditure to earn tax-free income not debited in P&L A/c, Section 14A cannot apply - Quippo Telecom Infrastructure Ltd vs. ACIT (ITA No. 4931/Del/2010) 3

21. No - Top Star Mercantile v. ACIT (Bom HC) [334 ITR 374]
Misc. issues
Whether while computing interest disallowance, interest earned can be reduced?
Yes - Morgan Stanley India Securities Pvt. Ltd. [ITA No.5072/Mum/2005]
No - Cranes Software International Ltd. [TS-662-ITAT-2014(Bang.)]
Can the appellate authority disallow the expense u/s 14A exceeding the amount originally proposed by AO?
No - Top Star Mercantile v. ACIT (Bom HC) [334 ITR 374]

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