I said I incurred no expenditure to earn my dividend income, and the officer simply applied rule 8D and disallowed a large sum. Can he go straight to the formula?
No. The Punjab and Haryana High Court held that where the assessee's consistent case, given in answer to the officer's notice, is that no expenditure was incurred, the officer must proceed under section 14A(2) to collect material or evidence to determine what expenditure, if any, was in fact incurred. Instead he applied rule 8D as a formula, which is meant for an assessee who has incurred interest expenditure not directly attributable to a particular receipt, and that was not this assessee's case. Using the rule as a substitute for the enquiry required by section 14A(2) was a wrong application and not permissible in law. The six appeals were dismissed, no substantial question of law arising.
Decided by the High Court (High Court of Punjab and Haryana at Chandigarh; Rajive Bhalla J and Dr Bharat Bhushan Parsoon J, judgment by Dr Bharat Bhushan Parsoon J) on 2013-09-03, reported as I.T.A. Nos. 105, 106, 107, 108, 109 and 110 of 2013 (O&M), Punjab and Haryana High Court, assessment years 2007-08, 2008-09 and 2009-10. It bears on section 14A, section 14A(2), section 14A(3), section 260A of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
Section 14A disallowances are among the commonest additions, and the pattern is always the same: the assessee says he spent nothing, the officer disbelieves him without saying why and reaches for rule 8D. This judgment fixes the order of operations. Rule 8D is not the enquiry; it is what follows a recorded dissatisfaction reached having regard to the accounts, and the officer's first duty under section 14A(2) is to gather material. It also carries forward the Court's earlier holding in Hero Cycles Ltd that disallowance under section 14A requires a finding that expenditure was incurred, and that where no expenditure was incurred for earning exempt income the disallowance cannot stand; the Revenue's argument that some expenditure is always incurred directly or indirectly was rejected there and again here. The question is one of fact, so a finding by the Tribunal that no expenditure was shown, if not perverse, ends the matter in the High Court.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Six appeals under section 260A were filed by the Revenue for assessment years 2007-08, 2008-09 and 2009-10 in the cases of two individuals, Deepak Mittal and Amrit Sagar Mittal, against the Tribunal's common order dated 17 October 2012 in six appeals before the Amritsar Bench. The facts of I.T.A. No. 109 of 2013, relating to Deepak Mittal for assessment year 2007-08, were taken as representative. The assessees derived income from various sources including dividend, which they returned as exempt, showing no expenditure against the earning of that income. The Assessing Officer gave notice calling for details of the expenditure incurred on earning the exempt income, and the assessee's consistent answer was that he had made no expenditure. The officer disagreed and made a disallowance of Rs 30,31,212 under section 14A read with rule 8D of the Income-tax Rules, 1962. The Commissioner (Appeals) deleted the addition, holding the disallowance unjustified. The Tribunal dismissed the Revenue's appeal, relying principally on the Court's decision of 4 November 2009 in ITA No. 331 of 2009, CIT-II v M/s Hero Cycles Limited, and on Walfort Share & Stock Brokers (P) Ltd. It found that the officer had brought nothing on record to show that any expense had been incurred to earn the exempt income, and held that before any disallowance is made there must be expenditure, which was missing. The Revenue's sole ground before the High Court was that the dividend income could not have been earned without direct or indirect expenditure, that section 14A is a special provision under which the onus lay on the assessee to prove that no expenditure was incurred, and that the Tribunal had overlooked the scope of rule 8D. The Revenue relied on sub-section (3) of section 14A and the assessees on sub-section (2), to which sub-section (3) refers.
The appeals were dismissed, no substantial question of law being found to arise. The Court set out section 14A in full and accepted that the Revenue's plea was correct that the onus lay on the assessee as to the quantum of expenditure incurred on earning the tax-free dividend income. But it held that where, despite the officer's notice calling for details, the assessee's consistent case was that he had made no expenditure on earning the exempt income, the officer was required by sub-section (2) of section 14A to proceed further and collect such material or evidence as would determine the expenditure, if any, actually incurred. Instead he relied on rule 8D and applied it as a formula. That rule applies to an assessee who has incurred expenditure by way of interest not directly attributable to any particular income or receipt, which was not the case of this assessee. Applying it was therefore a wrong application, introduced as a substitute for the enquiry required by sub-section (2) of section 14A, and was not permissible in law.
The Court read the three sub-sections of section 14A together. Sub-section (1) denies a deduction for expenditure incurred in relation to income not forming part of total income. Sub-section (2) tells the officer what to do about quantum: he shall determine the amount of expenditure incurred in relation to such income in accordance with the prescribed method, but only if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the assessee's claim. Sub-section (3) extends sub-section (2) to a case where the assessee claims that no expenditure has been incurred at all. The Court's point is that sub-section (3) does not dispense with sub-section (2); it routes the no-expenditure claim into it. So when the assessee answers the notice by saying he spent nothing, the officer's next step is the enquiry, that is, to collect material or evidence bearing on whether expenditure was in fact incurred. The prescribed method is what he applies after that enquiry, and it is addressed to a particular situation, an assessee with interest expenditure that cannot be directly attributed to a particular income or receipt. Where that situation does not obtain, treating the formula as itself the determination inverts the provision. The Court then adopted the Tribunal's finding of fact, that the officer had brought nothing on record showing any expense incurred to earn the exempt income, so it could not be said that the assessee had actually incurred any expenditure, and that this had to be brought on record whether before or after the insertion of rule 8D. It applied its own earlier decision in Hero Cycles Limited, where the same argument based on section 14A(2) and rule 8D(1)(b) had been rejected on the finding that interest expenditure had been set off against interest income and the investment in shares and funds came out of dividend proceeds. That decision holds that disallowance under section 14A requires a finding of incurring of expenditure, that where no expenditure has been incurred for earning exempt income the disallowance cannot stand, that whether expenditure was incurred is a question of fact, and that the Revenue's contention that directly or indirectly some expenditure is always incurred cannot be accepted; it in turn followed Winsome Textile Industries Limited. With that law fully applicable to the facts, nothing remained to be adjudicated afresh.
the Assessing Officer instead relying on Rule 8-D of the Rules applied as a formula... was clearly a wrong application introduced as a substitute for sub-section 2 of Section 14-A of the Act
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Handle my notice → Ask a CA on WhatsAppNo. The Punjab and Haryana High Court held that where the assessee's consistent case, given in answer to the officer's notice, is that no expenditure was incurred, the officer must proceed under section 14A(2) to collect material or evidence to determine what expenditure, if any, was in fact incurred. Instead he applied rule 8D as a formula, which is meant for an assessee who has incurred interest expenditure not directly attributable to a particular receipt, and that was not this assessee's case. Using the rule as a substitute for the enquiry required by section 14A(2) was a wrong application and not permissible in law. The six appeals were dismissed, no substantial question of law arising. This was decided by the High Court (High Court of Punjab and Haryana at Chandigarh; Rajive Bhalla J and Dr Bharat Bhushan Parsoon J, judgment by Dr Bharat Bhushan Parsoon J) and bears on section 14A, section 14A(2), section 14A(3), section 260A of the Income Tax Act 1961. It is reported as I.T.A. Nos. 105, 106, 107, 108, 109 and 110 of 2013 (O&M), Punjab and Haryana High Court, assessment years 2007-08, 2008-09 and 2009-10. Section 14A disallowances are among the commonest additions, and the pattern is always the same: the assessee says he spent nothing, the officer disbelieves him without saying why and reaches for rule 8D. This judgment fixes the order of operations. Rule 8D is not the enquiry; it is what follows a recorded dissatisfaction reached having regard to the accounts, and the officer's first duty under section 14A(2) is to gather material. It also carries forward the Court's earlier holding in Hero Cycles Ltd that disallowance under section 14A requires a finding that expenditure was incurred, and that where no expenditure was incurred for earning exempt income the disallowance cannot stand; the Revenue's argument that some expenditure is always incurred directly or indirectly was rejected there and again here. The question is one of fact, so a finding by the Tribunal that no expenditure was shown, if not perverse, ends the matter in the High Court. If it applies to you, the first step is this: Answer the officer's notice with a specific statement of how the investments were funded and why no expenditure was incurred, and keep that case consistent throughout.
Six appeals under section 260A were filed by the Revenue for assessment years 2007-08, 2008-09 and 2009-10 in the cases of two individuals, Deepak Mittal and Amrit Sagar Mittal, against the Tribunal's common order dated 17 October 2012 in six appeals before the Amritsar Bench. The facts of I.T.A. No. 109 of 2013, relating to Deepak Mittal for assessment year 2007-08, were taken as representative. The assessees derived income from various sources including dividend, which they returned as exempt, showing no expenditure against the earning of that income. The Assessing Officer gave notice calling for details of the expenditure incurred on earning the exempt income, and the assessee's consistent answer was that he had made no expenditure. The officer disagreed and made a disallowance of Rs 30,31,212 under section 14A read with rule 8D of the Income-tax Rules, 1962. The Commissioner (Appeals) deleted the addition, holding the disallowance unjustified. The Tribunal dismissed the Revenue's appeal, relying principally on the Court's decision of 4 November 2009 in ITA No. 331 of 2009, CIT-II v M/s Hero Cycles Limited, and on Walfort Share & Stock Brokers (P) Ltd. It found that the officer had brought nothing on record to show that any expense had been incurred to earn the exempt income, and held that before any disallowance is made there must be expenditure, which was missing. The Revenue's sole ground before the High Court was that the dividend income could not have been earned without direct or indirect expenditure, that section 14A is a special provision under which the onus lay on the assessee to prove that no expenditure was incurred, and that the Tribunal had overlooked the scope of rule 8D. The Revenue relied on sub-section (3) of section 14A and the assessees on sub-section (2), to which sub-section (3) refers. The matter was decided on 2013-09-03 by the High Court (High Court of Punjab and Haryana at Chandigarh; Rajive Bhalla J and Dr Bharat Bhushan Parsoon J, judgment by Dr Bharat Bhushan Parsoon J). On those facts the High Court held as follows. The appeals were dismissed, no substantial question of law being found to arise. The Court set out section 14A in full and accepted that the Revenue's plea was correct that the onus lay on the assessee as to the quantum of expenditure incurred on earning the tax-free dividend income. But it held that where, despite the officer's notice calling for details, the assessee's consistent case was that he had made no expenditure on earning the exempt income, the officer was required by sub-section (2) of section 14A to proceed further and collect such material or evidence as would determine the expenditure, if any, actually incurred. Instead he relied on rule 8D and applied it as a formula. That rule applies to an assessee who has incurred expenditure by way of interest not directly attributable to any particular income or receipt, which was not the case of this assessee. Applying it was therefore a wrong application, introduced as a substitute for the enquiry required by sub-section (2) of section 14A, and was not permissible in law.
The Court read the three sub-sections of section 14A together. Sub-section (1) denies a deduction for expenditure incurred in relation to income not forming part of total income. Sub-section (2) tells the officer what to do about quantum: he shall determine the amount of expenditure incurred in relation to such income in accordance with the prescribed method, but only if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the assessee's claim. Sub-section (3) extends sub-section (2) to a case where the assessee claims that no expenditure has been incurred at all. The Court's point is that sub-section (3) does not dispense with sub-section (2); it routes the no-expenditure claim into it. So when the assessee answers the notice by saying he spent nothing, the officer's next step is the enquiry, that is, to collect material or evidence bearing on whether expenditure was in fact incurred. The prescribed method is what he applies after that enquiry, and it is addressed to a particular situation, an assessee with interest expenditure that cannot be directly attributed to a particular income or receipt. Where that situation does not obtain, treating the formula as itself the determination inverts the provision. The Court then adopted the Tribunal's finding of fact, that the officer had brought nothing on record showing any expense incurred to earn the exempt income, so it could not be said that the assessee had actually incurred any expenditure, and that this had to be brought on record whether before or after the insertion of rule 8D. It applied its own earlier decision in Hero Cycles Limited, where the same argument based on section 14A(2) and rule 8D(1)(b) had been rejected on the finding that interest expenditure had been set off against interest income and the investment in shares and funds came out of dividend proceeds. That decision holds that disallowance under section 14A requires a finding of incurring of expenditure, that where no expenditure has been incurred for earning exempt income the disallowance cannot stand, that whether expenditure was incurred is a question of fact, and that the Revenue's contention that directly or indirectly some expenditure is always incurred cannot be accepted; it in turn followed Winsome Textile Industries Limited. With that law fully applicable to the facts, nothing remained to be adjudicated afresh. In the words reproduced by the source cited on this page: "the Assessing Officer instead relying on Rule 8-D of the Rules applied as a formula... was clearly a wrong application introduced as a substitute for sub-section 2 of Section 14-A of the Act"
It was decided by the High Court on 2013-09-03 and is reported as I.T.A. Nos. 105, 106, 107, 108, 109 and 110 of 2013 (O&M), Punjab and Haryana High Court, assessment years 2007-08, 2008-09 and 2009-10. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 14A, section 14A(2), section 14A(3), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed, no substantial question of law being found to arise. The Court set out section 14A in full and accepted that the Revenue's plea was correct that the onus lay on the assessee as to the quantum of expenditure incurred on earning the tax-free dividend income. But it held that where, despite the officer's notice calling for details, the assessee's consistent case was that he had made no expenditure on earning the exempt income, the officer was required by sub-section (2) of section 14A to proceed further and collect such material or evidence as would determine the expenditure, if any, actually incurred. Instead he relied on rule 8D and applied it as a formula. That rule applies to an assessee who has incurred expenditure by way of interest not directly attributable to any particular income or receipt, which was not the case of this assessee. Applying it was therefore a wrong application, introduced as a substitute for the enquiry required by sub-section (2) of section 14A, and was not permissible in law. It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 14A, section 14A(2), section 14A(3), section 260A of the Income Tax Act 1961, and was decided by High Court of Punjab and Haryana at Chandigarh; Rajive Bhalla J and Dr Bharat Bhushan Parsoon J, judgment by Dr Bharat Bhushan Parsoon J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Make the officer record his dissatisfaction with your claim having regard to your accounts, and identify what in the accounts he is dissatisfied with, before he touches rule 8D. Point out that rule 8D addresses interest expenditure not directly attributable to a particular receipt, and show that your case is not that, if it is not. Where interest expenditure was set off against interest income and the investments came out of dividend proceeds or own funds, put the trail on record; that was the finding that decided Hero Cycles Ltd.
Still good law. A Division Bench judgment of 3 September 2013 following the Court's own decisions in CIT-II v Hero Cycles Ltd (ITA No. 331 of 2009, decided 4 November 2009) and CIT v Winsome Textile Industries Ltd (ITA No. 504 of 2008, decided 25 August 2009). The source page records that it has been cited in 69 later matters, which were not read in this session. It construes section 14A as it stood for assessment years 2007-08 to 2009-10, before later amendment; whether that amendment affects the reasoning was not examined here, nor was any appeal to the Supreme Court checked. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
There is a tension on the face of the judgment that it does not resolve. Paragraph 8 accepts as correct the Revenue's plea that the onus lay on the assessee to prove the quantum of expenditure incurred, while paragraphs 9 to 11 proceed on the footing that it was for the officer to bring material on record and that in the absence of such material no disallowance could be made. The judgment does not say what would satisfy the onus it accepts, nor what enquiry under section 14A(2) would have been sufficient. It does not set out rule 8D, so its statement of the rule's scope has to be taken as it stands. It gives the disallowance figure only for the lead year and does not record the amounts in the other five appeals, or the funding of the investments in this assessee's case, the finding about dividend proceeds and own funds coming from the earlier Hero Cycles matter rather than from this record. The batch line gave the sections as 14A, 14A(2) and rule 8D, which matches. The Tribunal's common order of 17 October 2012 and the decisions relied on were not read in this session beyond the passages this judgment extracts. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed, no substantial question of law being found to arise. The Court set out section 14A in full and accepted that the Revenue's plea was correct that the onus lay on the assessee as to the quantum of expenditure incurred on earning the tax-free dividend income. But it held that where, despite the officer's notice calling for details, the assessee's consistent case was that he had made no expenditure on earning the exempt income, the officer was required by sub-section (2) of section 14A to proceed further and collect such material or evidence as would determine the expenditure, if any, actually incurred. Instead he relied on rule 8D and applied it as a formula. That rule applies to an assessee who has incurred expenditure by way of interest not directly attributable to any particular income or receipt, which was not the case of this assessee. Applying it was therefore a wrong application, introduced as a substitute for the enquiry required by sub-section (2) of section 14A, and was not permissible in law.
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You gave particulars, paid by cheque and got a confirmation. Has the burden shifted?
The officer disallowed your claim. Does a disallowance automatically bring penalty with it?
The Tribunal recalled its whole order on my miscellaneous application. Will that recall survive?
Shares held for control, or as stock-in-trade. Does s.14A still bite?