Section 10(34)

Section 10(34) — the law in short

What the courts have decided on section 10(34), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Maxopp Investment Ltd v CIT Supreme CourtCuts both ways
  Shares held for control, or as stock-in-trade. Does s.14A still bite?
  Yes. The dominant purpose for which shares were acquired is irrelevant — s.14A rests on apportionment. But only expenditure relating to exempt income can be disallowed, and the officer must record satisfaction before rejecting your own computation.
• PCIT v Totagars Co-operative Sale Society (5 January 2017) High CourtHelps taxpayerHigh Courts differ
  My society earns interest on deposits placed with a co-operative bank. The Assessing Officer says s.80P(2)(d) covers only investments with a co-operative society and a co-operative bank is not one. Is there authority the other way?
  Yes. The Karnataka High Court, Dharwad Bench, held that 'co-operative society' is a genus and 'co-operative bank' a species of it, so a co-operative bank is necessarily covered by the words 'co-operative society' and interest earned from it qualifies under s.80P(2)(d). It also held that the Supreme Court's decision in Totgars, being on s.80P(2)(a)(i), is inapplicable to a claim under s.80P(2)(d). But the same High Court, at the same Bench, took the opposite view five months later on the same assessee.
• Mewar Polytex Ltd v ACIT High CourtHelps departmentNo later treatment found
  The loan my client's company took carried interest and TDS was deducted on it, and the lender's objects clause covers financing. Is that enough to keep it out of s.2(22)(e)?
  No, on these facts. The Rajasthan High Court held that payment of interest and deduction of tax at source do not convert a loan into an inter-corporate deposit or into a loan taken in the ordinary course of business, and that the sub-clause (ii) exception needs money lending to be a substantial part of the lender's business — interest of Rs 2,97,552 on a single loan was not. The Court also held that deemed dividend under s.2(22)(e) was outside the s.10(34) exemption read with s.115-O and remained taxable in the recipient's hands.
• Avendus Enhanced Return Fund v ACIT — a Category III AIF is assessed in its own name, and a s.14A disallowance the fund overstated in its own return goes back to the Assessing Officer for verification ITATHelps taxpayerNo later treatment found
  My client is a Category III Alternative Investment Fund. It filed its own return, overstated a section 14A disallowance by more than a crore, and the Assessing Officer and the Commissioner (Appeals) both refused to correct it, citing Goetze. Is a revised computation before the Assessing Officer really worthless?
  No. The Mumbai Tribunal set aside the appellate order and restored the issue to the Assessing Officer, holding that Goetze (India) is confined to the powers of the Assessing Officer while the Bombay High Court in Pruthvi Brokers & Shareholders has held that the appellate authorities are competent to entertain a legitimate claim even if it was not made through a revised return. It did not decide the merits: because the nature and quantum of the exempt income, the applicability of section 115BBDA and the consequential section 14A disallowance all required verification from the assessment records, the matter went back with all contentions open. Note what the case also shows on the facts — a Category III AIF is assessed in its own name, on its own income, under the ordinary provisions; the section 115UB pass-through has nothing to do with it.
• Bata India Ltd. v. ACIT ITATCuts both waysNo later treatment found
  Can I simply cite Colorcon Asia and get the treaty rate on my DDT, or will the Tribunal want more?
  It will want more. The Kolkata Tribunal admitted the additional ground but declined to decide it, restoring the issue to the Assessing Officer for re-adjudication. It held that although the ground is a legal one it requires verification of facts, and it identified three things that had to be established on the Kolkata Bench's own earlier decision in Indian Oil Petronas — that the dividend constitutes income in the hands of the non-resident shareholder, that the shareholder is the beneficial owner, and that the shareholder has no permanent establishment in India — and two things not considered in Colorcon Asia, namely the protocol to the treaty and the effect of the Supreme Court's decision in Nestle SA.
• Cognizant Technology Solutions India P Ltd v ACIT ITATHelps departmentUnder appeal
  We repurchased shares through a court-approved scheme. Can the department still call it a dividend?
  On these facts, yes. The Chennai Tribunal held the repurchase was a colourable device — in substance a reduction of capital releasing the company's assets to shareholders — taxable as deemed dividend under s.2(22)(d), alternatively s.2(22)(a), with dividend distribution tax under s.115-O payable by the company. The High Court's sanction of the scheme conferred no tax immunity.
• Giesecke & Devrient (India) Pvt. Ltd. v. Addl. CIT ITATHelps taxpayer
  Is there any Tribunal authority, older than the recent High Court decisions, that DDT cannot exceed the treaty rate — and can I still cite it?
  Yes. The Delhi Tribunal held on 13 October 2020 that the tax rates specified in a double taxation avoidance agreement in respect of dividend must prevail over DDT, and that the DDT levied by the company should not exceed the rate specified in Article 10 of the India-Germany treaty. It allowed the additional ground on principle but restored the matter to the Assessing Officer for the limited purpose of verifying, under Article 10(4), whether the beneficial owner carried on business in India through a permanent establishment; the appeal was allowed in part for statistical purposes.
• Statutory position — the proviso to s.57: only interest, capped at twenty per cent of the dividend, from AY 2021-22 CBDT Circulars & InstructionsCuts both ways
  Dividends are taxable in my hands again. What can I actually deduct against dividend income, and is there a limit?
  Only interest expense, and not more than twenty per cent of the dividend income included in your total income for that year computed without this deduction. The proviso to s.57 was inserted by the Finance Act 2020 with effect from 1 April 2021, so it applies from AY 2021-22 onwards; the same amendment substituted the word 'dividends' in clause (i) for 'dividends, other than dividends referred to in section 115-O', which is what brought ordinary dividends back into the shareholder's assessment.
• Statutory position — Rule 8D of the Income-tax Rules, 1962 was SUBSTITUTED with effect from 2 June 2016: the three-limb formula was replaced by a two-limb one, and the disallowance is now capped at the total expenditure claimed — which formula applies is a question of the year, and the answer is not the same for every year still open CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer has computed a s.14A disallowance under Rule 8D. Which version of Rule 8D applies to my year, and is the disallowance capped?
  That depends entirely on the previous year, because Rule 8D was substituted. THE DATE IS THE FIRST QUESTION: the departmental page for Rule 8D carries footnote 78, "Substituted by the IT (Fourteenth Amdt.) Rules, 2016, w.e.f. 2-6-2016", and footnote 79, "Omitted by the IT (Fourteenth Amdt.) Rules, 2016, w.e.f. 2-6-2016". As substituted, sub-rule (1) provides that 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 sub-rule (2). Sub-rule (2) as substituted has TWO limbs and a cap: the expenditure is the aggregate of (i) the amount of expenditure directly relating to income which does not form part of total income, and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, with a proviso that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee. The three-limb formula that preceded it, including the interest-apportionment limb and the percentage-of-average-investments limb, is STILL the applicable law for earlier previous years, and is still being applied in appeals for them. The pre-substitution text is now sourced, from the departmental page for the notification that inserted the rule: under the original rule 8D(2) the disallowance was the aggregate of (i) expenditure directly relating to exempt income, (ii) where interest expenditure was not directly attributable to any particular income or receipt, an amount computed as A x B / C, where A was that interest, B the average value of investments yielding exempt income on the first and last day of the previous year and C the average of total assets on the same two days, and (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". Sub-rule (3) defined "total assets" as total assets in the balance sheet excluding an increase on revaluation but including a decrease.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.