Section 14A

Section 14A — the law in short

What the courts have decided on section 14A, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• South Indian Bank Ltd v CIT Supreme CourtHelps taxpayer
  Your own funds exceed the tax-free investments. Can interest still be disallowed proportionately?
  No. Where interest-free own funds exceed the investment in tax-free securities, a presumption arises that the investment came from those funds, and the officer cannot substitute an estimated proportionate figure.
• 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.
• CIT v Essar Teleholdings Ltd Supreme CourtHelps taxpayer
  The Assessing Officer has applied Rule 8D to an assessment year before 2008-09. Can he?
  No. Rule 8D is prospective and cannot be applied to any assessment year prior to AY 2008-09. For earlier years the officer must work out a reasonable disallowance under s.14A(1) on the material before him, not by the prescribed formula.
• Godrej & Boyce Manufacturing Co Ltd v DCIT Supreme CourtCuts both ways
  The Assessing Officer has disallowed interest under section 14A against my dividend income, though I have more than enough of my own funds — can he do that without showing a link?
  No, not on this record. The Supreme Court held on 8 May 2017 that section 14A does apply to dividend on which the company has paid tax under section 115-O, because such dividend is not includible in the shareholder's total income. But section 14A(1) still requires proof that the expenditure sought to be disallowed was actually incurred in earning that dividend. Here the Assessing Officer recorded no reasons, showed no nexus, and departed from findings for earlier years without any new fact. With interest-free funds of about Rs.280 crore against investments of Rs.125 crore, no diversion of borrowings was proved. The assessee got the full exemption.
• CIT v Walfort Share & Stock Brokers P Ltd Supreme CourtHelps taxpayer
  I bought mutual fund units just before the record date, took the tax-free dividend and sold them ex-dividend at a loss — can the department disallow that loss for a year before section 94(7) came in?
  No, not for a year before 1 April 2002. The Supreme Court held on 6 July 2010 that section 14A disallows expenditure incurred to earn exempt income and needs a proximate cause between the two. A pay-back or return of investment is not expenditure at all: it hits the balance sheet, not the profit and loss account, and is not a debit item allowable under sections 30 to 37. The loss on sale was genuine, there was a real sale at a real price, and using the exemption in section 10(33) is not an abuse of law. From 1 April 2002 section 94(7) applies, but it ignores the loss only to the extent of the dividend.
• CIT v Reliance Petroproducts Pvt Ltd Supreme CourtHelps taxpayer
  The officer disallowed your claim. Does a disallowance automatically bring penalty with it?
  No. Section 271(1)(c) needs either concealment or particulars that are factually false. Where everything was disclosed truthfully and only the legal claim was untenable, there is nothing inaccurate — and no penalty.
• PCIT-2 v EYGBS (India) Pvt Ltd High CourtHelps taxpayer
  Your client offered a transfer pricing adjustment itself because its APA required it. The officer says s.92C(4) bars the s.10AA exemption on that extra income. Is he right?
  No. Where the assessee computes the arm's length price itself pursuant to an APA entered into with the CBDT, none of the conditions in s.92C(3) is attracted, and s.92C(4) therefore never comes into operation at all. The bar in s.92C(4) is aimed at income by which the Assessing Officer enhances the declared total income, not at figures the assessee has itself declared in conformity with its APA. The Revenue's appeals were dismissed.
• Mukundbhai Manubhai Patel v ACIT High CourtHelps taxpayerNo later treatment found
  I bought mutual fund units, took the dividend the same day and booked a short-term loss. The department calls it fictitious and has reopened. Can it?
  Not on that material alone. The Gujarat High Court quashed a s.148A(d) order and s.148 notice where the reopening rested on an allegation that the fund house had manipulated its distributable surplus: purchasing units and earning dividend on the same day is not impermissible, and allegations against the fund manager cannot be extended to the investor without something showing he knowingly participated.
• Williamson Financial Services Ltd v CIT High CourtHelps taxpayer
  The officer says the 2022 Explanation to s.14A is clarificatory and applies to my old years. Is there High Court authority against that?
  Yes, and from a Court joining a settled line. The Gauhati High Court held that the Explanation inserted in s.14A by the Finance Act 2022 is prospective, set aside the Guwahati Tribunal's view that it was clarificatory and therefore retrospective, and affirmed the Commissioner (Appeals), whose orders had capped the disallowance under s.14A read with Rule 8D at the income claimed as exempt. It reached that result by following six earlier decisions of the Delhi, Calcutta and Madhya Pradesh High Courts, and the revenue's counsel conceded the point before it.
• PCIT v Alchemist Ltd; PCIT v Uno Minda Ltd High CourtHelps taxpayerNo later treatment found
  The department says the Finance Act 2022 Explanation to s.14A is clarificatory and applies to my old years. Is it?
  The Delhi High Court held it is not. The Explanation was inserted with effect from 1 April 2022 and, following its own decision in Era Infrastructure, the Court held that calling a provision an Explanation or saying it is for the removal of doubts does not make it retrospective where it fundamentally alters the statutory position. The Court also upheld the rule that a disallowance, even computed under Rule 8D, cannot exceed the exempt income earned in the year.
• PCIT v Keti Construction Ltd High CourtHelps taxpayer
  Does the 2022 Explanation to s.14A help the department on an old year outside Delhi?
  Not in Madhya Pradesh either. The High Court held that because the assessment before it was for AY 2013-14, the amendment made to s.14A would not be applicable and the Revenue's contention founded on it was not relevant. The Revenue's appeal was dismissed.
• PCIT-4, Kolkata v M/s Maco Corporation India Pvt Ltd High CourtHelps taxpayer
  Is there any High Court authority that a donor keeps his s.35(1)(ii) weighted deduction when the donee's approval is cancelled with retrospective effect after the payment?
  Yes. The Calcutta High Court dismissed the Revenue's appeal and answered the questions on s.35(1)(ii) against it, holding that under the Explanation in s.35(1) a deduction shall not be denied merely because the approval granted to the research organisation has been withdrawn after the payment, and applying the Supreme Court's decision in CIT v Chotatingrai Tea. The Tribunal's finding that nothing on record showed the assessee had connived in the arrangement was held not to be perverse.
• PCIT v Era Infrastructure (India) Ltd High CourtHelps taxpayer
  The AO applied the 2022 Explanation to s.14A to an old year. Can he do that?
  No. The Explanation inserted by the Finance Act 2022 is prospective from 1 April 2022 and governs assessment year 2022-23 onwards. A 'removal of doubts' label does not make an amendment retrospective where it in truth changes the law, and the Memorandum to the Finance Bill said so expressly.
• Prem Brothers Infrastructure LLP v National Faceless Assessment Centre High CourtHelps taxpayer
  The Assessing Officer raised my own section 14A disallowance and then called it misreporting, so he refused me immunity under section 270AA and levied penalty under section 270A. Can he do that?
  No. The Delhi High Court quashed the penalty order and directed the Assessing Officer to grant immunity under section 270AA. The only addition was a recomputation of a section 14A disallowance the assessee had itself estimated and disclosed. Both sides worked from the same details and reached different figures; the Court said that by no stretch of imagination can that be called misreporting. It also found that the penalty order did not say which limb of section 270A was attracted or how sub-section (9) was satisfied, and that the bare use of the word misreporting made the order manifestly arbitrary.
• Sobha Developers Ltd v DCIT High CourtHelps taxpayer
  Can the Rule 8D figure be added back to book profit under clause (f) of the Explanation to s.115JB?
  The Karnataka High Court held it cannot. A disallowance under s.14A is a notional disallowance, and the amount cannot be added back to book profit under clause (f) by taking recourse to s.14A. Clause (f) can operate only on amounts actually debited to the profit and loss account.
• PCIT v Texport Overseas P Ltd High CourtHelps taxpayer
  Clause (i) of s.92BA was omitted in 2017. Is the TPO adjustment for an earlier year still good?
  No. Omission of clause (i) of s.92BA by the Finance Act 2017 without a saving clause obliterates it as if it had never been enacted, so the reference to the Transfer Pricing Officer and the adjustment made under it are invalid even for the earlier year under assessment.
• Principal Commissioner of Income Tax-6 v Nalwa Sons Investment Ltd High CourtHelps taxpayerNo later treatment found
  My company deals in shares as part of its business, but its income comes mainly from lending. The Commissioner (Appeals) has treated the share loss as a speculation loss under the Explanation to section 73. Is the company excepted?
  Yes, if its total income mainly consists of income derived from the granting of loans and advances. The Delhi High Court held that the Tribunal was textually right to find the company within the exception carved out in the parenthesis of the Explanation to s.73, so the Commissioner (Appeals) fell into error in treating the reported loss as pertaining to a speculative transaction, and no question of law arose.
• PCIT v IL & FS Energy Development Company Ltd High CourtHelps taxpayerSuperseded by amendment
  The officer relies on CBDT Circular 5/2014 to disallow under s.14A although I earned no exempt income at all in the year. Does the Circular carry it?
  For years before the Finance Act 2022 Explanation, no. The Delhi High Court held that Circular No. 5/2014 cannot override the express provisions of s.14A read with Rule 8D, because Rule 8D(1) speaks of income not forming part of total income 'for such previous year' — so if no exempt income was earned in the year, no disallowance arises. That position has since been altered prospectively by statute, and the entry must be read with that.
• Cheminvest Ltd v CIT High CourtHelps taxpayerSuperseded by amendment
  I earned no exempt income at all this year. Can the AO still disallow under s.14A?
  No, for assessment years up to 2021-22. Section 14A speaks of expenditure in relation to income which does not form part of total income, which presupposes income actually received or receivable in that year; it cannot be applied to notional exempt income that may arise later.
• ACB India Ltd v ACIT High CourtHelps taxpayer
  The officer took my whole investment portfolio into the Rule 8D average. Should it not be only the investments that gave exempt income?
  Only the investments whose income does not form part of total income go into the average. The Delhi High Court set aside a computation in which the Assessing Officer, instead of adopting the average value of tax exempt investments, factored in the total investment — here Rs 38,61,09,287 in place of Rs 3,53,26,800.
• Joint Investments Pvt Ltd v CIT High CourtHelps taxpayer
  My whole exempt dividend income has been wiped out by the s.14A disallowance. Is that permissible?
  No. A disallowance that works out to the whole of, or more than, the exempt income cannot stand — by no stretch can s.14A or Rule 8D be read to mean that the entire tax exempt income is to be disallowed. The Delhi High Court set aside a disallowance amounting to about 110 per cent of the dividend earned.
• Patco Investment & Consultancy Services Pvt Ltd v ACIT High CourtHelps taxpayerNo later treatment found
  Can a dividend-stripping loss be disallowed for a year before s.94(7) came in, on the footing that it was expenditure relating to exempt income?
  No. Sub-section (7) of s.94 was inserted by the Finance Act 2001 with effect from 1 April 2002 and is enforceable only from AY 2002-03 onwards; it did not apply to AY 2001-02. And on Walfort Share and Stock Brokers, a loss on the purchase and sale of units is not expenditure incurred in relation to exempt income, so s.14A does not reach it either.
• CIT v Taikisha Engineering India Ltd High CourtHelps taxpayer
  The officer went straight to the Rule 8D formula without saying what was wrong with my own s.14A working. Is that a good ground?
  It is the ground. Sub-rule (2) of Rule 8D is not reached at all until the Assessing Officer has first recorded the satisfaction mandated by s.14A(2) and Rule 8D(1), on the accounts. Where the officer never explained why the voluntary disallowance was unreasonable or unsatisfactory, the Rule 8D re-computation falls.
• Commissioner of Income Tax v Deepak Mittal High CourtHelps taxpayer
  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.
• 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.
• ACIT v Reliance Industrial Investments and Holdings Ltd — a compound financial instrument needs a liability component before s.115JB(2C) bites ITATHelps taxpayer
  On conversion to Ind AS our convertible debentures were parked under "other equity" and a note called them the equity component of a compound financial instrument. The Assessing Officer has treated the whole amount as transition amount and is adding one-fifth a year to book profit. Can he?
  Not if the instrument has no liability component. Ind AS 32 requires a compound financial instrument to have both a liability component and an equity component, and where the balance sheet shows the debentures as an instrument entirely equity in nature, they are not a compound financial instrument, are therefore no part of the transition amount defined in s.115JB(2C), and no one-fifth adjustment can be made.
• Unilever Industries P. Ltd. v ACIT ITATHelps taxpayerNo later treatment found
  A bilateral APA signed years after the assessment fixes my margin for a run of years and MAP has settled the rest. What do I do with the appeals still pending for those years, and do my other grounds go with them?
  The transfer pricing grounds go, the rest stay. Where a bilateral APA executed with both revenue authorities fixes the arm's length margin for the years under appeal and the MAP proceedings have been settled, the Tribunal allows the assessee to withdraw its transfer pricing grounds in compliance with Rule 44G and dismisses the Revenue's transfer pricing grounds as settled. The corporate tax grounds are decided on their merits in the same order.
• Reckitt Benckiser Healthcare India Pvt Ltd v DCIT ITATHelps department
  Our demerger was sanctioned by the High Court. The AO now says it is not a demerger under s.2(19AA) and has taxed capital gains and dividend distribution tax. Can he go behind the sanctioned scheme?
  Yes, on the tax conditions. The Tribunal held that the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) is not pre-empted by the High Court's sanction of the scheme, and that the assessee had failed to comply with s.2(19AA)(ii) and (iii). A segment whose liabilities were knocked off against its assets, so that only assets and nil liabilities passed to the resulting company, does not satisfy the requirement that all liabilities relatable to the undertaking be transferred.
• ITD Cementation India Ltd v DCIT — an omitted Ind-AS reduction from book profit can still be claimed before the appellate authority ITATHelps taxpayerNo later treatment found
  We forgot to claim the one-fifth transition amount and the s.115JB(2A)(b) other-comprehensive-income reduction in the return. We raised it by letter during the assessment. The CIT(A) has thrown it out because no revised return was filed. Is that the end of it?
  No. The bar on entertaining a fresh claim without a revised return operates against the Assessing Officer, not against an appellate authority. Where the material was before the CIT(A) he should have examined it and granted the reduction from book profit if it was allowable, and the Tribunal restored the two Ind-AS claims to the Assessing Officer to be reconsidered on the revised Form 29B.
• DCIT v Cyquator Media Services Pvt Ltd ITATHelps taxpayerNo later treatment found
  The AO says our amalgamation was a colourable device to move shares tax-free and has taxed their market value under s.56(1). Can he disregard a scheme the High Court sanctioned?
  Not on these facts. The Mumbai Tribunal reversed the finding that the scheme was a tool for evasion, holding that the High Court had approved the scheme and its terms, the Department had raised no objection at that time before the High Court, and it could not now claim the scheme was a colourable device. The exemption in s.47(vi) was therefore available and the addition of Rs.1,466.60 crore under s.56(1) went.
• Osho Forge Ltd v DCIT ITATCuts both waysNo later treatment found
  The Assessing Officer has disallowed interest on plant under erection at a flat 12 per cent. I say I funded it out of cash accruals. Who has to prove what?
  The assessee has to prove it. The Tribunal held that where the assessee says the asset was funded out of internal accruals beyond the identified borrowing, but has not supported that through its financials or documentation before any authority, the contention fails and the proviso to section 36(1)(iii) applies. It accepted, however, that where borrowed funds enter a common pool the disallowance must be computed at the average rate of interest on the assessee's borrowings, not at a rate picked by the Assessing Officer, and remanded on that footing.
• The Karnataka Bank Ltd v DCIT (ITAT Bangalore) — Explanation 2 to s.36(1)(vii) brings in the clause (b) to (d) assessees; it does not make a clause (a) bank set its non-rural write-off against the rural provision ITATHelps taxpayer
  For assessment year 2014-15 onwards the Assessing Officer says Explanation 2 to s.36(1)(vii) requires my client bank to set its NON-RURAL bad debts against the s.36(1)(viia) provision account before claiming anything. Is that right?
  The Bangalore Tribunal held it is not right for a bank claiming under sub-clause (a) of s.36(1)(viia). It construed Explanation 2, inserted by the Finance Act 2013 with effect from 1 April 2014, as operating in respect of sub-clause (a) only in relation to rural advances, and in respect of sub-clauses (b) to (d) — a foreign-incorporated bank, a public financial institution or State financial corporation or State industrial investment corporation, and a non-banking financial company — for advances given by both rural and non-rural branches. Its reason was that the Supreme Court in Catholic Syrian Bank had held sub-clause (viia)(a) to apply to rural advances only, that Parliament did not amend sub-clause (a), and that an Explanation inserted in clause (vii) does not override that construction. It therefore directed the Assessing Officer to allow the bad debts relating to non-rural branches under s.36(1)(vii) without adjusting them against the provision account.
• Sun Pharmaceutical Industries Ltd v ACIT ITATHelps taxpayerNo later treatment found
  Your APA for a later year accepts the foreign associated enterprise as the tested party. Can the TPO still make you the tested party in an open earlier year?
  Not without the question being looked at again on the APA's basis. Following the Ahmedabad Bench's order in the assessee's own group for assessment year 2009-10, this Bench took the same view and restored the tested party issue to the Transfer Pricing Officer for fresh adjudication treating the associated enterprises as the tested party. The ground was allowed for statistical purposes.
• Dish TV India Ltd v ACIT ITATHelps taxpayerNo later treatment found
  Two High Courts disagree on short deduction and mine has not ruled. Which view applies to me?
  The one favourable to the assessee. Where two non-jurisdictional High Courts differ and the jurisdictional High Court has not ruled, the Mumbai Tribunal adopted the assessee-favourable view, so deducting 2 per cent under s.194C where the officer said 10 per cent under s.194J attracted no disallowance under s.40(a)(ia): there is nothing in that section to treat an assessee as a defaulter where there is only a shortfall in deduction. The Tribunal did not reason the tie-break for itself - it adopted the reasoning of two coordinate Benches and held itself bound to follow them.
• ACIT v Vireet Investment Private Limited (Special Bench) ITATHelps taxpayer
  The officer has added the s.14A disallowance to my book profit under s.115JB. Can he do that?
  Not by simply carrying the s.14A figure across. A Special Bench of the Tribunal held that the addition under clause (f) of Explanation 1 to s.115JB(2) has to be worked out on its own, without resorting to the computation under s.14A read with Rule 8D. Clause (f) requires the expenditure actually relatable to exempt income to be identified.
• 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.