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.
• 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 taxpayerValidity unconfirmed
  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.
• 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 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 taxpayerValidity unconfirmed
  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.
• 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.
• Cheminvest Ltd v CIT High CourtHelps taxpayer
  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.
• 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.
• Dish TV India Ltd v ACIT ITATHelps taxpayerValidity unconfirmed
  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 taxpayerValidity unconfirmed
  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.

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.