Expenditure Not Includible in Total Income

by Ram Dutt Sharma

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CONTENTS

CHAPTER 1

Evolution of Section 14A & Rule 8D

Background	4
Memorandum Explaining the Introduction of Section 14	4
Objective behind insertion of section 14A	6
Objective behind insertion of section 14A with retrospective effect	8
The purpose for introduction of section 14A	8
Position prior to the introduction of section 14A	12
Legislative history	12
15 Key Takeaways from Supreme Court ruling in Godrej Boyce on Section 14A disallowance	4
Disallowance under Section 14A on Non-Accrual of Exempt Income	4
Analysis of section 14A	6
Conditions where section 14A cannot be invoked	8
CBDT's clarification regarding disallowance of expenses under vlqgA section 14A in cases where corresponding exempt income has Wolfseid not been earned during the financial year	8
Method for determining amount of expenditure in relation to income not included in total income [Rule 8D]	12
Evolution of Section 14A & Rule 8D	12

CHAPTER 2

Evolution of Section 14A & Rule 8D

Logic for introduction of section 14A	15
Position prior to the introduction of section 14A	15
Scope and applicability of Section 14A	15
Agricultural income	16

CHAPTER 3

Evolution of Section 14A & Rule 8D

Definition of the term 'expenditure' and 'incurred'	18
Nexus between the income earned and the expense occurred	18
Expenditure incurred in relation to exempt income	18
Expenditure to be incurred actually and not notionally	19

CHAPTER 4

Evolution of Section 14A & Rule 8D

Relevance of the words 'in relation to'	38
Expenditure incurred in relation to income which does not form part of the total income [Section 14A(1)]	38
Meaning - Expenditure incurred	39
Relevance of the words 'expenditure incurred'	39
Determination of expenditure incurred in relation to exempt income M by the Assessing Officer [Section 14A(2)]	39
Determination of expenditure incurred in relation to exempt income by the Assessing Officer when assessee claims that no expenditure has been incurred [Section 14A(3)]	39

CHAPTER 5

Evolution of Section 14A & Rule 8D

Expectations from the Assessing Officer	49
Assessing Officer failed to satisfy himself about correctness of assessee's claim, impugned disallowance was to be deleted	49
Rule 8D is Applicable from Assessment Year 2008-09 Only	66
Exemption and Deduction Provisions cannot be Treated as Same in Applying Section 14A	66
Disallowance Can be Made on Same Reasonable Basis	67

CHAPTER 6

Applicability of Section 14A to Tax-free Income	157

CHAPTER 7

Recording of Satisfaction by Assessing Officer for Making Disallowance Under Section 14A [Section 14(2)]	157

CHAPTER 8

Evolution of Section 14A & Rule 8D

Logic for introduction of Rule 8D	88
Background	88
Prior to the introduction of Rule 8D	89
Prescribed method of determining the quantum of expenditure incurred for earning exempt income [Rule 8D]	89
Amendment to the method of determining the quantum of expenditure incurred for earning exempt income [Rule 8D]	91
Comparison of New Rule 8D with the old provisions of Rule 8	92
Points to be kept in mind while calculating disallowance under Rule 8D	92

CHAPTER 9

Evolution of Section 14A & Rule 8D

What is exempted income?	107
Method for determining amount of expenditure in relation to exempt income	108
Methods of calculation of disallowance under section 14A - When 181 there is a direct nexus of expenses incurred	109
Methods of calculation of disallowance under section 14A - When there is no direct nexus of expenses incurred	110
Illustration on Rule 8D Computation	111

CHAPTER 10

Evolution of Section 14A & Rule 8D

Establishment of nexus between the exempt income and related expenditure	118

CHAPTER 11

Evolution of Section 14A & Rule 8D

Own funds exceed investment, no disallowance of interest can be made under section 14A	135

CHAPTER 12

Evolution of Section 14A & Rule 8D

A-Life insurance business	151
B - Other insurance business	152
C-Other provisions	152

CHAPTER 13

Provisions of Section 14A and Set off of loss	157

CHAPTER 14

Applicability of Section 144A to Chapter VI-A Deductions	158

CHAPTER 15

Applicability of Section 14A while Computing Book Profits Under Section 115JB	165

CHAPTER 16

Section 14A and Reassessment Under Section 148	173

CHAPTER 17

Applicability of Section 14A in Case of Incomert from Firm	177

CHAPTER 18

Section 14A and Revision of Assessment Under Section 263	181

CHAPTER 19

Applicability of Section 14A in Case ofShares Held as Stock-in-Trade	190

CHAPTER 20

Applicability of Section 14A to Strategic Investment Held for Control Purpose

What is strategic investment	203

CHAPTER 21

Cases where Disallowance Under Section 14A Held Justified	214

CHAPTER 22

Cases where Disallowance Under Section 14A Held not Justified	217

CHAPTER 23

Cases where Section 14A is Applicable

Applicability of Section 14A	230

CHAPTER 24

Cases where Section 14A is not Applicable	233

CHAPTER 25

Penalty - Section 14A, read with Section 271(1)(c) of the Income-tax Act, 1961	241

About the Author

Ram Dutt Sharma

Ram Dutt Sharma was born on 27th June, 1958 in Narnaul, Haryana. He got his post-graduation from M.D. University, Rohtak in 1980. He joined the Income-tax Department in the year 1983 and retired as Income Tax Officer on 30.06.2018. He worked at various stations of North-West Region of Income-tax Department. He has wide experience of all wings of Income-tax Department such as Assessment Unit, Special Range, TDS Wing, Investigation Wing, etc. He has been Contributing articles and addressing on topics relating to Income Tax at NADT Regional Campus, Chandigarh & Bhopal. He has also addressed number of seminars organized by the Income-tax Department, Chartered Accountants, Advocates and various Trade Associations.

He is recipient of first-ever Finance Minister's Award 2017, the Income Tax Departments highest honour for sustained devotion, commitment to duty & promoting excellence in the field of Direct Taxation at National Level. The Hon'ble Union Finance Minister, Shri ArunJaitley conferred this Finance Ministers Award for Excellence for his meritorious services at VigyanBhawan, New Delhi on 24.07.2017.

Awarded by Hon'ble Member (Revenue& TPS), CBT, Special Secretary to the Government of India Certificate of Appreciation for his contribution recognized and included in the chapter Miscellaneous Orders in Let Us Share A compilation of Best Practices & Orders Vol. VIII released on 31stOctober, 2016.

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