India: Various Ways In Which Section 14A Of The Income Tax Act, 1961 Gets Invoked

Last Updated: 31 May 2018
Article by Gagan Kumar and Amit Kaushik

Introduction

When the going gets tough, taxman get going. During the time when economic recovery is sluggish, the tax collection is also dismal. Whereas, welfare schemes require considerable spending. Hence, we got section 14 A in the Income Tax Act, 1961. Ever since its entry into the statute book, it has been a rockstar, rocking the boats of taxpayers. Finally it seems Supreme Court has been able to anchor the controversies around this section.

The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. Applying the same analogy, the exemption from tax is also allowable in respect of net income.

Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 of the Income Tax Act, 1961 ("Act") lay down the provisions for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax.

The basic reason for insertion of section 14A of the Act was that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act and hence the relatable expense should not be allowed as deduction. In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. Therefore, the purpose behind Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit in case of composite transactions. In this article we are touching upon various issues arising under section 14A of the Act:

1. What was the position prior to introduction of Section 14A ?

Section 14A was first inserted by Finance Act, 2001 with retrospective effect w.e.f. 01.04.1962. It is to be noted that Section 14A was inserted by Finance Act, 2001 and the provisions were fully workable without their being any mechanism provided for computing the expenditure. Although Section 14A was made effective from 01.04.1962 but proviso was inserted by Finance Act, 2002, providing that Section 14A shall not empower assessing officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before 01.04.2001. Thus, all concluded assessments prior to 01.04.2001 were made final and not allowed to be re-opened.

Prior to introduction of section 14A, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. (Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450).

However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the 'exempt' income or income not exigible to tax, was not allowable as a deduction. The theory of apportionment of expenditure between taxable and non-taxable has been in principle widened under section 14A. CIT v. Walfort Share & Stock Brokers P Ltd. [2010] 326 ITR 1 (SC).

2. After the introduction of Section 14A but prior to introduction of Rule 8D?

The provisions of section 14A of the Act, as introduced by Finance Act, 2001 provided no method of computing the expenditure incurred in relation to income which did not form part of the total income. It is to be noted that Section 14A was inserted by Finance Act, 2001 and the provisions were fully workable without their being any mechanism provided for computing the expenditure. CIT v. Essar Teleholdings Ltd. [2018] 401 ITR 445 (SC). The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT - {(2010) 328 ITR 81 (Bom)} held that even prior to introduction of rule 8D of the Rules, Assessing Officer had to enforce provisions of sub-section (1) of section 14A and for that purpose, Assessing Officer was duty bound to determine expenditure which had been incurred in relation to income which did not form part of total income under the Act by adopting a reasonable basis or method consistent with all relevant facts and circumstances.

3. Whether Rule 8D is prospective in operation?

Rule 8D is prospective in operation and cannot be applied to any assessment year prior to assessment year 2008-09 this issue has now been settled. CIT v. Essar Teleholdings Ltd. [2018] 401 ITR 445 (SC)

4. Can Disallowance of Expenditure under section 14 A of the Act be made with respect to dividend earned on shares held as stock–in –trade or where the shares/stocks were purchased of a company for the purpose of gaining control over the said company?

In this regard, there were diverse judgments of the Delhi High Court in Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 and that of Punjab and Haryana High Court in Pr. CIT .v State Bank of Patiala [2017] 391 ITR 218 (Punj. & Har.). Recently, the same fell for consideration before the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC).

It was argued that where the shares/stocks were purchased of a company for the purpose of gaining control over the said company or as 'stock-in-trade', then the dominant purpose for the same was for business and therefore any income in the form of dividends generated incidentally cannot lead to applicability of section 14A of the Act.

The Hon'ble Apex court finally held that the fact remains that dividend income is non-taxable and if expenditure is incurred on earning the dividend income that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. The court was of the view that the dominant purpose for which the investment into shares is made by an assessee may not be relevant and keeping the objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income in a manner that the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act.

5. Does the expenditure must also have taken place in relation to income which does not form part of total income?

If no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the said Act. Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC)

6. Can the Disallowance under section 14A be more than expenditure claimed by the assessee?

Disallowance under section 14A cannot exceed expenditure actually claimed by assessee. Gillette Group India (P.) Ltd. vs. Asstt. CIT (2012) 16 ITR (Trib) 57 (Del.).

7. Can the Disallowance under section 14 A be made even if there is no exempt income earned?

The Hon'ble Delhi Tribunal in the case of Relaxo Footwears Ltd vs. Addl. CIT (2012) 50 SOT 102 (Del.) held that earning of an income in a particular year is not a sine qua non for allowing an expenditure.

8. Where the Assessee has surplus funds out of which tax free investments are made, will the provisions of section 14A applicable?

Where assessee had its surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A would arise and therefore, the question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D would also not arise (Principal Commissioner of Income-tax-IV, Ahmedabad v. Sintex Industries Ltd. [2018] 93 taxmann.com 24 (SC)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Amit Kaushik
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions