Critical Issues : Section 14A &

Rule 8D CA ROHAN SOGANI 1

Basic Principle Of Taxation

EXEMPT INCOME

TAXABLE INCOME

EXPENSES

NO DEDUCTION

DEDUCTION ALLOWED

CA Rohan Sogani

Net Income to be taxed :

Gross Income – Expenditure

(related)

2

BASIC PRINCIPLE OF TAXATION

EXEMPT SOURCES ` 1,000

NON- EXEMPT

SOURCES ` 1,000

INCOME ` 2,000

EXPENSE ` 200

EXPENSE ` 300

CA Rohan Sogani 3

Why Section 14A ???

Taxable Income

` 500 or ` 700 ????

RRRR Birth Of Section 14A

Rajasthan State Warehousing Corporation(2000) 242 ITR 450 (SC)

Letting of Godowns & Warehouses

(Exempt u/s 10(29))

Income Interest & Adm. Charges(Taxable)

INDIVISIBLE BUSINESS

ITO Proportionate Basis

Rajasthan HC Proportionate

Basis

Supreme Court : No

Apportionment, Fully Allowable

4 CA Rohan Sogani

Supreme Court : Dpt. wrong in providing deductions only for

expenses giving rise to taxable income Deduction governed by relevant provisions of Act

Past Judgment Maharasthra Sugar Mills Ltd (1971) 82 ITR

452 (SC)

Cultivation of Sugar Cane (Exempt)

Manufacturing of Sugar Cane

(Taxable)

INDIVISIBLE BUSINESS

Indian Bank Ltd. (1965) 56 ITR 77 (SC)Raja (MSP) (1976) 105 ITR 295 (Mad)

5 CA Rohan Sogani

Chain of EventsSection 14A

CA Rohan Sogani

Finance Act, 2001 w.r.e.f. 1st April 1962

Circular No. 14 of 2001, Dated 12th December 2001Assessments

Proceedings Final before 1st April 2001

Not to be reopened u/s 147

Proviso to Subsection 1(inserted by Finance Act 2002. wref 11/5/2001)

Intention of Proviso Set existing controversy at rest(Circular 8 of 2002)

Not to unsettle the cases

6

Section 14A : Position as on Date

• Exempt Income : No Deduction for exp.• Proviso : effect on assessments after 1-

Apr-2001

Sub-section (1)

• AO to Satisfy condition• Verify accounts of Assessee• Not satisfied : correctness of claim• Determine Exp. As per Rule 8D

Sub-section (2)

• Subsection 2 to apply : Assessee claims no expenditure

Sub-section (3)

7 CA Rohan Sogani

Rule 8DIT ( Fifth Amdt.) Rules, 2008

w.e.f. 24th March, 2008

Assessing Officer

Correctness of Claim

No Expenditure incurred

Satisfied Not Satisfied

Assessee’s Accounts

Rule 8D(2) 8 CA Rohan Sogani

Rule 8D(2) : Relevant Calculations

Direct Expenditure

Indirect Interest Expenditure –

Proportionate Basis

0.5% of Average Investment (income

from which is exempt) CA Rohan Sogani 9

Rule 8D(2) : Can be Harsh..!!!

CA Rohan Sogani

Financial Details Disallowance : Rule 8D(2)

Particulars Amt (`) Particulars Amt (`)

Investment in Mutual Funds out of Own Funds (Previous Financial Year)

10,000 Direct Expenses (No new investment, no treasury team, dividend directly received in Bank)

NIL

Direct Expenses NIL Proportionate Indirect Interest (1,000*10,000/40,000)

250

Interest on Working Capital Limit

1,000 0.5% of Investment in Mutual Fund

50

Other Assets 30,000 Disallowance as per Rule 8D

300

Dividend Income 1,000 Actual Expenditure NIL10

14A & 8D : Only Option ??

11 CA Rohan Sogani

Oscillating OnusAssesse

eAssessing

Officer

Onus Discharged by Assessee

CA Rohan Sogani

Identify expenses incurred in relation to

exempt income

No expenses incurred

Expenses Identifiabl

e

Expenses not Identified

No disallowance

Make voluntary disallowan

ce

Disallow certain

portion on reasonable

basisDisclose the

working & reason

Onus Discharged12

Onus shifts to AO

Examine the Working of the

Assessee

If not satisfied with the working,

Examine the Accounts

Record finding of

dissatisfaction of Expenditure

cal. By Assessee

If no Direct nexus, Disallow expenses based on Reasonable

Method

Indicate cogent reasons for

dissatisfaction

Point out Direct Nexus between

Expenses & Exempt Income

Rebut with reasons why Assessee is

Wrong and he is right

No rebuttal, No dissatisfaction

Onus Discharged

by AO

CA Rohan Sogani 13

Judicial Precedence

14 CA Rohan Sogani

Walfort Share & Stock Brokers (P.) Ltd [2010] 326 ITR 1 (SC)

Godrej & Boyce Mfg. Co. Ltd.

[2010] 328 ITR 81 (Bom)

Maxopp Investment Ltd. [2012] 347 ITR

272 (Delhi)

Hero Cycles Ltd [2010] 323 ITR

518 (P& H)

Rule 8D or Reasonable Method?

Record Dissatisfactio

n on the working of Assessee

Find out a reasonable method of

Working out a

disallowance

If No reasonable

method only then Invoke

Rule 8D

Hero Management Services Ltd. [2014] 360 ITR 68 (Delhi)

Auchtel Products Ltd. [2012] 52 SOT 39 (Mumbai)(URO)

REI Agro Ltd. [2013] 144 ITD 141 (Kolkata - Trib.)

CA Rohan Sogani 15

Conclusion till now

Primary Onus on Assessee

Once Assessee discharges his Onus,

Onus Shifts to AO

Application of 14A and Rule 8D not

Automatic CA Rohan Sogani 16

CA Rohan Sogani

cExempt Income but

No Expenditure...????Particulars Amt (`)

Investment in Mutual Funds out of Own Funds (Previous Year)

10,000

Direct Expenses (No new investment, no treasury team, dividend directly received in Bank etc)

NIL

Interest on Working Capital Limit 1,000

Other Assets 30,000

Dividend Income 1,000

Disallowance under Section 14A NIL

17

Exempt Income butNo Expenditure ..????

(Conti..)

18 CA Rohan Sogani

• ITAT : No expenditure incurred• Investment made by own funds• Revenue : No counter to ITAT findings

Glenmark Pharmaceuticals

Ltd. (2013 ) 351 ITR 359

(Bom) (HC) • No Expenses pointed by AO• AO failed to discharge his duty• No disallowance

Jammu and Kashmir Bank Ltd. [2013]

152 TTJ 52 (Amritsar - Trib.)

• AO & CIT(A) : Disallowed 0.5% of Investment & Interest expenses

• ITAT : No proof, investment by own funds. As per 14A(3), disallowance as per 14A(2) has to be made

Kerala State Industrial

Development Corporation Ltd. (2014) 29 ITR 45 (Cochin) (Trib)

No Exempt Income?? No Disallowance

19 CA Rohan Sogani

Particulars Amt (`)

Investment in Shares out of Own Funds (Previous Year)

10,000

Direct Expenses (Salary of Treasury Team, Admin Expenses etc)

2,000

Dividend Income NIL

Disallowance under Section 14A NIL

No Exempt Income??No Disallowance (Conti..)

Income Exempt

category

Expenditure must

be incurred

Exp. Must be related to exempt income.

20 CA Rohan Sogani

• Winsome Textile Industries Limited [2009] 319 ITR 204

(PH)

• Lakhani Marketing (PH), ITA No.970 of 2008

• Cortech Energy Pvt. Ltd. (Guj) ITATonline.org

• Shivam Motors Pvt. Ltd. (All)- I.T.A. No.88/2014

• Against View : Cheminvest Ltd. [2009] 121 ITD 318

(Delhi -Trib)

Investment from Own Funds

INFLOW OUTFLOW

Date Particulars Amt (`)

Date Particulars Amt (`)

05/04/2014

Share capital introduced

200 06/04/2014

Investment in Mutual Funds

150

01/05/2014

Share Capital introduced

500 15/05/2014

Investment in Mutual Funds

500

01/07/2014

Working Capital Limit Utilization

200 31/03/2015

Interest on Working Capital Limit

20

31/03/2015

Dividend Income

10021

Issue 1

CA Rohan Sogani

22 CA Rohan Sogani

Investment from Own Funds (Conti..)

Issue 2

INFLOW OUTFLOW

Date Particulars Amt (`) Date Particulars Amt (`)

01/04/2014

Share Capital introduced

600 2/05/2014

Investment in Mutual Funds

550

01/05/2014

Working Capital Limit Utilization

400 31/03/2015

Interest on Working Capital Limit

40

31/3/2015

Dividend Income

50

Investment from own funds (Conti..)

Investment out of Share

Capital/Own Funds

Nexus to be proved

Own Funds more than borrowed

funds

BNP Paribas SA [2013] 214 Taxman 548 (Bom.) (HC)

Gujarat Power Corporation Ltd. [2013] 352 ITR 583

(Guj) (HC)

HDFC Bank Limited (Bom) (HC) [2014]

Mohan Exports (P.) Ltd. [2013] 151 TTJ 667 (Delhi -

Trib) 23 CA Rohan Sogani

Disallowance of Indirect Interest Expense u/s 14A? - NO

Term Loan – Business Purpose

24

INFLOW OUTFLOW

Date Particulars Amt (`) Date Particulars Amt (`)

01/05/2014

Share Capital Introduced

1,000 02/07/2014

Investment in Mutual Funds

1,100

01/07/2014

Term Loan (Building construction)

1,200 31/03/2015

Building Construction Expenses

1000

31/3/2015

Dividend Income

200 31/03/2015

Interest on Term Loan

100

CA Rohan Sogani

Term Loan – Business Purpose (Conti..)

Term Loan for Specific

Business Activity

Nexus of Utilization

No Disallowance on Notional

Basis

Gujarat Power Corporation Ltd. [2013] 352 ITR 583

M/s. Best & Crompton Engineering Ltd. [2013] 60

SOT 53 (Chennai - Trib.)(URO)

25 CA Rohan Sogani

Disallowance of Interest on Term Loan u/s 14A? - NO

GROUP INVESTMENTS

26

Interest on Borrowed funds disallowed u/s 14A

Share in Partnership Firm

CA Rohan Sogani

INFLOW OUTFLOW

Particulars Amt (`) Particulars Amt (`)

Money borrowed @ 12%

1,000 Investment in Partnership Firm

900

Share in profits of partnership firm (Exempt u/s 10(2A))

50 Interest Expenses on Money borrowed

120

•Vishnu Anant Mahajan [2012] 16 ITR 621 (Ahmedabad) (SB)•Shankar Chemical Works [2011] 47 SOT 121 (Ahmedabad)

GROUP INVESTMENTS

27

No Disallowance under Section 14A

Shares as Stock in Trade

CA Rohan Sogani

Date Particulars Amt (`)

01/04/2014 Shares purchased out of Own Funds (10 * 100)

1,000

31/05/2014 Shares sold (12*80) 960

31/03/2015 Dividend received on Unsold Shares 5

31/03/2015 Expenses incurred during the year 100

•Primary Intention : Earn out of sale of shares•Income Derived on sale of shares offered to tax•Shares remained unsold due to other reason– Not to earn dividend Income •Dividend Income : just a fall out•Expenses incurred not directly related to exempt income

CCI Ltd [2012] 250 CTR 291 (Kar)

Group Investments

JV Partners

JV

New

operations

100% Subsidiary

B Pvt. Ltd(Madhya Pradesh)

D Pvt. LtdA Pvt. Ltd (Rajasthan)

A D Pvt. Ltd

CA Rohan Sogani 28

GROUP INVESTMENTS

29

• Investment in Related Party

• Primary Object – Holding Controlling Stake

• Commercial Expediency

• Long Term Nature

Oriental Engineers Pvt. Ltd. (Delhi) (HC) (ITAT

online. Org)

JM Financial Ltd. (Mum) (Tribunal)

Garnare Mall Ropes Ltd. (Mumbai) (Tribunal)

(ITAT online. Org)

Group Investments (Conti..)

CA Rohan Sogani

Any queries …..

CA Rohan Sogani 30

Contact: rohan@soganiprofessionals.

com

CA Rohan Sogani

THANKYOU

31