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SECTION 14A OF THE INCOME TAX ACT, 1961

SECTION 14A OF THE INCOME TAX ACT, 1961. By Deepika Mevadi (CA Final). Topics Covered. Background of Section 14A Rationale of Section 14A Objective Method of Allocating Expenditure relating to Exempt Income Computation of Disallowance Judicial Decisions (Rule 8D)

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SECTION 14A OF THE INCOME TAX ACT, 1961

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  1. SECTION 14A OF THE INCOME TAX ACT, 1961 By Deepika Mevadi (CA Final)

  2. Topics Covered • Background of Section 14A • Rationale of Section 14A • Objective • Method of Allocating Expenditure relating to Exempt Income • Computation of Disallowance • Judicial Decisions (Rule 8D) • Decision to Section 14A • Recent Developments • Special Bench Decision (SB) • Implication of SB

  3. Brought onto the statute by the Finance Act, 2001 • Provides for disallowance of expenditure incurred in relation to income which is not included in the total income of the assessee • Proviso to the Section was added by the Finance Act, 2002 w.e.f. 11-5-2001.

  4. RATIONALE FOR THIS SECTION

  5. MEANS TO OBJECTIVE

  6. Method for Allocating expenditure in relation to exempt income[Section 14A(2) and Rule 8D]

  7. (a) Assessing officer is satisfied

  8. (b) Assessing officer is not satisfied with

  9. Introduction of RULE 8D • Formula laid down in the said Rule is • Highly unfair and does not take into cognizance the facts of any case. • It merely lays down an arithmetical method of arriving at a disallowance. • This disallowance often comes to much more than the entire expenses debited to the Profit and Loss Account by the tax payer.

  10. Computation of Disallowance

  11. Computation of Disallowance

  12. formula for disallowance = A x BC

  13. Computation of Disallowance

  14. Rule 8D provides

  15. JUDICIAL DECISIONS (ISSUES TO RULE 8D) [Godrej & Boyce Manufacturing Company Limited vs. DCIT (2010) 194 Taxman 203 (Bom.)]

  16. JUDICIAL DECISIONS (ISSUES TO RULE 8D) [ K.V. Trading Co. Limited vs. DCIT (supra) ]

  17. JUDICIAL DECISIONS (ISSUES TO RULE 8D) [CIT vs. Hero Cycles Limited 323(2010) ITR 518 (P&H)]

  18. JUDICIAL DECISIONS (ISSUES TO RULE 8D) [Dy. CIT vs. Maharashtra Seamless Limited (2011) 16 Taxman.com 97 (Del.)

  19. JUDICIAL DECISIONS (ISSUES TO RULE 8D) Morgan Stanley India Securities (P) Limited vs. ACIT (2011) 55 DTYR (Mub) (Trib) 177

  20. JUDICIAL DECISIONS (ISSUES TO RULE 8D) [ Varun Shipping Company Limited vs. Addl CIT (2012) 134 ITD 339 (Mum) ]

  21. JUDICIAL DECISIONS (ISSUES TO RULE 8D) K. V. Trading Co. Limited vs. DCIT (supra)

  22. JUDICIAL DECISIONS (ISSUES TO RULE 8D) State Bank of Travancore vs. ACIT (2009) 318 ITR (AT) 171 (Coach)

  23. JUDICIAL DECISIONS (ISSUES TO RULE 8D) DagaCapital Management P Ltd  [312 ITR 1 ]  & ACIT vsCheminvest Ltd case [124 TTJ 577]

  24. JUDICIAL DECISIONS (ISSUES TO RULE 8D) CIT vs. New India Investment Corporation Limited (1978) 113 ITR 778 (Cal.)

  25. JUDICIAL DECISIONS(ISSUES TO RULE 8D) [CIT vs. Kribhco (2012) 75 DTR 265 (Del.)

  26. JUDICIAL DECISIONS(ISSUES TO RULE 8D) Gillette Group India (P.) Limited vs. ACIT 12(1)

  27. to Section 14A

  28. to Section 14A e.g. Dividend Distribution tax, Tax payable by firms, etc

  29. to Section 14A

  30. to Section 14A

  31. Recent developments • Once the Rule 8D was notified sometime in early 2008, the tax officers have been mechanically applying the said Rule to all pending assessments. • In most cases, they have been rejecting the working prepared by the tax payer and huge disallowances have been made under section 14A based on the irrational computational mechanism laid down in the Rule.

  32. Recent developments • However, the latest development has made matters even worse now. • Recently, the Income-tax Appellate Tribunal had occasion to decide on the issue of applicability of the section in those cases, • Where a tax payer had invested money in investments, the income from which, as and when received, would be tax free in the hands of the tax payer. • In view of conflicting decisions of various Tribunals in the matter, it was decided to constitute a SPECIAL BENCH. This Special Bench at Delhi has given its decision vide its consolidated order dated 5th August, 2009 in the case of ITA Nos. 87/Del/2008, 4788/Del/2007 and 233/Ahd/2006

  33. Special Bench Decision

  34. Special Bench decision

  35. Special Bench Decision

  36. Special Bench Decision Decisions of the Supreme Court in the case of Maharashtra Sugar Mills and Rajasthan State Warehousing

  37. Decision of special bench

  38. Implications of the decision

  39. Implications of the decision

  40. Implications of the decision

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