Tabulated hereunder are a few recent decisions on the subject and the ratios laid down therein – key takeaways from the decisions are also given in the table:

Discussion on the decision of Hon’ble Mumbai ITAT in case of Asha Lalit Kanodia v. Additional Commissioner of Income-tax, Range-12 (2), Mumbai

Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 – Expenditure incurred in relation to income not includible in total income (Onus of proof) – Assessment year 2008-09 – Assessee had earned tax-exempt income, being dividend on units, shares and securities and long-term capital gain – She had also earned exempt dividend income from proprietary concern – Assessing Officer made disallowance under section 14A, read with rule 8D(2)(iii), i.e., toward indirect administrative expenditure discarding assessee’s contention that no expenditure had been incurred by her – Whether since assessee had claimed that no expenditure was incurred to earn exempt dividend income, onus was on assessee which had to be substantiated with her accounts – Held, yes – Whether since assessee failed to discharge her onus, disallowance made under section 14A, read with rule 8D was justified – Held, yes (Para 4.4) [In favour of revenue]

Facts of the Case:

“The assessee earned tax-exempt income, being dividend on units, shares and securities and long-term capital gain (LTCG). The assessee had also earned another sum as dividend income in a proprietary concern, DFSS Ltd. and claimed exemption under section 10(34). The disallowance effected by the Assessing Officer was under section 14A, read with rule 8D(2)(iii), i.e., toward indirect administrative expenditure, for which the rule prescribes a rate of 0.5 per cent of the relevant investment held during the year.

■ On the assessee’s appeal, the Commissioner (Appeals) confirmed the disallowance.

■ Before the Tribunal, the assessee contended that:

– No expenditure had been incurred by the assessee in the first place. The assessee had maintained two sets of accounts, i.e., for personal transactions and her business of recruitment agency. No expenditure had been claimed in the personal accounts, reflecting an investment in tax-free securities, i.e., securities yielding or liable to yield income which is tax-exempt, the direct expenditure in the form of depository charges and securities transaction tax/service charges being debited to her capital account.

– As regards the accounts of the business, as evident from the balance sheet (as on 31.3.2008) of

DFSS Ltd., the expenditure pertained only to the assessee’s business.

– There could be no presumption with regard to the assessee having incurred expenditure in relation to the income not forming part of the total income, i.e., merely because the assessee had earned such income.

– The Assessing Officer could not proceed mechanically to apply rule 8D, but had to record his dissatisfaction with the correctness of the assessee’s claim, giving cogent reason for not accepting the same.”

Held:

“Clearly, it is only where the expenditure has been incurred in the first place, that there could be a disallowance u/s. 14A, which is only of expenditure – direct or indirect, incurred by the assessee, in-so-far as and to the extent it relates to the income not forming part of the total income, i.e., qua the activity yielding or liable to yield such income. The statement is in fact axiomatic, on which there could be no dispute or two views. The question is one of onus. True, a claim by the assessee, including as to no expenditure having been incurred, is to be rebutted by the A.O. where not satisfied, with reference to the assessee’s accounts. This is as only its’ accounts could reveal the existence of expenditure – direct or indirect, that could be said to be incurred by the assessee toward or in pursuing such activity. The assessee’s claim, however, cannot be a bald claim, made in the face of expenditure being incurred and claimed. How could, one may ask, the correctness of a bald claim be examined? Such a claim has no sanction in law, and no cognizance could be given therein to it. It is only where the claim, again, with reference to its accounts, is made by the assessee that the A.O. could, having regard thereto, examine the same as to its correctness and express his satisfaction or, as case may be, dissatisfaction therewith, proceeding to invoke rule 8D in case of the latter. Rule 8D is toward an estimation of such expenditure, and mandatory in its application, so that the A.O. has no discretion in the matter once the rule gets attracted. The plea of no expenses having been incurred cannot, therefore, be lightly made, much less without any substance, as in the present case. It is toward this that the assessee’s accounts are relevant and gain primacy. The disallowance u/s. 14A, it needs to be appreciated, is a statutory disallowance. The issue also has been examined, in the fact situation of the given case by the tribunal in different decisions, and toward which we may advert to its order in AFL (P.) Ltd. v. Asstt. CIT [2013] 60 SOT 63/37 taxmann.com 274 (Mum. – Trib.), reproducing from its relevant part:

‘6.3 It is, therefore, clear that the initial onus, even as stated by the ld. CIT (A), to make a claim in respect of the expenditure incurred in relation to the income that does not form part of the total income, is on the assessee. Once the assessee makes such a claim with reference to its accounts, the A.O. is bound to examine the same for the purpose of satisfying himself with regard to its correctness or otherwise, and where not satisfied, determine the same in accordance with the prescribed method. Further, therefore, though there is no specific requirement of recording dissatisfaction, it is incumbent on A.O. to do so, as in its absence it cannot be ascertained if he had actually examined the assessee’s claim or proceeded mechanically. Two, his order being appealable, it is only where it bears his reasons, could the validity thereof and, thus, of his action of disallowance u/r. 8D, be subject to judicial review. It is in this context that it has been held that the said dissatisfaction has to be explicit and informed. The same, thus, is not a jurisdictional requirement, but toward completing the inbuilt fairness of the procedure as provided for. The requirement of recording dissatisfaction predicates on the discharge of the onus cast on the assessee, and which may not always obtain. The Revenue on its part could only extend opportunity to the assessee for the discharge of the said onus. In a particular case, the assessee may not produce the accounts. How could the A.O. possibly verify the correctness of the assessee’s claim in such a case? In another, the assessee does not state the basis of its claim or makes the same de hors the expenses incurred and claimed. The A.O. could not possibly verify the correctness of such an incoherent or infirm claim.

True, no disallowance would ensue in the absence of any nexus or proximity between the expenditure and the related activity. The law does not presume a nexus or proximity – which is a matter of fact; but where one is inferable or not excluded on the facts, sanctions apportionment of the expenditure. This aspect stands abundantly clarified by the Hon’ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.), on which extensive reliance is placed, stating that the theory of apportionment has since been widened, i.e., by the introduction of section 14A, further relying on the decision in the case of CIT v. Walfort Shares & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC). Reliance toward this is also placed on the decisions by the tribunal, as in the case of Dy. CIT v. Damani Estates & Finance (P.) Ltd. [2014] 41 taxmann.com 462 (Mum. – Trib.) and Kunal Corpn. v. Asstt. CIT [2015] 55 taxmann.com 339 (Mum. – Trib.).

4.4 Under the circumstances and, in view of the foregoing, we find little merit in the assessee’s case and, accordingly, uphold that of the Revenue, dismissing the assessee’s appeal. We decide accordingly.”

Discussion on the decision of Hon’ble Amritsar ITAT in case of Lally Motors India (P.) Ltd. v. Pr. CIT

“This decision of ITAT which is in favour of Department has come in a period when various Courts are deciding the issue in favour of Assessees. The Hon’ble Court has held as under: “Section 14A of the Income-tax Act, 1961 – Expenditure incurred in relation to income not includible in total income (Scope of) – Assessment year 2012-13 – Whether applicability of section 14A does not hinge on actual earning of tax-exempt income – Held, yes – Assessee made investment in shares – Assessee claimed that it had not earned any income by way of dividend on

said shares, thus, section 14A would not apply – Further, it had not incurred any expenditure in relation to said investment in shares, so that section 14A would even otherwise would not apply –

It was noted that assessee firm had negative net worth during relevant year and entire investment was financed by borrowed capital and, administrative expenditure was incurred by assessee – Whether section 14A would apply even if no tax-exempt income (i.e., income not forming part of total income) had in fact been earned, as long as expenditure was incurred for earning such income – Held, yes – Whether, therefore, administrative expenses incurred on money borrowed for investment in shares, which had not yielded any dividend, was not to be allowed – Held, yes [Para 4.2] [In favour of revenue]”

“The second, equally relevant, aspect of the matter is if the provision could be invoked in the absence of any tax-exempt income. Toward this, while the Pr. Commissioner relies on the Board

Circular 5/2014, the assessee was during hearing at pains to emphasize that the same stands since ‘torn apart’ by the High Courts, so that it is bereft of any value. On being asked if the same had been set aside or stayed by any High Court, he would though admit of it being not the case. The question is not which of the two is correct (view) or more correct, but if same is binding on the A.O. as an Assessing Authority. The reason is simple. The Assessing Officer, despite an order by the revisionary authority directing him to do so, cannot pass an order consistent with the Board Circular where the same has been struck down by a competent court, unless, of course, the same stands, at the same time, upheld by the jurisdictional High Court. In fact, even a decision by the said court (or by the Apex Court) contrary to the dictum of the said Circular, i.e., without it being stayed or struck down by any court, shall have same effect, so that the said circular would in that case loose its binding force on the Assessing Officer. Further, a decision by a non-jurisdictional High Court shall not have the same effect inasmuch as the same is not binding on the Assessing Officer. No such decision by either the jurisdictional High Court or the Apex Court has been brought to notice. The moot question therefore is if the said Circular is in conformity with the law.

The principle that it is the net income, i.e., net of expenditure relatable thereto, which is subject to tax and, correspondingly, not liable to tax, i.e., where it does not form part of the total income, is well established. Equally well settled is the principle that once an income is liable (or not liable) to tax, all expenditure relatable thereto is to be reckoned, and it matters little that the said expenditure has indeed resulted in a positive income, or in whatever sum. It is in fact this, i.e., the expenditure being higher than the gross income, which could be nil, that leads to the phenomenon of loss, which could therefore be across both the categories income, i.e., taxable or non-taxable, being essentially a matter of fact. The interpretation of the words ‘for earning such income’ stands already settled by the Apex Court in Rajendra Prasad Moody’s case (supra). To therefore recognize relatable expenditure where it fructifies in a positive income is misconceived. It is, it may be appreciated, the quality of the expenditure that determines its deductibility and not its quantum or effect, i.e., where it stands incurred for the stated purpose. Given the premise of section 14A, i.e., to exclude income not forming part of the total income in computing the ‘total income’, with a view to determine the latter correctly, and the two principles afore-referred, the proposition under reference, i.e., to exclude all expenditure relatable to the earning of income not forming part of the total income, irrespective of its quantum, becomes axiomatic, even as noted by the Hon’ble Apex Court in Maxopp Investment Ltd.’s case (supra). Para 32 thereof reads as under:

’32. In the first instance, it needs to be recognized that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee “in relation to income which does not form part of the total income under this Act”. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is (not) includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.’

Where, one wonders, then, is the scope for two views. Relying extensively on its decision in Walfort Share & Stock Brokers (P.) Ltd.’s case (supra), the Apex Court upheld the theory of apportionment, discountenancing the theory of predominant object. The uncertainty of earning the dividend income, or of it being earned incidentally, was also noted by it, though to no moment. It was immaterial if dividend income was actually earned or not, which, rather, may be a consideration where the shares, as in the present case, are held to retain control over the investee company, i.e., for strategic reasons, as was the case with regard to the investment by Maxopp Investment Ltd. – one of the assessees in that case. The related expenditure has to be reckoned on an expansive basis, i.e., as attributable thereto. The constitutionality of r.8D, providing for rules of apportionment of both direct and indirect expenditure, stands already upheld by the Hon’ble High Court in Godrej & Boyce Mfg. Co. Ltd. (supra). Earlier, in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2017] 81 taxmann.com 111/247 Taxman 361/394 ITR 449 (SC), with reference to the language of section 14A, the title of which is itself clarificatory, the Apex Court clarified that income must not be includible in the total income, so that once this condition is satisfied, the expenditure incurred in earning the same cannot be allowed to be deducted. The AO in the present case has clearly failed to apply the law in the matter, which gets reiterated time and again by the Hon’ble Apex Court.

In view of the foregoing, there is no merit in the assessee’s case. The impugned order is upheld both on the aspect of lack of inquiry by the Assessing Authority, as well as his non-observance of the Board Circular 5/2014, which one has found to be in consonance with the law as explained by the Apex Court. The impugned order being after the date of amendment (by way of Explanation 2) to section 263, i.e., 1-6-2015, the same is an equally valid ground for the exercise of revisionary power under section 263. It is this power, i.e., to deem an order as erroneous in-so-far as it is prejudicial to the interests of the revenue, that stands conferred with effect from 1-6-2015. That is, the law, with effect from 1-6-2015, deems an order as so, where any of the circumstances specified is, in the opinion of the competent authority, satisfied. It has nothing to do with the date of the passing of the order deemed erroneous, or the year to which it pertains. Being a part of the procedural law, the provision shall have effect from 1-6-2015. The assessment does not represent a correct application of the law, furnishing one more ground, albeit parimateria, for the assessment being liable for revision under section 263. [Para 6]”

(b) In the above referred to decision the Hon’ble ITAT has also referred to decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325 and relevant part of said decision is reproduced herein below.

“Reference in this regard may finally be made to the recent decision by the Hon’ble Apex Court in Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154. For our purposes, para 3 of the

Judgment is of prime relevance, and which we reproduce as under:

‘3. Though, it is clear from the plain language of the aforesaid provision that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, the effect whereof is that if certain income is earned which is not to be included while computing total income, any expenditure incurred to earn that income is also not allowed as a deduction. It is well known that tax is leviable on the net income.

Net income is arrived at after deducting the expenditure incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. 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. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel upto this extent.’ (Emphasis, Ours) The principle behind section 14A and its applicability, and toward which the Hon’ble Court cites an example – which is the same as that obtains in the present case, is so well established that the Apex Court itself finds the same as settled and not disputed. The applicability of sec. 14A does not hinge on the actual earning of the tax-exempt income………………………..”

(c) The Hon’ble ITAT has referred to Circular 5/2014 and held that disallowance under Section 14A can be made even if no exempt income is earned. In the above referred case, facts as discussed by Hon’ble ITAT in para 3 are that assessee has made investment in shares but has not earned any exempt income. During the course of assessment proceedings, assessee has relied upon decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. (supra) and same was accepted by AO as he did not make any disallowance. However, in Section 263 proceedings, Principal CIT has referred to Circular No. 5/2014 issued by CBDT and directed AO to re-examine the issue of disallowance under Section 14A. With reference to such circular the Hon’ble ITAT has held: “The A.O., despite an order by the revisionary authority directing him to do so, cannot pass an order consistent with the Board Circular where the same has been struck down by a competent court, unless, of course, the same stands, at the same time, upheld by the Hon’ble jurisdictional High Court. In fact, even a decision by the said Court (or by the Hon’ble Apex Court) contrary to the dictum of the said Circular, i.e., without it being stayed or struck down by any court, shall have same effect, so that the said Circular would in that case loose its binding force on the AO. Further, a decision by a non-jurisdictional High Court shall not have the same affect in-as-much as the same is not binding on the AO”     

Discussion on the decision of Hon’ble Mumbai ITAT in case of D.H. Securities (P.) Ltd. v. Deputy Commissioner of Income-tax -4(1):

Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-Tax Rules, 1962 – Expenditure incurred in relation to income not includible in total income [Shares] – Assessment year 2008-09 – Whether disallowance under section 14A can be made even in cases where dividend income has been earned on shares held as stock-in-trade – Held, yes [Para 12][In favour of revenue]

Facts of the Case:

These are cross appeals, i.e., by the Assessee and the Revenue, in respect of the assessee’s assessment for the assessment year (A.Y.) 2008-09 vide order u/s. 143(3) of the Income-tax Act, 1961 (‘the Act” herein) dated 30.11.2010, following the order by the first appellate authority, being the Commissioner of Income Tax (Appeals)-8 Mumbai (‘CIT(A)’ for short) dated 11.05.2011.

The Revenue’s Appeal (ITA No. 5163 /Mum/2011)

2. The only issue raised in the Revenue’s appeal is the non-allowance of the credit of Securities Transaction Tax (STT) u/s. 88E of the Act in view of the assessee’s tax liability for the current year being determined u/s 115 JB of the Act. In view of the Assessing Officer (AO) the said rebate in tax would only arise where the assessee’s tax liability is worked out under the regular provisions of the Act. The ld. CIT(A) has allowed the assessee’s claim in its respect following the decision by the Tribunal in the case of Horizon Capital Ltd. v. ITO [IT Appeal No. 592(Bang.) of 2010 dated 16.07.2010] discussing the matter in detail vide paras 2.1 to 2.3 (pages 4-8) of his order.

The argument as being advanced in the instant case stood also raised in the case of Daga CapitalManagement (P.) Ltd. (supra); in fact, finding favour with the dissenting member of the constitution, though did not find approval of the larger Bench. The said decision stands impliedly approved in Godrej & BoyceMfg. Co. Ltd. (supra); the hon’ble court striking it down insofar only as the retrospective operation of rule 8D is concerned.

In fact, as its reading would show, Rule 8D putting in place or articulating a method for estimating the expenditure that can be regarded as relating to income that does not form part of the total income, was also responsible for the Hon’ble court for holding that the said rule is not retrospective. Further, what better proof of pudding than in its eating? Rule 8D, which only seeks to give effect to the provision of section 14A(1), since held as constitutionally valid by the hon’ble court, only seeks to apportion not only direct but also indirect expenditure, so that the latter also falls within the scope of the words ‘in relation to’ occurring in section 14A(1). Reference in this context may also be drawn to the discussion by the hon’ble court under the head lC5 The order of restoration passed by the Tribunal’ at pages 134 to 137 of the judgment. Repelling the argument that investment in shares yielding tax free dividend income has been made out of the own funds, so that no interest expenditure has been incurred in relation to the dividend income, it clarified that the said fact was no longer dispositive of the matter, and that, even so, a disallowance in respect of interest would have to be made, and no presumption of investment of own funds, on ground of its sufficiency, could be drawn, distinguishing its own decision in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.); its relevant observations (at placitum 5, pg. 135) reading as under :

     “In all these decisions, the Tribunal held that no nexus had been established between borrowed funds and investments by the assessee in dividend yielding shares/income yielding mutual funds. Now assuming that this is so, the only conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such income. Even if the assessee has utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the Assessing Officer has to determine.”

6.5 We may now come to the actual apportionment, for which rule 8D has been provided and, as held in the case of Godrej & BoyceMfg. Co. Ltd. (supra), operative w.e.f A.Y. 2008-09. At the outset, though, we may set at rest an argument by the assessee that rule 8D, which is mandatory, would not apply in a case where the shares are held as stock-in-trade. That is, even though section 14A may be applicable, rule 8D would not be inasmuch as words used in the rule, specifying the apportionment formula, is the ‘value of investment’, so that it would apply only where the shares are held as investment. Reliance has been placed in the matter on the decision in the case of Dy. CIT v. Gulshan Investment Co. Ltd. [2013] 142 ITD 89/31 taxmann.com 113

(Kol.). This argument was specifically taken before the Special Bench in the case of Daga CapitalManagement (P.) Ltd. (supra), and rejected by the Tribunal, clarifying that the words used are ‘value of investment’ and not ‘held as investment’. We may reproduce the relevant part of the order for the sake of better clarity: (pg. 233 of the report in ITD)

 “23.9 The learned Counsel for the assessee…………….. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the ‘value of investment’ and not the assets ‘held as investment’. A person may make investment in shares and the shares so purchased may be held either as “Stock-in-trade’ or ‘Investment’. The word ‘investment’ in this rule refers to the making of purchase of shares and not holding it as investment.”

Continuing further, with regard to the actual apportionment of costs, we find that rule 8D(2), which provides the formula for apportionment; rule 8D(1) stating the basis for the application of rule 8D itself, consists of three parts, each in relation to a separate set of expenditure. The first sub-clause (i) is in respect of direct expenditure relating to income which does not form part of the total income. The second, i.e., sub-clause (ii), concerns the interest expenditure (other than that directly attributable to any particular income or receipt), while sub-clause (iii), which is qua indirect expenditure, provides for an amount equal to one half per cent of the average value (as appearing in the books of account) of the investment, income from which does not form part of the total income. The rule is self- explanatory. There could be no quarrel with regard to the allocation of direct expenditure, which in fact states the obvious, and would in any case warrant a disallowance, i.e., even in the absence of the rule. Similarly, the part of the rule prescribing the ratio in respect of indirect expenditure (rule 8D(2)(iii)) cannot be altered on account of (say) hardship. This is as the rule prescribes the same as the ratio of indirect expenditure required to support an investment. In fact, the same, at 0.5%, is very nominal, recommending itself to an easy acceptance, eschewing the charge of being harsh. It is the third component, qua interest expenditure in rule 8D(2)(ii), which, however, presents a problem in the instant case.

This is as the same, as would be readily seen, seeks to quantify the interest on the investments, income from which is not taxable, on a proportionate basis, and which though is not only understandable, but as appropriate and justifiable as a general formula could be. However, in the instant case, shares, which yield the tax exempt dividend income, interest qua which is to be disallowed, being held as stock-in-trade, also yield share trading income, which is taxable. Therefore, to say that the entire interest relatable to the average share holding is to be attributed to the tax exempt dividend income would be patently incorrect on facts. That, in fact, the shares are bought and held primarily for share trading income, further accentuates the apparent incongruity of the situation arising on the mechanical application of r. 8D(2)(n). Clearly, therefore, the amount as per rule 8D(2)(ii) would need to be scaled down, bifurcating the expenditure so arrived at as between these two incomes. As regards the ratio of such scaling down, no hard and fast rule for the purpose would hold, each fact situation being different. However, considering that the dominant objective of the share holding, which in our view should be dispositive of the matter, is the share trading income, we propose a ratio of 20% toward the tax exempt dividend income. One could argue that the percentage suggested by us is ad hoc or not scientific. We have already explained that an indirect expenditure, including interest, has no direct relation with the income, much less its quantum, allocating it on the basis of the income generated or arising would not be appropriate, and neither does rule 8D support the same. Further, that in arriving at the suggested rate of 20%, we have been guided principally by the fact that the share trading is the dominant object of the share holding. We also consider it pertinent to mention though the average share holding would be the same, the share composition, in view of the share trading activity, would vary continuously; the turnover for a year being easily in the range of 4 to 5 times the average share holding. Accordingly, in arriving at the disallowance under rule 8D, the amount as per rule 8D(2)(ii) would stand to be restricted to 20% thereof. Further, as regards the legal mandate for the same, we have again already clarified of the manifestly incorrect, if not absurd results that would otherwise follow. In fact, in our view, the language of rule 8D(2)(ii) itself provides the mandate inasmuch as it prescribes or authorizes a disallowance only qua investment income from which is not taxable, so that in limiting the amount worked out with reference to the total investment; the same also yielding taxable income, we have only sought to operationalize the said rule. It would also be appreciated that not doing so would also violate the principle of only net income (from any source) being subject to tax inasmuch as a disallowance for the total interest as per rule 8D(2)(ii) would in effect bring the share trading income to tax without deduction of the interest expenditure allocable or attributable thereto.

Some other Decisions in favour of the Revenue:

1. In case of United Breweries Ltd. v. Dy. CIT [2016], the Hon’ble High Court held that section 14A is applicable even where motive of acquiring shares is to obtain controlling interest in companies.

1. In case of Haldia Petrochemicals Ltd. v. Jt. CIT [2016], said that for the purpose of calculating book profit u/s 115JB, the expenditure incurred to earn exempt income, which had been disallowed under section 14A, had to be added back to book profit. Provisions of section 14A are also applicable to the case of calculating book profit under section 115JB of the Act.

• Supreme Court: Section 14A is applicable to dividend income irrespective of Dividend Distribution Tax (DDT) payment :

Section 14A of the Income Tax Act, 1961 (Act) provides for disallowance of expenditure incurred in relation to income which is not included in the total income of the assessee. In a recent judgement, the issue before the Supreme Court (SC) was whether Section 14A would be applicable to dividend income irrespective of the fact that DDT is paid by the company.

Facts of the case:

The taxpayer declared dividend income of INR 343.4 million.

The Assessing Officer (AO) had disallowed a portion of the total interest expenses on a notional basis in the ratio of cost of investment in shares and units to the cost of total assets appearing on the balance sheet. The Commissioner of Income Tax (Appeals) (CIT(A)) reversed the order of the AO following the stand taken in the earlier order.

The Income Tax Appellate Tribunal (ITAT) upheld the order of the CIT(A) on the premise that the AO failed to establish any nexus between investments in shares/mutual funds and the borrowed funds. However, the ITAT remanded the order to the AO for a fresh adjudication in light of the amendments made under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

On being aggrieved by the order of the ITAT, an appeal was filed before the High Court (HC). The HC held that the amendment in Rule 8D were to be applied prospectively and accordingly the same would not apply to the year under consideration (Assessment Year 2002-03). The HC further held that on a plain reading of the section, the same also applies to dividend income subjected to DDT on the premise that it is not includible in the total income of the taxpayer.