summary of points to be discussed on

8/14/2019 Summary of Points to Be Discussed On

1/6


2/6

5. Working of Disallowance amount under Rule 8D and Interpretation of

various terms used in Rule 8D(2).

a) amount to be disallowed under Rule 8D(2) is the aggregate of the

following :

i) Direct Expenses

ii) Interest * Average Investments

Total Average Asset

iii) 0.5% of Average Investments.

b) Various Terminology used in Rule 8D.

The Expenditure in relation to Income which does not from part of

total income. (Total Income may include Income which is Taxable

and exempt from Tax).

i. Partly taxable i.e. Trading and partly Exempt i.e.

Dividend income in the case of Trading Companies.

ii. Partly taxable STCG in the next assessment year

and/or LTCG on UN-QUOTED shares, where income

is not Exempt.

Interest (whether Gross or Net).

i) For Net interest, the nature of interest income, i.e. interest income

should be business income & not from Other Source.

ii) Requirements of Schedule VI that any item which is more than 5

% should be shown separately in Profit & Loss account.

Investment.

i) Whether stock in trade included?

ii) Can you deduct Un-Quoted shares?

iii) Can you deduct shares on which STCG is earned next year?


3/6

Total Asset.

i) Whether Intangible assets to be included?

ii) Whether Preliminary Expenses etc. to be included?

iii) Whether Deferred Tax Asset to be included?

iv)Income Tax not to be deducted as there will be corresponding

Provision for Taxation on Liability side.

It is BETTER for the assessee to have Denominator at Higher

amount, for the calculation of Investment to Total Asset.

6 Discussion on Special Bench ITAT judgment in the case of Daga

Capital Management Private Ltd.

WORST for the assessee in all respect:-

i)Rule 8D held to be Retrospective.

ii)Investment includes Stock in Trade.

iii)It had only Interest paid.

7. Five member Special Bench Redundant as the matter is in Mumbai High

Court. All Appeals before the Mumbai ITAT Blocked.

8. Discussion on the following RECENT JUDGEMENTS pronounced

after Notification of Rule 8D and after Daga Capital Judgment:-

a) ITAT Mumbai in the cases of ACIT vs. Indexport Ltd. and DCIT

vs Citizen Hotels held that :

Section 14A and Daga Capital can not put assessee in worse

position. In other words section 14A disallowance under Rule

8D can not exceed original disallowance made at the time of

assessment.


4/6

b) Delhi Tribunal has held that disallowance can be more than

Dividend or Exempt Income.

c) ITAT Delhi Special Bench in the case of Cheminvest Ltd vs ITO has

held that section 14A disallowance has to be made even if assessee

has NO TAX FREE INCOME.

d) The recent judgment of P & H High Court in the case of CIT vs

Hero Cycles held that : Even under rule 8D of section 14A,

disallowance can be made only if there is actual nexus between

tax free income and expenditure.

9. Various methods to calculate Disallowance u/s. 14A which can be accepted

by the A. O. under Rule 8 D (1).

Proportionate method for the Trading companies where % of Exempt

Income to Total Income is Disallowed out of Interest / Total

Expenses.

Direct Nexus method for assesses having taxable business income &

Exempt income, wherein the assessee shows the Nexus of Borrowed

to its utilization.

Show that Investment is out of Net Owned Fund so that entire interest

is allowed as deduction & no amount is apportioned against Exempt

income.

Working based on Daga Capital with Net Interest and also with only

Investment & not stock in trade while calculating amount of

Average Investments. From Investment, the assessee can deduct Un-

Quoted shares and Quoted shares on which STCG is earned in the

Next Year as it will give rise to Taxable Income.


5/6

10 Penalty u/s. 271(1) (C ) for concealment.

Position prior to Rule 8D, No penalty.

Position after Rule 8D, the assessee has to disallow some amount

voluntarily to avoid Penalty u/s 271(1)(C) for Concealment.

11. Applicability of section 148 or 263, if the A.O. has not followed Rule

8D(2) or Daga Capital.

Different methods are available, if the AO has adopted one method,

the Commissioner cannot set aside the Order u/s 263 just because

other method would have resulted in higher Disallowance.

Rule 8D (1) also allows the AO to accept the method of the

assessee. In any method accepted by the AO, it is Deemed to have

been covered u/rule 8D (2).

12. Submission to be kept on record during the assessment proceedings:-

If the AO is not accepting your method, file all the methods so that

any of your methods can be accepted after the Judgment of Mumbai

High Court is announced in future.

If the AO is accepting your method, file the working only for that

method. If working of different other methods are on record, audit

objection and may tempt the Commissioner for 263.

13. Tax Audit Reporting in Form in 3 CD:-

Before Rule 8D, the Best way was to claim disclaimer that in the

absence of the Prescribed method, it is not possible to Quantify theamount.

After Rule 8D, the Auditor has to be very Specific and Clear in

Reporting.


6/6

Any calculation is not binding on the Dept. and the assessee as well.

However, any negative remark, the AO will rely on that working or

the remark.

14. Applicability on Companies paying tax under Section 115 JB.

As Dividend is not considered as income for determining Book

Profit u/s 115 JB, corresponding expense has to be considered.

LTCG is considered as income for Book Profit u/s 115 JB, hence no

expense to be considered for Disallowance.

15 Individual who is Proprietor and also having share of profit from the Firm

which is Exempt; Whether Section 14 A is applicable ?

.Held by Mumbai ITAT, No. the Partner is different entity from the

Firm and expenses incurred in the Proprietary concern is for earning

taxable income and no portion can be apportioned or allocated

against tax free income of the Partnership firm.

16 For a small Tax Planning, Sale of shares and Units on 31st March to avoid

0.5 % Disallowance under Rule 8D(2)(iii).

17 Dividend covered u/s.94(7) whether considered to be Exempt u/s.10(34) or

not while calculating disallowance u/s.14A r.w. Rule 8D.

Dividend covered u/s.94(7) is Taxable as either Capital Gain or

Business Income and not under the head Income from Other

Sources. Once Dividend Distribution Tax is paid u/s.115-O, Dividend is

Exempt u/s.10(34) in all cases irrespective of 94(7).

Hence entire Dividend continues to be Exempt for calculating

disallowance u/s.14A r.w. Rule 8D.

summary of points to be discussed on

Documents