Section 14A amp Rule 8D CA ROHAN SOGANI 1 Basic Principle Of Taxation EXEMPT INCOME TAXABLE INCOME EXPENSES NO DEDUCTION DEDUCTION ALLOWED CA Rohan ID: 513706
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Slide1
Critical Issues :
Section 14A & Rule 8D
CA ROHAN SOGANI
1Slide2
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)
2Slide3
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
????Slide4
RRRR
Birth Of Section 14A
Rajasth
an State Warehousing Corporation
(2000) 242 ITR 450 (SC)
Letting of Godowns & Warehouses
(Exempt u/s 10(29))
Income Interest & Adm. Charges
(Taxable)
INDIVISIBLE BUSINESS
4
CA
Rohan
SoganiSlide5
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
SoganiSlide6
Chain of Events
Section 14A
CA
Rohan
Sogani
Finance Act, 2001
w.r.e.f
. 1
st
April 1962
Circular No. 14 of 2001, Dated 12
th
December 2001
AssessmentsProceedings 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
6Slide7
Section
14A : Position as on Date
7
CA
Rohan
SoganiSlide8
Rule 8D
IT
( Fifth
Amdt
.)
Ru
les, 2008
w.e.f
.
24
th
March, 2008
Rule 8D(2)
8
CA
Rohan
SoganiSlide9
Rule 8D(2) : Relevant Calculations
CA
Rohan
Sogani
9Slide10
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
NIL
10Slide11
14A & 8D : Only Option ??
11
CA Rohan Sogani
Oscillating Onus
Assessee
Assessing
OfficerSlide12
Onus Discharged by
Assessee
CA Rohan
Sogani
Identify expenses incurred in relation to exempt income
No expenses incurred
Expenses Identifiable
Expenses not Identified
No disallowance
Make voluntary disallowance
Disallow certain portion on reasonable basis
Disclose the working & reason
Onus Discharged
12Slide13
Onus shifts to
AO
CA
Rohan
Sogani
13Slide14
Judicial Precedence
14
CA Rohan SoganiSlide15
Rule 8D or Reasonable Method?
CA
Rohan Sogani
15Slide16
Conclusion till now
CA
Rohan
Sogani
16Slide17
CA
Rohan Soganic
Exempt 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
17Slide18
Exempt Income but
No Expenditure ..???? (Conti..)
18
CA
Rohan
SoganiSlide19
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
NILSlide20
No Exempt Income??No Disallowance (Conti..)
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)Slide21
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
100
21
Issue 1
CA
Rohan
SoganiSlide22
22
CA Rohan Sogani
Investment from
Own
F
unds
(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
50Slide23
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? -
NOSlide24
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
SoganiSlide25
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? -
NOSlide26
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
)
Slide27
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)Slide28
Group Investments
JV Partners
JV
New operations
100% Subsidiary
B Pvt. Ltd
(Madhya Pradesh)
D Pvt. Ltd
A Pvt. Ltd
(Rajasthan)
A D Pvt. Ltd
CA
Rohan
Sogani
28Slide29
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 SoganiSlide30
Any queries
…..
CA Rohan Sogani
30Slide31
Contact: rohan@soganiprofessionals.com
CA Rohan
SoganiTHANKYOU
31