Section 14A & Rule 8D of the Income Tax Act
Section 14A is one of the most litigated section in the income tax act. The section states that no deduction shall be allowed in respect of expenditure which is incurred to earn income which is exempt from tax. Further, the Assessing Officer shall determine the amount of expenditure incurred in relation to the exempt income if he is not satisfied with the correctness of the claim of the assessee in respect of the exempt income. The above provisions shall also apply in case the assessee claims that he has not incurred any expenditure in relation to the exempt income.
The method of computation of this expenditure is given in Rule 8D.
As per the rule, the amount of expenditure shall be computed by aggregating the following amounts:
- Amount of expenditure directly related to the income; and
- Amount equal to 1% of the annual average of the monthly average of the opening and closing balances of the value of investment (whose income would not form a part of total income.
Here, I would like to quote that the recent judgement on this issue passed by the Bangalore ITAT in the case of Century Real Estate Holdings Pvt. Ltd Vs ACIT (Bang) wherein the ITAT rejected the appellant’s stand of considering the value of investment made only in the shares of the firm for the purpose of disallowance and held that since the share income from a partnership firm is exempt from tax, the value of investment made in the partnership firm are required to be considered for comparing the value of investments with the available own funds and for computing the amount of disallowance.
Thus, in case of an assessee claiming any expense, it is advisable that he/she confirms that it is earned for income which is chargeable to tax. In case any expense relates to both exempt as well as taxable income, it is advisable to compute the expense deduction cautiously as section 14A is one of the key areas Income tax department focuses on.
