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TMI BlogCBDT BURIES s.14A-r.8D CONTROVERSIES Finally, The Might is Right.X X X X Extracts X X X X X X X X Extracts X X X X ..... CBDT BURIES s.14A-r.8D CONTROVERSIES Finally, The Might is Right. - By: - Mr. Harish Chander Bhatia - Income Tax - Dated:- 14-2-2014 - - HOWEVER NOT TO FORGET "It is unwise to be too sure of one's own wisdom. It is healthy to be reminded that the strongest might weaken and the wisest might err". Mahatma Gandhi Since the introduction of section 14A , there have been many controversies, divergent opinions, inconsistencies in its application any many different views of judiciary. The CBDT finally, issues clarification vides its Circular No 5-dated 11.2.2014 , the operative part of which is reproduced here in below:- SUB: Clarification regarding disallowance of expenses under section 14A of the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t , in cases where corresponding exempt income has not been earned during the financial year--regarding Para 4: The above position is further clarified by the usage of term "includible" in the heading to section 14A of the Act and also heading of Rule 8D of the Income Tax Rules 1962 , which indicates that it is not necessary that exempt income should necessary be included in a particular year's income for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A , it is not material that assessee should have earned such exempt income during the financial year under consideration. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us in light of the above, CBDT in exercise of its power under section 119 of the Act hereby clarifies that Rule 8D r.w.s section 14A of the Act provides for disallowance of the expenditure even where taxpayer in particular year has not earned any exempt income. Section 14A was inserted by the Finance Act, 2001, with retrospective effect from 1-4-1962 for disallowance of expenditure incurred in relation to income, which is not includible in the total income of the assessee. It was just to clarify that any expenditure incurred to earn tax free income shall not be deductible from taxable income, Let us have a quick look on the explanatory memorandum issued with the Finance Bill, 2001, gives the purpose for which the amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made. This reads as under: "Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent they are relatable to the earning of taxable income. Before enactment of this section, it was clarified in the explanatory memorandum that certain expenses incurred to earn exempt income are debited to reduce the taxable income. But under the garb of above explanatory memorandum, the provision of section 14A was introduced, which was quite inconsistent with that. I agree that there was a practice to debit all expenses against the income whether incurred to earn taxable income or tax-free income, which led to understating the taxable profit, and it was quite logical to disallow those expenditure, which had no nexus with earning of the taxable income, either on specific basis or on proportionate basis. But Rule 8D r.w. s 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speaks something else, it simply disallows the expenses on a set formula at a fixed percentage of average of investment over average of total assets, whether the taxpayer has incurred any expenditure or not any tax free income is earned or not. This was not the legislative intention. One may refer to the explanatory memorandum. Quite irrational or should be called a ridicule rule of the law, where the taxpayer is made to pay for that, which he has not received and charge for that, which he has not incurred. Why one should be subjected to disallowance of expenses not on the proportionate between taxable income and tax-free income, but on the proportionate of investments over the total assets. This draconian rule will simply disallow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... genuine expenses incurred to taxable income. Let us have a numerical example of rule 8D to establish, how the innocent tax payers are fooled and cheated, the Board heartily desire is that tax payer should not remain an honest taxpayer, because if he becomes honest and law abiding, how the government official will survive, where the officer will get the money, how they will be able to amass wealth, the honesty will wear away black money from market, no harmony between taxpayers and tax collector, economy will dull, without exchange of hands with money no charm will there to work, simple a dry cheque of salary, how boring. Un-enthusiastic approach. Rule 8D has no connection with quantum of your net profit. Suppose you have incurred (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs: 2.00 lac towards expenses. The average investment in shares/MF is (b) Rs 10.00 lac (opening balance Rs; 8.00 lac and Closing balance Rs: 12.00 Lac) and Average of assets of the business is(c) Rs 50.00 Lac (Opening Balance Rs: 40.00 lac and closing balance Rs: 60.00 Lac) = a*b/c=2*10/50= 00.40 lac, which is further to be increased by half percentage of (c) i.e. Rs: 00.25 lac. So total disallowance would be Rs: 00.65 lac (Rs00.40 lac+Rs: 00.25 lac) against an expenses of Rs: 2.00 lac. And this disallowance of legitimate expenses will continue, whether you received any income or not. It really appears an unscientific provisions , the tax payers is subjected to tax on disallowance of expenditure against taxable income on account of tax fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee income includible but not included. Further, in the case of dividend income, the scheme of the Income-tax Act is to collect tax as DDT plus applicable surcharge at the time of distribution. It is for this reason that tax is not levied in the hands of the investor. Similarly, the firm is required to pay tax at 30% plus applicable surcharge. For this reason, the balance of profit apportioned to partners is exempted in the hands of the partners. Similar exemption is given u/s.10(38) in respect of long term capital gains on which STT is paid. This exemption is granted not as an incentive but because the tax is levied at source. Therefore, there is no logic in disallowing expenditure u/s.14A in such cases where tax is collected at source. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Is it just? Is it not amount to strangulation of the taxpayers. and CBDT action as a gadget to squeeze the taxpayers to extract the every drop of the blood. CBDT in one blow has buried many judicial pronouncement-favoring taxpayers to the unfathomable graveyard, to rest in peace. Taxpayers have no option but to wash their face with tears and standup again to fight. you have to pay for the tort, which you have not committed. - Reply By CA. Surender Gupta as = Dear Mr. Bhatia The issues raised by you are valid and cause of worry. Though this circular has been issued Rule 119 of the Income Tax Act, but one legal questing is striking that when the provision of Section 14A and Rule 8 has been interpreted by various High Courts and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Apex Court , whether CBDT made an attempt to overrule the interpretation by issuing a Circular / instruction u/s 119. In the case of KALYANI PACKAGING INDUSTRY [2004 (5) TMI 64 - SUPREME COURT OF INDIA] and M/s. Hindoostan Spinning Wvg. M. Ltd. Anr. [2009 (4) TMI 11 - SUPREME COURT OF INDIA] while interpreting the decision in DHIREN CHEMICAL INDUSTRIES [2001 (12) TMI 3 - SUPREME COURT OF INDIA] it was held that: "By issuing the clarifications/circulars they represent merely their understanding of the statutory provisions. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the SC/HC declares the law on the question arising for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, circular should not be given effect contrary to the view expressed in a decision of this SC/HC - Revenue authorities can challenge the validity of circulars / clarifications." We hope that Apex Court in due course and appropriate time, may issue guidelines for the CBDT / CBEC that may be taken care of before issuing any such circular / clarification. Dated: 14-2-2014 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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