16 September 2010
Whether disallowance u/s. 14A of the Income Tax, calculated as per Rule 8D can exceed the exempt income? If yes, can we offer for tax income which is exempt from tax inorder to avoid any disallowances under section 14A.
16 September 2010
NO. the disallowance cann0t exceed what is calculated as per the RULE 8D. And the rule dont apply to the Income which is taxable. So only the expemt income is to be considered.
16 September 2010
I feel the question raised is "Whether disallowance can exceed exempt income"
It may exceed exempt income. Let us say for instance a company has invested amounts in a partnership firm. The share of profit from the firm is exempt. If the company has taken some loan and has invested the same in partnership firm, the interest payable on such loan will be an expenditure incurred in relation to exempt income. The expenditure on account of interest may be more than the share of profits (eg where there is a loss).
Further as mentioned by CA shivang, the disallowance cannot exceed the amount computed as per rule 8D
16 September 2010
The disallowance as computed under rule 8D u/s 14A most of the times gives weird results and also crossed the exempt income. So it can exceed exempt income.
16 September 2010
In case if the disallowance as computed under rule 8D exceeds my exempt income, then whether I have option to voluntary offer exempt income to tax so that nothing is disallowed and I would end up paying tax only on income earned and not more than that.
16 September 2010
1. In one of the case which i dealt with, it exceeded the total expenditure incurred as well. 2. As far as offering exempt income for taxation is concern, it may not be possible. The incomes which are exempt are spelt out in the Act and the taxmen cannot tax then.
17 September 2010
First of all at the outset it cannot exceed expenditure incurred as you cannot have excess of income being taxed here. That is not possible i think, as the section reads to disallow expenses in relation to exempt income and hence it cannot exceed the expenses claimed.
Now as far as rule 8D is concerned in this regard i had the same view that i should offer the exempt income for tax so that the disallowance does not exceed the exempt income and the same was also discussed with the ITO but what he said was Rule 8D has no upper limit and to get the rule attracted there is no need of earning any exempt income during the year also.
The disallowance calculated by applying rule 8D may exceed the total expenditure some times especially because of the 1/2% calculated on average investments. Consider a case where the investments are huge and expenses are negligible.
We finally had to restrict the disallowance to the extent of expenditure incurred.
17 September 2010
The same thing i had said it cannot exceed the expenses claimed which is now said by you whereas earlier u had stated it exceeded the total expenditure incurred as well to which i said it has to be restricted to total expenses.
CAclubindia
