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Disallowance under section 14a of the income tax act

10 October 2015

Fact of the case

HUF has borrowed unsecured loan amounting to Rs.3,25,00,000/- long back and invested in Business concern.

HUF has transfer a business concern to private limited company in consideration of 36,50,000 equity share of that company @ 10 each.

Now question arise as to wheter interest expenses incurred, on the unsecured loan borrowed by HUF for investment in business concern having no intention to earn exempt income at the time of raising such fund, be disallowed U/S 14A on account of transfer of business concern to private limited compny in consideration of issue of equity share yeilding income by way of Dividend.

please provide your view on above as early as possible

Thanks & Regard

Kiran chhabhaiya

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6 Replies

Karthik.V.Kulkarni (Chartered Accountant) (594 Points)
Replied 10 October 2015

There are couple of questions you need to ans 1. Is it proprietorship or partnership firm? 2. What the unsecured loan used for? 3. Is the pvt ltd co to which the business is transferred run by same ppl of huf? In case it is not run by same ppl then the transfer of business is charged to capital gain. Here in such a senario sec 14 a doesn't come into play. Please clarify the above quesions

kiran chhabhaiya (article) (79 Points)
Replied 11 October 2015

Thanks for your consideration 1) HUF was proprietor of business concern which has been transfer to pvt ltd company and huf itself is the only shareholde of that company 2) unsecured loan was invested in business concerns which has been transfer to pvt ltd company. 3) section 14A would come into play as now HUF going to receive dividend income Which is exempt income. Now considering the fact of the case please share your view.

Karthik.V.Kulkarni (Chartered Accountant) (594 Points)
Replied 11 October 2015

14 A comes when a expense realted to earning an exempt income , which states such an expense is also exempt.

Here there is no direct nexus between acquiring share and borrowed capital even indirect nexus is absent . The borrowed capital was used for setting up and running a business concern . After conversion the same cannot be said to borrowed to acquire shares in the pvt ltd company . This will be the case if all the assets and liablities are transfered to company and company is claiming deduction of interest on borrowed capital .

But where interest liablity i.e borrowed capital is not taken over by the company then the same may be disallowed on basis of indirect nexus with acquiring the shares .

kiran chhabhaiya (article) (79 Points)
Replied 11 October 2015

Thanks for sharing your views @ Karthik v. Kulkarni For your clarification HUF have only transfer business concern not a unsecured loan to company. Can you provide me some statutory pronouncements on such issue.

Karthik.V.Kulkarni (Chartered Accountant) (594 Points)
Replied 12 October 2015

There are no case laws exactly matching your case . But there are certain case laws which deteremine certain underlying principles of sec 14A as pointed below:

1) Proximity of nexus between expense and exempt income

2) Disallowance when no exempt income is earned

So on careful analysis of facts of the case and applying relevant sections one has to come at his own opinion. There is no case laws as such for this particular type of case .