25 August 2011
S. 14A : Business Expenditure – Exempted Income – Interest on Borrowed Funds used to buy shares for trading purposes.
In case of assessee, engaged in trading and investment of shares and received tax-free dividend income of in A.Y. 2004-05. It was held by Tribunal that Rule 8D does not apply prior to A.Y. 2008-09 (Godrej & Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (Bom.) followed). It was further observed that the expression “in relation to” in section 14A means dominant and immediate connection or nexus with the exempt income. In order to disallow expenditure under section 14A, there must be a live nexus between the expenditure incurred and the tax-free income. Disallowance cannot be made on presumptions and estimation by the Assessing Officer. When it is possible to determine the actual expenditure “in relation to” the exempt income or where no expenditure is incurred “in relation to” the exempt income, the principle of apportionment embedded in section 14A has no application.
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