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Addition of income

Piyush Jain (CA) (283 Points)

13 May 2010

Can A.O. make addition more than the income. In one of my client case, the A.O. with reference to sec 14A has disallowed the expenditure related to exemot income(i.e. dividend). Although the dividend income was only Rs. 1.6crore but with the given calculation in sec 14A it came around 4.8 Crore.

Is it constitutionally valid? can anyone provide any case law on the same matter.

Regards

Piyush

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5 Replies

CA. RUPESH JOSHI (Chartered Accountant) (174 Points)
Replied 14 May 2010

As per well settled law and also according to canons of taxation only that expenditure which is relatable to taxable income should be deducted in computing the total income. Expenditure which has a bearing on exempt income should not be considered in the computation of total income as otherwise this would result in double advantage to the assessee

Though the AO does not have suo motto right to resort to Rule 8D, it looks imperative on the part of the AO to resort to application of Rule 8D only if he is not satisfied with the correctness of the quantum of disallowance admitted by the assessee and where the assessee claims that no expenditure has been incurred with respect to exempt income.

The Finance Act, 2006 revamped the Section 14 A adding sub sections (2) & (3) with effect from 1st April, 2007. Consequently, under the changed circumstances, the importance of many favourable decisions got diluted.

The disallowance of assumed indirect expenses on a percentage basis would in many cases nullify the exemption itself. It is therefore preferable to keep expenses of exempt income under separate cost code and demonstrate that no such expenditure has been taken into account in the computation of total income, so as to avoid recourse to Rule 8D. It is advisable to compute the total income taking into cognizance the expenditure to be disregarded with respect to exempt income as provided for under this rule.

CA Shiv (Business Controller) (2987 Points)
Replied 14 May 2010

Well, i dont understand the Copy paste done above. i am sorry....

But general interpretation is AO can do it...But still power remains in the hand of assessee to prove the amount of exp made to earn the exempt income. May be you can go in Appeals.

CA Shiv (Business Controller) (2987 Points)
Replied 14 May 2010

8D. Method for determining amount of expenditure in relation to income not includible in total income.—

(1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with—

(a) the correctness of the claim of expenditure made by the assessee ; or

(b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :—

(i) the amount of expenditure directly relating to income which does not form part of total income ;

(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :—

A X---

Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ;

B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ;

C = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ;

(iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.

3. For the purposes of this rule, the “total assets” shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.

Rules prescribed as above are self explanatory and same is being applied by the Assessing officer where they found any exempted income in accounts of the assessee as in any case disallowance of .50% of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year can be made without making any other disallowance.

Piyush Jain (CA) (283 Points)
Replied 15 May 2010

Mr. Shivang and Mr. Rupesh, the question is not that whether AO can invoke 14A or not. Definitely he can, this is one of the most non debatable addition that he can enjoy.

But to what extent is the question. Can he go beyond the quantum of income he is making addition for.

Regards

Piyush

CA Shiv (Business Controller) (2987 Points)
Replied 15 May 2010

Piyush please read my answer properlly.... In first sentence only i made it clear... YES HE CSN DO IT .. if the amount expensed is calculated as per the rule....

IF the company makes expense and than company fails to give dividend that what will you do?...