NEW RULE SPECIFYING METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME
Background
There has been considerable litigation between the assessee’s and the Tax Department ever since the insertion of Section 14A into the Income Tax Act, 1961 (IT Act) vide Finance Act 2001. Section 14A provides that for computing the income of an assessee, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the assessee’s total income under the IT Act. Sub section (2) to Section 14A, inserted in the IT Act vide Finance Act 2006 with effect from April 1, 2007, further stipulates that the Assessing Officer (AO) shall determine the amount of expenditure incurred by the assessee in relation to such income in accordance with the prescribed method, if having regard to the assessee’s accounts, he is not satisfied with the correctness of his claim.
Further, the provisions of Section 14A(2) also apply where the assessee claims that no expenditure has been incurred in relation to such income. With a view to frame the methodology prescribed in Section 14A(2) of the IT Act, the CBDT has issued Notification No. 45/2008 dated March 24, 2008, which provides for insertion of Rule 8D in the Income Tax Rules, 1962. The said Rule 8D would apply in either of the following situations –
(a) Where the AO is not satisfied with the correctness of the claim of expenditure made by the assessee; or
(b) Where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income.
The salient features of Rule 8D are as under –
As per sub rule 2 of Rule 8D, the expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts –
(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 which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula -
A = amount of expenditure by way of interest (other than the amount of interest directly relating to income which does not form part of total income) 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 0.5% 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.
Further, the term ‘total assets’ has been defined to 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.
Conclusion
The said notification was long awaited especially since sub section 2 to Section 14A was inserted into the IT Act vide Finance Act 2006 with effect from April 1, 2007.
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