Sec 14a rwr rule 8d

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 X B/C

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.

The AO can invoke rule 8 D only when he is not satisfied with the claims made by assessee.

However if only own funds are used for earning exempted income then the value under Rule 8D (ii) will be nil, resulting in reduction of empenditure on exempted income to be disallowed by the AO. But value will be calculated as per clause (i) & (iii). 

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. As per your query if the assessee is not claiming any expenditure at all, then the AO cannot invoke section 14A itself.

Hi,

Thanks for your reply.

As per clause (iii) it is stated that 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.  

You also mentioned that if only own funds are used for earning exempted income then the value under Rule 8D (ii) will be nil, resulting in reduction of empenditure on exempted income to be disallowed by the AO. But value will be calculated as per clause (i) & (iii). 

Say the investment as on 1 April is 15 lakhs and as on 31 March is 25 lakhs. Then as per clause (iii) 0.5% of the average investments (20  lakhs ) comes to Rs. 10,000 Can the AO added this amount to the taxable income and calculate tax payable on it. Do we have any citations / case laws, orders, etc to that effect. It will be very helpful if you can provide the same.

Ya sure AO can calculate the value as per 8 D (iii), as value of "expenditure on exempted income", as per rule 8D is aggregate of clause (i),(ii)&(iii).

But as i hav mentioned it earlier Rule 8D can only be invoke by AO on a reasonable basis if and only if he is not satisfied wid the claim made by assessee..

Thanks Akash,

But i am still a bit confused.

In my COI i have shown three types of income

1. Short Term Capital Gain (STCG) (taxed @ 15%)

2. Long Term Capital Gain (exempt)

3. Dividend (exempt)

As per my earlier query, i have not claimed any expenses against any of the above income

So if the AO calcuates Rs. 10,000 (as above) where will he add it.

Wil he increase my STCG then I will have to pay tax @ 15%, or will he reduce mine LTCG / Dividend income (any increase / decrease should not have effect on the tax liability as they both are exempt from tax) or will he include the Rs.10,000 as income from other sources and calculate tax as per the normal slab rates.

Please specify how will he treat the Rs. 10,000 in the COI and claim tax on it. I once again request you if you could provide me with any case laws, etc to the above effect.

Thanks,

CSJ

Dear Chandresh

The whole point of section 14A is to disallow the expenditure on exempted income claimed by assessee, However if the actual value of such expenditure incurred cannot be determined for any practical purpose or the AO is not satisfied with the claims made by the assessee then the value can be determine with the help of Rule 8D.

In your case if u r not claiming any expenditure then the AO cannot invoke section 14A itself. However as u said if certain expenditure is claimed under CG, that expenditure should pertain to expenditure on that particular CG (Chargeable to tax) transaction only, AO cannot add expenditure on exempted income into it.

Expenditure claimed should have one to one relation with the Exempt income & those chargeable to tax.

In case if i am not been able to make my self clear pls feel free to post your query.

Thank u :)

Dear Chandresh,

The most basic condition to apply section 14A is that for earning such exempt income, some expenditure has been incurred..

If no expenditure is incurred for earning income exempt from tax, then section 14A is not applicable..

In your case, no expenditure is incurred hence section 14A is not applicable..

Further, where the entire amount of investment has been acquired by the assessee from its own funds and no part of borrowed capital has been used for the purpose acquisition of the investments at any time during the previous year, no disallowance on account of interest expenditure can be made by invoking Rule 8D- BALARAMPUR CHINI MILLS Ltd. v. CIT(2011) 140 TTJ (KOL.) (UO) 73