CBDT clarifies that expenditure incurred in relation to exempt income would be disallowed under Section 14A even if no such income has been earned in a particular year
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CBDT clarifies that expenditure incurred in relation to exempt income would be disallowed under Section 14A even if no such income has been earned in a particular year

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Disallowance of the expenditure under Section 14A of the Income-tax Act, 1961 (the Act) incurred in relation to exempt income has been a subject matter debate before the Courts. The Courts have dealt ...

Disallowance of the expenditure under Section 14A of the Income-tax Act, 1961 (the Act) incurred in relation to exempt income has been a subject matter debate before the Courts. The Courts have dealt with an issue as to whether disallowance under Section 14A of the Act should be made even if no exempt income has been earned by a taxpayer during the financial year.

The Central Board of Direct Taxes has examined this matter and issued a Circular which has been summarised in the attached Flash News.

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CBDT clarifies that expenditure incurred in relation to exempt income would be disallowed under Section 14A even if no such income has been earned in a particular year CBDT clarifies that expenditure incurred in relation to exempt income would be disallowed under Section 14A even if no such income has been earned in a particular year Document Transcript

  • KPMG FLASH NEWS KPMG IN INDIA CBDT clarifies that expenditure incurred in relation to exempt income would be disallowed under Section 14A even if no such income has been earned in a particular year 13 February 2014 Disallowance of the expenditure under Section 14A of the Income-tax Act, 1961 (the Act) incurred in relation to exempt income has been a subject matter debate before the Courts. The Courts have dealt with an issue as to whether disallowance under Section 14A of the Act should be made even if no exempt income has been earned by a taxpayer during the financial year. The Central Board of Direct Taxes (CBDT) has 1 examined this matter and issued a Circular which has been summarised as follows:   Further, Section 14A of the Act does not use the word ‘income of the year’ but ‘income under the Act’, which indicates that for invoking disallowance under Section 14A, it is immaterial that the taxpayer should have earned such exempt income during the financial year under consideration.  The above position is substantiated by the language used in Rule 8D(2)(ii) and 8D(2)(iii) of the Income-tax Rules, 1962 (Rules) which mentions as “... investments , income from which does not or shall not form part of the total income....”. 2 Perusal of Circular which clarifies the purpose for introduction of Section 14A, indicates that the expenditure which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. In view of above, the CBDT clarified that Rule 8D of the Rules read with Section 14A of the Act provides for disallowance of the expenditure incurred in relation to the exempt income even where the taxpayer in a particular year has not earned any exempt income. ________________ 1 2 CBDT Circular No. 5/2014, dated 11 February 2014 CBDT Circular No. 14/2001, dated 9 November 2001 © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • . Our comments 3 While dealing with this issue, some of the Courts have held that the disallowance of expenditure under Section 14A of the Act would attract even if the taxpayer has not earned any exempt income during the year. However, the Bombay High Court in the case of Delite 4 Enterprises , while affirming the Tribunal’s decision, held that as there was no exemption claimed under Section 10(2A) by the taxpayer and there was no tax-free income, Section 14A could not apply. Further the High Court held that based on the facts of the case there is no (tax-free) income during the relevant assessment year. It is important to note that Circular issued by the CBDT is binding on the tax officers and not bind the Courts or even the taxpayer. The same has been held by the Supreme 5 Court in the case of Hero Cycles Pvt. Ltd . ___________________ 3 Siva Industries & Holding Ltd [2012] 54 SOT 49 (Chen), Technopack Advisors P Ltd [2012] 50 SOT 31 (Del)(URO), Relaxo Footwear Ltd [2012] 50 SOT 102 (Del), India Infrastructure Developers Limited v. DCIT (ITA No. 5656/Mum/2011), Cheminvest Ltd v. ITO [2009] 121 ITD 318 (Del) 4 CIT v. Delite Enterprises (ITA No.110 of 2009) (Bom) 5 CIT v. Hero Cycles (P) Ltd. [1997] 228 ITR 463 (SC) © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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