Finance Act, 2001

Section 14A inserted (w.e. f. 1-4-1962)

Provided for disallowance for expenses incurred in relation to income exempt from income tax

Finance Act, 2002

Proviso to section 14A inserted
(w. e. f. 11-5-2001)

Clarification that section 14A cannot be used to reopen/rectify completed assessment

Finance Act, 2006

Sub-sections (2) and (3) inserted
(w e f 1-4-2007)

Provided the methodology for computing the disallowance under section 14A

IT (Fifth Amendment) Rules, 2008

Rule 8D inserted
 (w. e. f. 24-3-2008)

Prescribes the mechanics for allocating expenses to exempt income

Finance Act, 2016

Amendment to Rule 8D

Disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed

Commissioner of Income-tax, Mumbai vs. Walfort Share & Stock Brokers (P.) Ltd. [2010] 192 TAXMAN 211 (SC)

• The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income.

• Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.

• The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A.

• For attracting section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. In the absence of such proximate cause for disallowance, section 14A cannot be invoked.

Godrej & Boyce Mfg. Co. Ltd. vs. Deputy Commissioner of Income-tax, Range 10(2), Mumbai [2010] 194 TAXMAN 203 (Bom.)

• Sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such an expenditure.

• Sub-section (2) of section 14A does not authorise or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee.

• The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts, after considering all the relevant facts and circumstances.

• The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect.

• Rule 8D which has been notified on 24-3-2008 would apply with effect from the assessment year 2008-09. The rule, consequently, could not have an application in respect of the assessment year 2002-03 which was the year under consideration in the instant case.

• Even in the absence of sub-sections (2) and (3) of section 14A and of Rule 8D, the Assessing Officer was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-section (1) of section 14A which provides that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act.

• Undoubtedly, in determining what would constitute a reasonable method for effecting the disallowance, the Assessing Officer would have to give due regard to all the facts and circumstances of the case.

In U.P. Electronics Corporation Ltd. vs. DCIT (ITAT Lucknow) ITA No. 538/LKW/2012 (para 13) the ITAT observed that ‘before proceeding to determine the amount of expenditure, the Assessing Officer has recorded that the said allowance was not acceptable. The statement recorded by the Assessing Officer was not considered to be objective satisfaction by the Tribunal. In the instant case, the Assessing Officer has simply recorded that the contention of the assessee is not acceptable. Therefore, in the light of the aforesaid orders of the Tribunal and other judicial pronouncements, we are of the view that the Assessing Officer has not recorded any objective satisfaction with regard to the correctness of the claim of the assessee.’

Similar view has been adopted in case of Assistant Commissioner of Income-tax, Kolkata vs. Pawan Kumar Jhunjhunwala [2016] 66 taxmann.com 13 (Kolkata - Trib.).

Commissioner of Income Tax vs. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H)

• Even if deduction under s. 36(1)(iii) is ordinarily available in respect of borrowed funds utilised for the purpose of business s. 14A carves out an exception insofar as any expenditure which is relatable to the earning of dividend income not subject to tax is to be disallowed.

• It is to be ascertained as to whether the assessee has made the investment in purchase of shares out of borrowed funds or invested its own funds. If the assessee has invested its own money in the purchase of shares then there is no question of any disallowance in respect of interest on borrowed funds under s. 14A. However, if the borrowed funds have been utilised for purchase of shares of M/s. Winsome Yarns Ltd., disallowance under s. 14A shall have to be calculated even when investment has been made in the course of business of the assessee and the assessee qualifies for deduction under s. 36(1)(iii).

• Disallowance has got to be made under s. 14A if any expenditure relating to the earning of income which is not chargeable to tax has been debited to the accounts by the assessee.

Commissioner of Income-tax-IV v. Holcim India (P.) Ltd - [2015] 57 taxmann.com 28 (Delhi)

• Income exempt under section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long-term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability.

• Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend.

The Gujarat High Court in CIT vs. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Gujarat) held that section 14A provides that ‘if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance’.

Similar view has been adopted in the case of Lakhani Marketing [2014] 49 taxmann.com 257 (Punj. & Har.), Shivam Motors [2015] 55 taxmann.com 262 (All.)

CIT vs. - Hero Cycles 323 ITR 158 (P &H)

• The contention of the revenue, that directly or indirectly some expenditure is always incurred, which must be disallowed under section 14A, and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted

• Disallowance under section 14A requires finding of incurring of expenditure. Where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand.

Maxopp Investment Ltd. vs. Commissioner of Income-tax, New Delhi 247 CTR 162 (Del)

• The expression 'in relation to' appearing in section 14A cannot be ascribed a narrow or constricted meaning. The expression 'in relation to' does not have any embedded object. It simply means 'in connection with' or 'pertaining to'. If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act.

• While the expression 'expenditure incurred' refers to actual expenditure and not to some imagined expenditure, it is to be made clear that the 'actual' expenditure that is in contemplation under section 14A(1) is the 'actual' expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A.

• The requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure.

• It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method.

• Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act.

• Investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A inasmuch as the dividend received on such shares does not form part of the total income.

The above ruling was relied upon by the Kolkata Bench of the ITAT in the case of Coal India [I.T.A No. 1032/Kol/2012 decided on 13-5-2015] the Tribunal agreed with the argument that the term ‘expenditure’ as per section 14A would include expenditures that are related to the investment made i.e. administration, capital expenditure, travelling expenses, operating expenses, etc. That such investment decisions are highly strategic in nature and are required to be made highly qualified and experienced professionals, require research and analysis, need to attend board meetings and make policy decisions. By no stretch of imagination it can be assumed that such activities are done without incurring any expenditure. The assessee in this case did not rebut these arguments.

The Delhi High Court in the case of Oriental Structural Engineers Pvt. Ltd. [ITA 605/2012 decided on 15-1-2013] rejected the department's appeal against the ruling Delhi Bench of the ITAT wherein it was held that investments made in subsidiaries due to commercial expediencies i.e. Special Purpose Vehicles had to be set-up in order to contracts from NHAI, in such cases it could not be said that the expenses / interest was incurred for earning exempt income.

In Manugraph India Ltd vs. DCIT (ITAT Mumbai) ITA No. 4761/Mum/2013 the Mumbai Bench of the ITAT directed the AO to reconsider the disallowance u/s. 14A by excluding the investment in the Growth mutual funds scheme and further to earmark and identify the item of expenditure debited by the assessee in the P&L Account which can be allocated in relation to earning the exempt income.

In ITO vs. Pioneer Radio Training Services Pvt. Ltd. (ITAT Delhi) I.T.A. No. 4448/Del/2013 decided on 19-02-2015 the Tribunal held that ‘The auditor's remuneration and legal & professional charges incurred for maintenance of statutory books and its audit etc. were required to be incurred irrespective of whether the Company had any income or not and hence, there was absolutely no basis for considering a part of such expenditure towards earning of exempt income’.

Justice Sam P. Bharucha vs. Additional Commissioner of Income-tax-11(3), Mumbai [2012] 25 taxmann.com 381 (Mum.)

• Section 14A has within its implicit notion of apportionment in the cases where the expenditure is incurred for the composite / indivisible activities in respect of which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14A has no application.

• In order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. A notional expenditure cannot be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income.

• If the expenditure is incurred with an aim to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee.

• It is not the case of the revenue that the assessee has used his official machinery and establishment for earning the exempt income. The Assessing Officer has not given any finding of fact that any of the expenditure that is incurred and claimed by the assessee is attributable for earning the exempt income. In other words, the Assessing Officer has not indicated that certain expenditure is not incurred for earning the professional income, but is incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee. In the absence of any such instance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied.

Similar view has been adopted in ITAT ruling in case of ACIT Cir 8(1), N Delhi vs. SIL Investments ITA No. 2431(Del.)2010 (AY 2006-07) dated 4-5-2012.

Gillette Group India (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle 12(1) [2012] 22 taxmann.com 61 (Delhi)

• The disallowance cannot exceed the expenditure actually claimed by the assessee.

The Delhi High Court in Joint Investments Pvt. Ltd. vs. CIT ITA 117/2015 decided on 25-02-2015 held that ‘By no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case’.

Similar view has been adopted by the Mumbai Bench of the ITAT in case of Daga Global Chemicals Pvt. Ltd. vs. ACIT (ITAT Mumbai) ITA No.5592/MUM/2012 decided on 01-01-2015.

CCI Ltd. vs. Joint Commissioner of Income-tax, Udupi Range [2012] 20 taxmann.com 196 (Kar.)

• When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income.

• Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions.

Cheminvest Ltd. vs. Commissioner of Income-tax-VI - [2015] 61 taxmann.com 118

• In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.

Rulings on similar lines include CIT vs. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Gujarat), Shivam Motors [2015] 55 taxmann.com 262 (All.) and the Bombay High Court in the case of CIT vs. Delite Enterprises. It is pertinent to note that CBDT in its Circular No. 5/2014 had clarified that ‘by the usage of the term ‘includible’ in the heading to section 14A of the Act and also in the heading to Rule 8D of the I.T. Rules, 1962 which indicates that it is not that exempt income should necessarily be included in a particular year’s income, for the disallowance to be triggered. Also, section 14A of the Act does not use the word ‘income of the year’ but the ‘income under the Act’. This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration’. Certain Tribunals, on the basis High Court rulings in case of CCI and Gillette had doubted the validity of the circular No. 5/2014.

Notwithstanding the fact that the Delhi High Court in Cheminvest’s case the aforesaid circular was not brought to the notice of the Court, a clear verdict on the issue has been delivered and it will prevail over the circular.

CIT vs. Popular Vehicles And Services Ltd. 325 ITR 523 (Ker.)

• The share income from the partnership firm which is the only consideration for advancing the loan to the firm does not constitute income of the respondent u/s. 10(2A) of the I.T. Act. Since the share income from the firm does not constitute the part of taxable income of the assessee, section 14A(1) applies which prohibits the deduction of any expenditure incurred in relation to income not includible in total income

In Dharmasingh M. Popat vs. Assistant Commissioner of Income-tax [2010] 127 TTJ 61(Mum) the ITAT held that section 14A is applicable in computing total income of assessee-partner in respect of his share in profits of firm.

CIT v. HDFC Bank Ltd. [2014] 366 ITR 505/226 Taxman 132/49 taxmann.com 335

• In the present case, undisputedly the assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the Assessee.

• In any event, the tax free investment in securities were the petitioner's stock-in-trade. Consequently, there would be no occasion to invoke section 14A of the Act as held by this Court in India Advantage Securities Ltd. (supra) wherein the Revenue's appeal from the order of the Tribunal was dismissed, to contend that no disallowance can be made under section 14A of the Act in respect of exempted Income arising from stock-in-trade.

In HDFC Bank Ltd. vs. Deputy Commissioner of Income-tax -2(3), Mumbai [2016] 67 taxmann.com 42 (Mumbai) the Bombay High Court reiterated the principle that where both interest free funds and interest bearing funds are available and the interest free funds are more than the investments made, the presumption is that the investment in the tax free securities would have been made out of the interest free funds available with the assessee. and added that once the issue is settled by the decision of this Court in HDFC Bank Ltd. (supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds. Consequently, there is no merit in the submission made on behalf of the revenue that the petitioner was not able to establish that the amounts invested in the interest free securities came out of interest free funds available with the petitioner. The Bombay High Court referring to the case of India Advantage also commented that ‘In fact when an appeal is not entertained then the order of the Tribunal holds the field and the co-ordinate benches of the Tribunal are obliged to follow the same unless there is some difference in the facts or law applicable and the difference in fact and/or law should be reflected in its order taking a different view’.

The Bombay High Court also observed ‘that decision of this Court in HDFC Bank Ltd. ([2014] 366 ITR 505/226 Taxman 132/49 taxmann.com 335) on the issue of no disallowance in case of availability of own funds and the presumption of use of own funds has also been accepted by the revenue inasmuch as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the revenue on the issue of invoking the principles laid down in Reliance Utilities & Power Ltd. (supra) in its application to section 14A’.

Similar view has been adopted in Commissioner of Income-tax, Ahmedabad –IV vs. Torrent Power Ltd. [2014] 44 taxmann.com 441 (Gujarat) and Commissioner of Income-tax, Bangalore v. Karnataka State Industrial & Infrastructure Development Corpn. Ltd [2016] 65 taxmann.com 295 (Karnataka).

A contrary view has been adopted in an earlier ruling of the Kolkatta High Court in the case of Dhanuka & Sons v. Commissioner of Income-tax, (Central)-1 [2011] 12 taxmann.com 227 (Cal.) wherein it was held that ‘It was for the assessee to show the source of acquisition of those shares by production of materials that those shares were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it was for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest was payable by the assessee for acquiring those old shares. In the absence of any such material placed by the assessee, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from exempt source.’

Pr. Commissioner of Income-tax, Delhi-2 vs. Bharti Overseas (P.) Ltd - [2015] 64 taxmann.com 340 (Delhi)

• The object behind section 14A(1) is to disallow only such expense which is relatable to tax exempt income and not expenditure in relation to any taxable income. This object behind section 14A has to be kept in view while examining Rule 8D(2)(ii). In any event a rule can neither go beyond or restrict the scope of the statutory provision to which it relates.

• Rule 8D(2) states that the expenditure in relation to income which is exempt shall be the aggregate of
  (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to 'allocate' some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets.

• It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8D(2)(ii) is concerned with only 'common interest expenditure' i.e., expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income.

HSBC Invest Direct (India) Ltd vs. DCIT (ITAT Mumbai) I.T.A. No. 3485/Mum/2012 & I.T.A. No. 3944/Mum/2012 decided on17-10-2014

• The sole premise of law, it needs to be appreciated, including that mandated per Rule 8D, is to arrive at as fair and just an estimation of the sum expended by the assessee in relation to income that is not subject to tax, as the facts and circumstances admit, without at the same time allowing it to degenerate into an arbitrary or subjective exercise. That being so, i.e., the legal position, the matter, it would be discerned, is primarily factual.

• Certain expenditure is excluded on the ground of it being divorced from the activity of making or managing investment in shares. The same is valid in principle inasmuch as only the expenditure having a bearing or relation to the tax exempt income could be subject to disallowance - wholly or partly, u/s. 14A.

• The method is premised on 10% of the total administrative cost (other than excluded costs), including the employee cost and depreciation, as being toward investment activity, i.e., of the organizational resources being focused or engaged in the said activity to the extent of 1/10 by volume/quantum. The same seems impressive, particularly considering that it generates a sum which is far in excess of the quantum of income arising for the year that is not subject to tax. The two, however, are not correlated, or at least linearly, i.e., the organisational input, which is being sought to be measured or assessed, and the organisational output.

• Income that does not form part of the total income, in the context of section 14A, could be both positive or negative, or even nil for that matter. Further, we would still have considered the assessee's case valid, were it able to demonstrate, through or with reference to its accounts, a basis in estimating the devotion of the organisational resources, i.e., to the investment activity, at 10%.

• The assessee's accounts are admittedly not maintained activity-wise. On what basis then, one may ask, does it arrive at the said estimation of 10%? Why not 20% (say), or even 5% for that matter. Rule 8D is statutorily prescribed (refer section 14A(2)) only to remove the estimation exercise from the realm of arbitrariness or any subjectivity.

• Arbitrariness at the end of the assessing authority cannot be substituted by that at the assessee’s end, which is equally proscribed by law. The assessee speaks of the bulk, nay, almost the whole of its investment being in shares in subsidiary companies, which it claims is for strategic reason/s and not for income generation.

• We have already noted that income on investment in shares is almost wholly extrinsic to the company’s internal processes. An investee-company may do good, yet not declare dividend, or declare it at a rate which is nowhere compatible with the investment therein, finding it better to retain resources, being confident to being applied to propel future growth of the company. In fact, it’s doing good is itself independent of the investment by the assessee therein, being dependent on a host of company-specific as well as external, i.e., industry or economy specific, factors. Similar is the case of gain (or loss) that may be realised on the sale of shares, its price being predominately market driven. A price, by definition, is the equilibrium of opposing factors of supply and demand.

• While one deems it fit to sell, the other, to the contrary, does to buy it at the same rate. That the investment is in shares of subsidiary companies, limits the management’s options even further in-as-much as it is obliged to hold on to those shares, incurring costs, even if the same do not qualify on the investment criterion. It may even have access to information that may not be in the public domain and, besides, to a ‘better’ information, i.e., both quantitatively and qualitatively, enabling better decision making. What value then its claim of the shares being in subsidiary companies? True, there is merit in the contention that the investment being in (or primarily so) shares in subsidiary companies, the administrative cost may be lower, i.e., than that would normally obtain in case of investment in non-related companies. But then the question is not as to whether it is lower (or not so) in relation to another situation/scenario, but of what that expenditure is, and whether the claim as made is supported by its accounts, or even on any other objective basis.

• Incurring of expenditure is, after all, a matter of fact. If it is not in the accounts, where the expenditure incurred is reflected, where it is? In fact, all these arguments/contentions are of little moment and get subsumed in the assessee's claim of 10% of its (relevant) organizational costs being dedicated to this activity. The claim, valid in principle, though would require being established as a fact before its acceptance, cannot be a matter of presumption. The presumption, if it all, that would hold, is in terms of Rule 8D, which can thus be said to be a statutory presumption.

In ACB INDIA LIMITED vs. ACIT (Delhi High Court) ITA 615/2014 decided on 24-03-2015 the Court observed that ‘The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. The value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT (Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity.’

Commissioner of Income-tax, Bangalore vs. Karnataka State Industrial & Infrastructure Development Corpn. Ltd [2016] 65 taxmann.com 295 (Karnataka)

• It is not specified by the Assessing Officer as to why 5 per cent was adopted and he has failed to justify that the same is appropriate estimation. As the disallowance was made on an ad hoc percentage without any basis or assigning any reason whatsoever, the disallowance was rightly set aside by the appellate authorities. As per the provisions of section 14A, the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income which does not form part of the total income, if he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It is settled principle of law that the Assessing Officer is required to record the non-satisfaction of the correctness of the claim. In the absence of such recording of non-satisfaction, the disallowance is untenable.

Income-tax Officer, Ward 12 (3), Kolkata vs. Snowtex Investment Ltd - [2015] 64 taxmann.com 157 (Kolkata - Trib.)

• Interest which is already disallowed u/s. 36(1)(iii) of the Act and again considering the same for section 14A disallowance would only result in double addition.

Assistant Commissioner of Income-tax - 19(3), Mumbai v. Pahilajrai Jaikishin -[2016] 66 taxmann.com 30 (Mumbai - Trib.)

• Interest paid by the assessee-firm to the partners on capital contribution is covered as an 'expenditure' as envisaged under section 36(1)(iii) and the assessee-firm has to firstly establish its claim of deduction of interest on capital by satisfying the provisions of section 36(1)(iii) and then, section 40(b) puts limitation on allowability of interest once it passes the requirements of provisions of section 36(1)(iii) and thus, interest paid to partners on capital contribution is not a statutory allowance under section 40(b) but is an expenditure under section 36(1)(iii). Thus, if this expenditure is incurred in relation to the income which does not form part of the total income under this Act as envisaged under section 14A, the same shall only be allowed as deduction only against the exempt income under section 14A or in other words, such interest expenditure on the partner capital shall be disallowed under section 14A.

**The key observations have been reproduced verbatim from the ruling itself. While these observations may serve as guiding principles, applicability to a case would need to be evaluated on the basis of current judicial position, specific facts and circumstances.