January 2019

APPLICABILITY OF SECTION 14A – RELEVANCE OF ‘DOMINANT PURPOSE’ OF ACQUISITION OF SHARES/ SECURITIES – PART - I

Kishor Karia
Chartered Accountant / Atul Jasani
Advocate

INTRODUCTION


1.1     The Finance Act, 2001 introduced the provisions of section 14A in Chapter IV of the Income Tax Act,1961[the Act] with retrospective effect from 1/4/1962 to provide restriction on deduction, while computing the Total Income under the Act, of any expenditure incurred in relation to income which does not form part of the Total Income [such income is hereinafter referred to as Exempt Income]. Effectively, the section provides for disallowance of expenditure incurred in relation to Exempt Income.

 

1.1.1   For the purpose of determining the quantum of disallowance u/s. 14A, the Finance Act, 2006 introduced section 14A (2)/(3) with effect from 1/4/2007. Section 14A (2) provides that the Assessing Officer [AO] shall determine the amount of expenditure incurred in relation to Exempt Income in accordance with the prescribed method, if the AO, having regards to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. section 14A (3) further provides that the provisions of section 14A (2) shall also apply in cases where the assessee has claimed that no such expenditure is incurred [i.e. such expenditure is NIL]. The method of determining such expenditure is prescribed under Rule 8D which was introduced with effect from 24/3/2008 and the same was subsequently amended with effect from 2/6/2016

 

1.2     In the context of the provisions of section 14A, large number of issues have come-up for debate such as: applicability of section 14A in cases where the shares [having potential of yielding Exempt Income] are acquired /retained not for the purpose of earning dividend income but for acquiring/retaining controlling interest; such shares are for trading purpose and held as ‘stock-in trade’ where the dividend is incidentally earned; whether section 14A can apply to cases where no Exempt Income [dividend] is earned during the relevant previous year; etc. The issues have also come-up with regard to quantification of amount of disallowance u/s. 14A under different circumstances; whether the amount of disallowance should be limited to the amount of Exempt Income earned during the year and also, whether for this purpose, the application of Rule 8D is mandatory in all c

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