Unreported :
46 Disallowance of
expenditure : S. 14A of Income-tax Act, 1961 : Ss.(2) and Ss.(3) of S. 14A are
constitutionally valid : They apply w.e.f. A.Y. 2007-08 : Rule 8D is not
ultra vires
S. 14A : It applies w.e.f. A.Y. 2008-09.
[Godrej & Boyce v. DCIT (Bom.),
WP No. 758 of 2010 dated 12-8-2010]
In the writ petition
challenging the validity of S. 14A and Rule 8D, the Bombay High Court has held
as under :
“(i) S. 14A supersedes
the principle of law that in the case of a composite business, expenditure
incurred towards tax-free income could not be disallowed and incorporates an
implicit theory of apportionment of expenditure between taxable and
non-taxable income. Once a proximate cause for disallowance is established,
which is the relationship of the expenditure with income which does not form
part of the total income, a disallowance u/s.14A has to be effected.
(ii) The test which has
been enunciated in Walfort for attracting the provisions of S. 14A is that
“there has to be a proximate cause for disallowance which is its
relationship with the tax exempt income”. Once the test of proximate cause,
based on the relationship of the expenditure with tax exempt income is
established, a disallowance would have to be effected u/s.14A.
(iii) The provisions of
Ss.(2) and Ss.(3) of S. 14A are constitutionally valid. Ss.(2) and Ss.(3) of
S. 14A are not retrospective. They apply w.e.f. 1-4-2007 i.e., from
A.Y. 2007-08.
(iv) In the affidavit in
reply that has been filed on behalf of the Revenue an explanation has been
provided for the rationale underlying Rule 8D. In the written submissions
which have been filed by the Additional Solicitor General it has been
stated, with reference to Rule 8D(2)(ii) that since funds are fungible, it
would be difficult to allocate the actual quantum of borrowed funds that
have been used for making tax-free investments. It is only the interest on
borrowed funds that would be apportioned and the amount of expenditure by
way of interest that will be taken (as ‘A’ in the formula) will exclude any
expenditure by way of interest which is directly attributable to any
particular income or receipt (for example, any aspect of the assessee’s
business such as plant/machinery, etc.).
(v) Rule 8D is not
ultra vires the provisions of S. 14A. The Assessing Officer cannot
ipso facto apply Rule 8D, but can do so only where he records
satisfaction on an objective basis that the assessee is unable to establish
the correctness of its claim.
(vi) Rule 8D is
prospective and applies w.e.f. A.Y. 2008-09. For prior years the Assessing
Officer has to enforce the provisions of S. 14A(1).
(vii) U/s.14A(1), it is
for the Assessing Officer to determine as to whether the assessee had
incurred any expenditure in relation to the earning of income which does not
form part of the total income. The Assessing Officer would have to arrive at
his determination after providing an opportunity to the assessee to furnish
its accounts and to place on record all relevant material in support of the
circumstances which are considered to be relevant and germane.
(viii) The argument that
dividend on shares/units is not tax-free in view of the dividend
distribution tax paid by the payer u/s.115-O is not acceptable, because such
tax is not paid on behalf of the shareholder, but is paid in
respect of the payer’s own liability.”