New method for computation of Disallowance under section 14A read with Rule 8D The CBDT, vide Notification No. 1949(E), dated 2nd June 2016 has prescribed new method for computation of disallowance under section 14A of the Act read with Rule 8D. The existing sub-rule (2) and (3) of Rule 8D have been replaced by new sub-rule (2). The new sub rule (2) provides as under:
(a) The expenditure in relation to income which does not form part of the total income, shall be aggregate of: i. Expenditure directly related to exempt income, and ii. 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income.
(b) It has also been provided that the disallowance shall not exceed the total expenditure claimed by the assessee.
The new rule shall come into force on the date of its publication in the Official Gazette, i.e., on 2nd June 2016.
The Key Rule 8D has been subject to litigation since the time it was inserted in the Income-tax Rules, 1962. We hope that the amended Rule would reduce the litigation, especially in cases where the assessee has mixed funds (i.e., internal accruals as well as borrowed funds) & contends that the investment is made out of internal accruals but the tax authorities take a view that interest expenditure is indirectly attributable and accordingly, disallow proportionate expenditure. Restricting the disallowance to the total expenditure claimed by the assessee is a welcome step as the undue hardship, which was caused to the assessees whereby the amount of disallowance exceeded the total expenditure claimed by the assessee, shall be removed. However, no clarification has been provided in the notification w.r.t. the issue where the disallowance exceeded the exempt income or where no exempt income has been earned during the relevant year. In such cases the decision of various Courts wherein it has been held that where there is no exempt income there cannot be any disallowance under section 14A would continue to be applicable.
Sanjay Vasudeva Partner S.C. Vasudeva & Co. Chartered Accountants