Amendment restricting Sec 14A disallowance to the expenditure claimed by assessee 

1

Kolkata ITAT - [TS-6741-ITAT-2012(Kolkata)-O] 

Sec 14A disallowance not to exceed actual expenditure incurred

Disallowance u/s 14A read with Rule 8D not to exceed actual expenditure incurred in relation to exempt income; Sec 14A disallowance on interest expense not attracted since interest income exceeded interest expense

2

Delhi HC - [TS-92-HC-2015(DEL)-O] 

Reverses ITAT; Sec 14A disallowance cannot swallow entire tax exempt income!

HC reverses ITAT's order, deletes Sec 14A disallowance worked out by AO at about 110% of the entire tax exempt income; Remarks "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." ;Clarifies that the window u/s 14A, is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income"

 Apportionment of general interest pool 

3

Delhi HC - [TS-5587-HC-2015(DELHI)-O]

Upholds ITAT’s Rule 8D interpretation on ‘common’ interest expenses, acknowledges incongruity in formula

HC upholds ITAT order, no Sec 14A disallowance for interest expenditure under Rule 8D(2)(ii) (which provides methodology for allocating interest expenditure, not directly attributable to any particular income) absent common interest expenditure; Acknowledges that since intention of Rule 8D(2)(ii) is to allocate 'common interest expenses', not only interest directly attributable to tax exempt income, but also interest directly relatable to taxable income, to be excluded from variable 'A' in formula; Rejects Revenue's stand that ITAT cannot read down Rule 8D(2)(ii) on its own, clarifies that "What the ITAT has done in the present case instead is to follow its earlier decision in Champion Commercial (supra) ...ITAT did not on its own read down rule 8D (2) (ii)."; As entire interest expenditure was incurred for earning either taxable income or exempt income, HC concurs with ITAT that "no portion of interest really survives for allocation under Rule 8D(2)(ii)" 

4

Mumbai ITAT - [TS-5344-ITAT-2015(MUMBAI)-O] 

Confirms Sec 14A disallowance for bank; Rejects sufficient “own-funds” plea

ITAT confirms Sec 14A disallowance with respect to interest expense for AY 2008-09, rejects assessee's contention that it had sufficient balance in the current deposit account/s (on which no interest is suffered) which must be considered as applied toward tax-free investments; Clarifies that "to attribute a particular liability or a class of liabilities, &against a particular segment of assets, both accumulated over the years in the course of its business, would be incorrect"; As no case for financing by any dedicated source stands made out, holds that the investment in securities were made out of common pool of fund, further rejects assessee's stand that since tax-free investments were held as stock in trade, it would not attract Sec 14A disallowance; Extensively relies on Bombay HC ruling in Godrej & Boyce Mfg. Co. Ltd., distinguishes assessee's reliance on Bombay HC rulings in Reliance Utilities & HDFC Bank Ltd , India Advantage Securities Ltd. ruling 

5

Cochin ITAT - [TS-6245-ITAT-2014(COCHIN)-O] 

Kolkata ITAT - [TS-6669-ITAT-2012(KOLKATA)-O] 

Only "common" interest expenses allocable u/r 8D, excluding directly relatable to taxable income

ITAT interprets Rule 8D(2)(ii) which seeks to allocate interest expenditure, not directly attributable to any income, for purpose of Sec 14A disallowance; Holds variable 'A' in formula prescribed under Rule 8D(2)(ii) incongruous, as it does not exclude interest expenditure directly related to taxable income, while specifically excluding interest directly related to exempt income; Therefore, formula ends up allocating interest, directly attributable to taxable income, to exempt income; Since intention of Rule 8D(2)(ii) is to allocate 'common interest expenses', not only interest directly attributable to tax exempt income, but also interest directly relatable to taxable income, to be excluded from variable 'A' in formula; Only net current assets and not gross current assets to be considered for determining 'total assets' while working out disallowance under Rule 8D 

6

Gujarat HC - [TS-5305-HC-2014(GUJARAT)-O] 

No Sec 14A on interest expense; Dividend earned from investments in earlier years

Sec 14A disallowance not applicable on interest expense, as investments yielding dividend income made in earlier years; No new investments made during relevant year; AO did not apply law correctly, since assessee had huge interest free funds (equity, reserves, etc) which are greater than total investments; Relies on ratio of Gujarat State Fertilizers & Chemicals Ltd ruling

7

Bangalore ITAT - [TS-6590-ITAT-2014(BANGALORE)-O] 

Rule 8D doesn’t allow for netting of interest, upholds AO’s Rule 8D(2)(ii) application on gross-interest

ITAT rules that application of Rule 8D does not allow for netting of any interest income with interest expenditure; Holds that if netting of interest income is allowed, it would be equivalent to adding something which is not there in the Rule book, accordingly impermissible; Thus, upholds AO's application of Rule 8D(2)(ii) read with Sec. 14A on gross interest, though AO did not consider interest receipts on Fixed Deposits as 'income from other sources'; Holds treatment of interest by AO would not change the nature of transaction or character of receipts 

8

Bangalore ITAT - [TS-5478-ITAT-2015(BANGALORE)-O] 

Sufficient reserves & loan funds trail exonerates Sec 14A disallowance on interest expense

ITAT upholds CIT(A)'s order, deletes 'interest expenditure' disallowance u/s 14A read with Rule 8D(ii) [which provides for apportionment of expenditure, not directly attributable to any particular income]; Notes that assessee had sufficient reserves/surplus for making investment in tax free securities and moreover loans outstanding were taken for specified business projects, much before investment in tax-free investments; Further notes CIT(A) clearly brought out that 'interest expenditure' was not relatable, either directly or indirectly, to exempt income earned by assessee resulting in no nexus between borrowed funds and tax-free investment; Additionally, as AO failed to demonstrate that interest was "not directly attributable" to any particular income or receipt, holds Rule 8D(ii) not triggered in respect of 'interest expenditure'; However, noting trite that management of investments requires expertise, upholds Sec 14A disallowance for indirect expenditure worked out @ 0.5%of average value of investments as per Rule 8D

12

Kolkata ITAT - [TS-6831-ITAT-2013(KOLKATA)-O] 

Investments not yielding exempt income excluded under Rule 8D, 14A disallowance not attracted

Allows relief from disallowance of expenses u/s 14A; Average value of investment to compute disallowance under Rule 8D restricted to investments generating exempt income only; New investment in shares made during the year, which did not generate any exempt dividend income, out of Rule 8D calculation; Average of opening and closing investment value is to deal with cases of dividend striping; AO must record satisfaction having regard to accounts before invoking Sec 14A disallowance 

13

Kolkata ITAT - [TS-6932-ITAT-2013(KOLKATA)-O] 

Confirms Sec 14A disallowance on shares though Rule 8D inapplicable

Disallowance of indirect expenses under Rule 8D(ii) & (iii) not applicable to shares held as stock in trade, absent "investment" earning tax free income; Rule 8D(2)(i) covering direct expenses applicable to shares held as stock in trade, but held as inapplicable by CIT(A); Despite inapplicability of rule 8D, Sec 14A disallowance for indirect expenses upheld on ad-hoc basis; Rule 8 D(2)(i) much narrower in scope than Sec 14A but disallowance u/s 14A would prevail; SB ruling in Daga Capital and Bombay HC ruling in Godrej & Boyce relied upon 

14

Mumbai ITAT - [TS-14-ITAT-2013(MUM)-O] 

“Share application money” incapable of yielding income, Sec 14A disallowance not warranted

Disallowance u/s 14A read with Rule 8D to be computed without considering share application money as part of "average investment"; Such share application money incapable of earning any income, let alone tax-free income

15

Kolkata ITAT - [TS-5616-ITAT-2015(KOLKATA)-O] 

Average investments under Rule 8D includes loan converted into preference shares

Kolkata ITAT rules that investment in preference shares by assessee (a PSU) pursuant to directions issued by State Govt. be considered for determining average value of investments under Rule 8D(2)(iii), further rules that disallowance u/s 14A be restricted to exempt income earned by the assessee for AY 2008-09; Rule 8D(2)(iii) of IT Rules provides that an amount equal to one-half per cent of average value of investment shall be regarded as expenditure in relation to exempt income for computing 14A disallowance; Dismisses assessee’s plea that since outstanding loan was converted into preference share consequent to State Govt.’s directions, such preference shares should not be considered for determining average value of investments under Rule 8D(2)(iii); Distinguishes assessee’s reliance on Winsome Textile Industries Ltd.(P&H HC), Corrtech Energy (P) Ltd.(Guj HC), Shivam Motors Pvt. Ltd. (All. HC), Delite Enterprise (Bom HC), Holcim India Pvt. Ltd. (Del HC) and Alliance Infrastructure Projects Pvt. Ltd. (Bang ITAT).