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Disallowance under Section 14A cannot exceed the tax exempt income
13 March 2015
Background
Recently, the Delhi High Court in the case of Joint
1
Investments Pvt Ltd (the taxpayer) held that
disallowance under Section 14A of the Income-tax Act,
1961 (the Act) cannot exceed the tax exempt income.
The High Court held that Section 14A or Rule 8D of the
Income-tax Rules, 1962 (the Rules) cannot 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 of the Act, and
is only to the extent of disallowing expenditure ‘incurred
by the assessee in relation to the tax exempt income’.
Facts of the case

The taxpayer is engaged in diverse investment
activities and in the course of its business derives
income from rent, sale of investments, dividend
and interest.

During the Assessment Year (AY) 2009-10, it
reported a loss of INR5.26 million. It had declared
tax exempt income in the form of dividend to the
tune of INR4.89 million.
______________
1
Joint Investments Pvt Ltd. v. CIT (ITA No. 117/2015) –Taxsutra.com

The taxpayer voluntarily offered INR 2,97,440
under Section 14A of the Act for the purpose of
disallowance. However, the Assessing Officer
(AO) disallowed INR5.26 million under Section 14A
read with Rule 8D of the Rules. The taxpayer
claimed that the entire tax exempt income was
lower than the disallowance made by the AO.

The Commissioner of Income-tax (Appeals)
[CIT(A)] and Income-tax Appellate Tribunal (the
Tribunal) confirmed the order of the AO.
High Court’s ruling

The AO had not disclosed why the taxpayer’s claim
for attributing INR2,97,440 as a disallowance under
Section 14A of the Act was to be rejected.

The Delhi High Court in the case of Taikisha
2
Engineering held that computation or disallowance
of the taxpayer or claim that no expenditure was
incurred for earning exempt income should be
examined with reference to the accounts and only
if the taxpayer’s explanation is unsatisfactory, the
AO can proceed further.
____________
2
CIT v. Taikisha Engineering India Ltd. [2015] 229 Taxman 143 (Delhi)
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

In the present case, the accounts of the taxpayer had
not been scrutinised by the AO. The same aspect was
not noticed by the CIT(A) and the Tribunal. Further, the
tax exempt income was of INR4.89 million. However,
the disallowance worked out by the AO was of 110 per
cent of that sum, i.e., INR5.26 million.

Section 14A or Rule 8D cannot 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 of the Act, and is only to the extent of
disallowing expenditure ‘incurred by the assessee in
relation to the tax exempt income’. Accordingly, the tax
exempt income cannot be disallowed entirely.
Our comments
Disallowance under Section 14A of the Act has been a
subject matter of dispute for a long time.
The Mumbai Tribunal in the case of Daga Global Chemicals
3
Pvt. Ltd had held that disallowance under Section 14A
read with Rule 8D of the Rules cannot exceed the exempt
income. If any disallowance could be made, that is to be
restricted to expenditure with respect to exempt income.
The Delhi High Court in the present case has held that
Section 14A or Rule 8D of the Rules cannot be interpreted
so as to mean that the entire tax exempt income is to be
disallowed. The disallowance under Section 14A of the Act
is to be restricted to the tax exempt income.
In the present case, the accounts of the taxpayer had not
been scrutinised by the AO. The same aspect was not
noticed by the CIT(A) and the Tribunal. The Delhi High
4
Court in the case of Maxopp Investment Ltd observed that
the AO has to first reject the claim of the taxpayer with
regard to the extent of expenditure by considering the
accounts of the taxpayer, and such rejection must be for
disclosed cogent reasons. It is only then the question of
determination of disallowance of expenditure under Section
14A would arise.
This is a welcome decision which provides clarity for
computing disallowance under Section 14A of the Act read
with Rule 8D of the Rules.
_______________________
3
4
Daga Global Chemicals Pvt. Ltd v. ACIT (ITA No.5592/MUM/2012) (Mum)
Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Del)
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
©
2015 KPMG,
an Indian
Registered aPartnership
and
member
firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative
(“KPMG
International”),
Swiss entity.
Alla rights
reserved.
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