Section 14A of the Income Tax Act is one of the most abused law of land . The abuse of the law is more from revenue side than assessee. In fact, the Tax Simplification Committee constituted by the government mentioned in its report
“There has been a spate of litigation on the application of the section. The Committee is informed that around 15% of the tax litigation is attributed to the determination of expenditure relating to exempt income. The Committee therefore felt that there is an urgent need to clarify and simplify some of the provisions of the section and the rule.”
Sri Arun Jately, Hon’ble Finance Minister included in his Budget Speech his commitment to change the Rule 8D by saying as under :
167. Another issue which has led to considerable number of disputes is quantification of disallowance of expenditure relatable to exempt income in terms of Section 14A of the Income Tax Act. I propose to rationalize the formula in Rule 8D governing such quantification. The said Rule is being amended to provide that disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed.
Rule 8D Amended & Notified !
CBDT has issued NOTIFICATION NO. SO 1949(E) [F.NO.370142/7/2016-TPL], DATED 2-6-2016 by which the Rule 8D has been changed. First read the new rule
In exercise of the powers conferred by section 295 read with sub-section (2) of section 14A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules may be called the Income–tax (14th Amendment) Rules, 2016.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. In the Income-tax Rules 1962, in rule 8D,—
|for sub-rule (2), the following sub-rule shall be substituted, namely:—
|“(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:—
|the amount of expenditure directly relating to income which does not form part of total income; and
|an amount equal to one per cent 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:
|Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.”;
|sub-rule (3) shall be omitted.
Changed in Rule 8D That Are Good for many ?
It is clear from the new Rule 8D , now the Assessing Officer can not
( i) Disallow more than the expenditure claimed .
(ii) No more calculation of portion of interest that is deemed to be applied for earning exempt income.
Thus , this will seriously affect positively to a large number of tax payers.
Bad Change in New Rule 8D
I think the revenue loss ( although litigation is involved) scared the revenue official. So, the 1/2 % of average of investment clause earlier in Rule 8D(2)(iii) has been changed to higher portion i.e 1 % .
Moreover the calculation of the amount of average investments that may give rise to exempt income has also been changed . Previously it was the investment value as on ist of April and 31st march ( opening and closing ) . But now , the 1 % is calculated by taking monthly average of opening and closing of months ! The annual average is computed that way. How does that matter ?
Simple, previously if the 1st and last day data of investments was low or nil, the computation of the dis-allowance was less because 1/2 % of the investments on only first day and last day was required to be taken.
But now the monthly data of investments will create huge numbers in many cases , even if the first and last date investment figure is less.
In my opinion , the litigation on section 14A will reduce , but not considerably ! Anyway there issues like invoking the provision of section 14A even when there is no exempt income , has not been solved by the government despite Courts and Tribunals have held section 14A not applicable in case no exempt income was received.