Few Points on Section 14A disallowance.

Ø  Even if rule 8D isn’t applicable, AO can still disallow proportionate exp. under sec. 14A   

Ø   Expenses Incurred for earning those Income which is exempted under any provision of Income Tax Act. Under Income Tax Act those expenses are allowed to deduct from Income from them Taxable Income Earned otherwise no deduction is allowed from Income. If assesse considered those expenses which are incurred on earning exempted Income then assessing officer have right to add back those expenses. These expenses are disallowable under Sec 14A of Income Tax Act. Under Sec 14A only those expenses are disallowed which are directly related to the exempted Income, Indirect expenses are not disallowed under this section.

Ø  As per circular no 5/2014 dated 11-2-14 section 14A is applicable even though no exempt income has been earned during the year. -  Since this circular is very new which overrides all favorable judgments, more clarity will come in future.

Ø  Is Section 14A applicable on stock in trade- The controversy was first dealt with by the Special Bench in Daga Capital 117 ITD 169 (Mum)(SB). Thereafter, despite the High Court verdicts in CCI Ltd 71 DTR (Kar) 141 & Leena Ramachandran 339 ITR 296 (Ker) holding that s. 14A does not apply to stock-in-trade, some Division Benches have held that s. 14A applies to stock in trade (Damani Estates & American Express Bank) while others have held to the contrary (Yatish Trading, India Advantage, Gulshan Investments & Esquire Pvt. Ltd). It would be appropriate if the controversy is now referred to a 5 Member Special Bench instead of to a Third Member  

Ø  In addition to dividend income from shares or units of mutual funds, income referred to by section 14A includes agricultural income, income from tax-free bonds and also share of profits earned by a partner of a firm. Expenditure incurred in relation to such income is not allowed as a deduction in the hands of the taxpayer. 

Ø  Where primary object of investment is holding controlling stake in a group concern and the taxpayer has prima facie brought out a case that no expenditure has been incurred for earning the exempt income provisions of Section 14A cannot be applied : Mumbai ITAT  : Garware Wall Ropes Limited v. Addl. CIT in ITA No. 5408/Mum/2012

Ø  Expenses disallowed under sec. 14A to be added back for computation of book profit under sec. 115JB: RBK Share Broking (P.) Ltd: IT APPEAL NOS. 6678 & 7546 (MUM.) OF 2011 [ASSESSMENT YEAR 2008-09]  

Ø  The Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 has held that the disallowance u/s 14A is required to be made as per Rule 8D in relation to the assessment year 2008-09 and subsequent years