Note on section 14A.

Section 14A read with rule 8D is the most trouble making section under Income tax act for Indian corporates.   However following the Daga Capital case laws number of judgments comes  where it has been held that in case tax payer is not having any exempted income during the year,  then their cannot be any dis-allowance under section 14A of the Income tax act, 1961 and the same was a relief to number of holding companies.  

However , after the introduction of circular no.  5/2014 dated February  11, 2014 where it has been clarified by the CBDT that earning of exempted income is no necessary for invoking section 14A the situation again become painful to the corporates.  For this, the remedy is that  

Circulars are just a clarification and not a law (as law means act passed by Government at parliament  and judgment of Supreme court) and the same is binding on tax department and not on tax payer. If tax payer wants to follow the circular he can opt for that but no-body can forcefully bind to him.   Please refer the link where you will get more details in this respect.

http://taxbymanish.blogspot.com/2014/07/challenging-indian-revenue-authorities.html

Hope that above will provide some relief to the taxpayer that they have still a ground to argue with tax department in respect of section 14A of the Income tax act, 1961.

Further, below we are providing few latest case laws judgments which has been passed very recently i.e after the above-mentioned circular and the decision is still in the favour of the tax payer.

SN	Summary of judgement	Reference	Citation	In favour of
1	In order to invoke rule 8D, the AO has to first record a finding that he was not satisfied with the correctness of the claim for expenditure made by the assessee in relation to income, which did not form part of the total income	CIT .v. Hero Management Service Ltd	360 ITR 68	Tax Payer
2	For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of law. (ITA No. 88 of 2014, dt. 12.11.2013.)	CIT .v. Shivam Motors (P.) Ltd	All HC	Tax Payer
3	Disallowance of expenditure-Exempt income -No disallowance u/s 14A & Rule 8D can be made if the assessee does not have tax-free income & no claim for exemption is made. [R.8D]  In the present case, the Tribunal has recorded the finding of fact that the assessee did not make any	CIT .v. Cortech Energy Pvt. Ltd	Guj HC	Tax Payer
4	From the reading of s. 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:- a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), s. 14A of the Act cannot be invoked.( ITA No. 970 of 2008.,dated 02.04.2014.	CIT .v. Lakhani Marketing		Tax Payer
5	The Tribunal held that whatever expenditure is found to be disallowed under section 14A, the same is to be added back while computing book profit under section 115JB.	Godrej Consumer Products Ltd. .v. Addl.CIT	159 TTJ 21	Tax Department
	The Tribunal restored the case to the file of the Assessing Officer with a direction to find out as to whether sufficient own funds / interest free funds were available with the assessee on the date of investment made for earning exempt income and if found so not to make any disallowance for interest cost under this head. As fas as managerial and administrative expenses are concerned Tribunal restricted to 1 lakh only and held that disallowance of Rs. 2,75,000/- is on higher side as there was no separate treasury department and only one employee that too on part time basis, was looking after investments.
6	No disallowance u/s. 14A can be made if the AO has not recorded his dissatisfaction as regards accounts of the assessee. U/r. 8D(2)(iii) the amount disallowable is equal to ½ percentage of the average value of investment, income from which does not/shall not form part of the total income and not the total investment at the beginning and end of the year.	REI Agro Ltd. .v. Dy. CIT	98 DTR339	Tax Payer
7	Disallowance of expenditure-Exempt income-Disallowance as per section 14A(2) is required to be made, even if assessee claims that it did not incur any expenditure in earning dividend income.	ACIT .v. Kerala State Industrial Development Corporation Ltd	29 ITR 45	Tax Department
8	The department has not disputed this fact that out of the total investment about 98% of the investments are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. Accordingly disallowance by the AO was deleted.	JM Finacial Ltd .v. ACIT	ITA No. 4521/Mum/2012 dt. 26.03.2014 , (AY. 2009-2010)	Tax payer
9	Income--Expenditure in relation to income not includible in taxable income--Dividend--Income utilised for investment--No fresh investment--Interest-free funds available with assessee in excess of investments--No addition can be made	Deputy CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd.	VOL 31 PG 668	Tax payer
10	S. 14A --Income--Computation of income--Disallowance of expenditure on earning non-taxable income--No evidence of expenditure to earn non-taxable income--Disallowance under section 14A not justified	CIT v. Torrent Power Ltd	363 ITR 474	Tax Payer
11	Income--Expenditure in relation to income not includible in taxable income--Dividend--Assessing Officer working out disallowance applying rule 8D(2)(iii)--Onus of proving not discharged by assessee--Disallowance confirmed	Dufon Laboratories P. Ltd. v. Deputy CIT	VOL 31 PG 410	Tax Department
12	Assessee received exempt dividend income but he did not claim any expenses to be attributable to earn said income. Assessing Officer invoked provisions of rule 8D and made disallowance at 0.5 per cent towards expenses other than interest. Since disallowance had been computed as per mandate of rule 8D,disallowance was sustainable.(	ITO .v. RBK Share Broking (P.) Ltd	60 SOT 61	Tax Department
13	Where claim of assessee that only Rs. 15000 was incurred for earning exempt income of Rs. 1.58 crores, was rejected by AO without recording any reason as to why same was not found satisfactory, excess disallowance was not justified	Shriram Properties (P.) Ltd. v ACIT	60 SOT 75	Tax Payer
14	Where Assessing Officer neither pointed out proximate connection of administrative or other expenses not apportioned by assessee for earning of exempt dividend income, nor recorded any satisfaction with regard to accounts of assessee that claim of expenditure incurred in relation was exempt income was incorrect, no disallowance could be made under section 14A, read with rule 8D, in excess of amount already disallowed by assesse	Sesa Goa Ltd. v. JCIT	60 SOT 121	Tax Payer
15	Since it was found that assessee had not used interest bearing borrowed funds for purpose of investment in equity shares as interest-free funds were available with assessee and since revenue could not establish that assessee had incurred any expenses for earning dividend income from amount borrowed, no addition could be made invoking provision of section 14A.	CIT .v. Gujarat Industrial Development Corporation Ltd	218 Taxman 142	Tax Payer
16	Since AO instead of proceeding to collect material or evidence to determine expenditure incurred by assessee, relied upon rule 8D, and applied it as a formula, disallowance was to be deleted when the assessee had claimed that he had not made any expenditure on earning dividend income	CIT .v. Deepak Mittal	219 Taxman 314	Tax payer

From the above recent case judgments, following can be concluded in a summarized way.

01.   No Impact of circular no. 5/2014

02.  In case there is a exempted income, compute the section 14A disallowance in most rational & scientific way and disclose the same in return of income.

Hope that above short note will able to provide relief from the tax department from section 14A application. In case you have any further clarification, feel free to contact me at taxbymanish@yahoo.com or else you can view more articles & news related to Indian tax & finance at http://taxbymanish.blogspot.in/.