S. 14A has within it implicit notion of apportionment in cases where expenditure is incurred for composite/indivisible activities in which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to exempt income or when no expenditure has been incurred in relation to exempt income, then the principle of apportionment embedded in s. 14 A has no application. For s. 14A to apply, there should be a proximate relationship between the expenditure and the tax-free income. If the assessee claims that no expenditure has been incurred for earning the exempt income, it is for the AO to determine as to whether the assessee had incurred any expenditure in relation to the tax-free income and, if so, to quantify the extent of disallowance. In order to disallow the expenditure u/s 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the tax-free income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made u/s 14A merely because some tax exempt income is received by the assessee. On facts, from the details of the expenditure, it is clear that the expenditure incurred by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and establishment for earning the exempt income. The AO has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. Consequently, s. 14A disallowance is not permissible (Pawan Kumar Parmeshwarlal (ITAT Mumbai) & Auchtel Products (ITAT Mumbai) followed)

Whether s. 43B & s. 14A disallowance can be made under Article 7(3) of the India-Mauritius DTAA The Tribunal had to consider two issues: Whether in view of Article 7(3) of the India-Mauritius DTAA, a disallowance u/s 43B and s. …

State Bank of Mauritius Limited vs. DDIT (ITAT Mumbai) Read More »

The assessee’s act of getting its’ wholly owned subsidiary (‘WOS’) to distribute tax-free dividend, and thereby reduce the FMV of the shares of the WOS, just prior to the sale of those shares, did result in a tax advantage to the assessee because it paid lower tax on capital gains. However, the transaction of dividend distribution by the WOS cannot be regarded as a "colourable device" or as an "impermissible tax avoidance scheme". A transaction can be regarded as a "sham" where "the document is not bona fide nor intended to be acted upon, but is only used as a cloak to conceal a different transaction" or where "it is intended to give to third parties the appearance of creating between the parties legal rights and obligations which are different from the actual legal rights and obligations which the parties intend to create". On facts, the transaction cannot be regarded as a "sham" or a "colourable device" because (a) the WOS had sufficient reserves and cash surplus for the distribution of dividend & (b) the WOS paid dividend distribution tax which was duly accepted in its assessment

The FAR analysis gives the basis of broad characterization for e.g. Manufacturer, Service Provider, Distributor, etc with a further sub-characterization including low-risk service provider, high risk service provider; Full-Fledged manufacturer, contract manufacturer, etc. These characterizations are vitally important to determine the arm’s length price of international transactions