CA Jyoti Gupta has considered the question whether disallowance u/s 14A can be made in a case where exempt income is earned from stock-in-trade and strategic investments in the context of the recent judgement of the Supreme Court in Maxopp Investment Ltd vs. CIT 91 taxmann.com 154 (SC)
As could be discerned from the heading itself, vide this article we would be discussing the provisions of Sec.14A of the Income-tax Act. The matter for discussion, is the recent decision of Hon’ble Supreme Court in case of Maxopp Investment Ltd vs. CIT [2018] 91 taxmann.com 154 (SC).
The heading of Sec.14A, reads ‘Expenditure incurred in relation to income not includible in total income’.
Now the question which arises for consideration is, whether the provisions of Sec.14A would apply in cases where exempt income is earned or in cases where there are some expenses incurred for earning the exempt income.
The question, is quiet typical one, that is, Sec.14A would come into force, when there are actually some efforts made to earn exempt income, since in many circumstances, the income earned could be a passive income which is incidental to active income and absolutely no efforts are made to earn such income. Whether is such circumstances also, disallowance u/s 14A is to be made. The Hon’ble court has made a detailed discussion on this issue, considering various case laws relating to same.
Here court has interpreted the words ‘in relation to’ used in Sec. 14A of the Act and held that in this context ‘what is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income’.
Various High Courts have initially decided that, mere receipt of exempt income, incidental to holding of shares would not be sufficient for invoking the provisions of Sec.14A of the Act. In various decisions of High Courts and Tribunals, it was held that, dividend income earned on shares held as stock-in-trade or strategic investments amounts to an incidental income, which is earned without making any efforts and is a passive income. Accordingly, when no efforts are made to earn the same, no question arises of disallowance of expenses relatable to such exempt income.
However, the Apex Court, have specifically stated that the triggering point of Sec.14A, is the exempt income and the Law has provided a formula for making disallowance. Therefore, whenever there is exempt income earned, be it on Stock-in-trade or strategic investments, provisions of Sec.14A would come into force.
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Last para , what is reference of para in S. C . Order ? At the most this proposition may apply to stock in trade , as in the absence of exempt income . Whole expenditure is business expenditure . In case of strategic investment interest on loan for investment. Will be direct expenditure allocable for share purchases not business exp . For raising loan and purchasing shares administrative exp can not be denied .
For MORE > see posts @http://itatonline.org/archives/maxopp-investment-ltd-vs-cit-supreme-court-s-14a-rule-8d-applicability-to-shares-held-for-controlling-interest-or-as-stock-in-trade-the-argument-that-s-14a-rule-8d-will-not-apply-if-the-domi/
One can still argue that there are no expenses incurred and therefore one does not enter rule 8D and thus no disallaowance
Now questions arise:
1. In case there is no exempt income than no disallowance can be made though there may be huge investment and expenses incurred and directly attributable to Investment.
2. The disallowance if made should be restricted to Exempted Income.
Not worth reading.
I would disagree with this. The theory of apportionment in para 39 of the decision is probably not the conclusive one. As the decision is to be read in its entirety, the Hon’ble Court in para 40 categorically and without mincing with any words provides that the situation of State Bank of Patiala is different from Maxopp. Dividend earned is infact a quirk of fate. Ultimately, the Appeal of the Department is dismissed. It is this ratio of the Court which appears to be the correct one.