Section 14A & Rule 8D: Analysis Of Recent Important Judgements

CAs Ketan Ved and Rubal Arora have systematically tabulated the recent important decisions on the various contentious issues arising under section 14A and Rule 8D. The key takeaways from the judgements are given. The analysis will prove invaluable as a ready reckoner on the subject

Section 14A of the Income-tax Act, 1961 [Act] was introduced by the Finance Act, 2001 with retrospective effect from 01 April 1962, to provide for disallowance of expenditure incurred / deemed to have been incurred in relation to income not chargeable to tax.

Rule 8D of the Income-tax Rules, 1962 was introduced to provide a reasonable basis to compute the amount of disallowance (of the expense which may have been incurred on earning such exempt income). This Rule 8D was amended on 02 June 2016 to provide for a revised method for determining the amount of disallowance of expenditure on earning exempt income.

Over the years, interpretation of the said section 14A of the Act and the mechanics of its operation has thrown up various controversies and it has been a section, which, so to say, owns a substantial portion of tax litigation in today’s time. Major issues arising vis-à-vis section 14A litigation are:

1. Recording of satisfaction as a pre-requisite for making the disallowance;

2. Disallowance of interest – Owned funds v/s Borrowed funds;

3. Disallowance in the absence of any exempt income / in excess of exempt income / in excess of expenditure claimed;

4. Applicability to investments capable of yielding taxable income / shares held as stock-in-trade / investments made in group companies / investments made due to commercial expediency;

5. Applicability to share application money;

6. Applicability to dividend on shares received pursuant to amalgamation / merger, etc;

7. Applicability while computing book profits under section 115JB of the Act;

8. Disallowance of a sum lower than that worked out in terms of Rule 8D.

Various High Courts and Benches of the Income-tax Appellate Tribunal [ITAT] have on numerous occasions given decisions, which, have, at least for some time, resolved a few aspects of the matter. There have been occasions where different benches of the ITAT have taken different views on a particular issue or two High Courts have taken divergent views. This has led to creation of Special Benches at the ITAT and / or also made taxpayers await the final word on the subject by the Supreme Court.

Hence, it becomes imperative to update oneself with the currently prevailing view / decision on the various aspects of section 14A / Rule 8D litigation.

Tabulated hereunder are a few recent decisions on the subject and the ratios laid down therein – key takeaways from the decisions are also given in the table:

Sr. No.

Name of the decision and citation where reported

Issue under consideration

Direction / decision of the Court


PCIT v/s. Sintex Industries [2018] 93 24 (SC)

Disallowance of interest expenses under section 14A – Owned Funds v/s. Borrowed Funds

Whether interest can be disallowed under section 14A in cases where the assessee is unable to justify one-to-one use of borrowed funds for business purposes but has sufficient Owned Funds (viz., share capital and free reserves).  

The Supreme Court in the said decision has ruled in favour of the assessee by holding that where assessee had surplus funds against which minor investment was made, no question of making any disallowance of expenditure under section 14A of the Act arose and therefore, there was no question of any estimation of expenditure under Rule 8D of the Income-tax Rules, 1962.



While the Bombay High in the case of HDFC Bank Ltd. [2016] 67 42 (Bombay) and Reliance Utilities & Power Ltd. [2009] 178 Taxman 135 (Bombay) has laid down a broad proposition on the issue, the Apex Court has decided the issue in specific fact set i.e. the investments were minor (quantum of investment was less compared to the funds available). Hence, one will have to examine this issue on a case to case basis and blanket use of the Supreme Court decision may not be completely correct.






Maxopp Investment Ltd.v/s. CIT [2018] 91 154 (SUPREME COURT)

Applicability of section 14A  to shares held to gain controlling interest / in group companies / as stock-in-trade

The Supreme Court has held that while determining the disallowance, the dominant purpose or the intention while making the purchase of such investment is not relevant.

If an income is considered exempt, expenses incurred for earning such dividend income have to appropriately apportioned and disallowed.

The Supreme Court has also held that when the shares are held as stock-in-trade, dividend income is earned, which is exempt under section 10(34) of the Act. The same also triggers applicability of Section 14A of the Act and the depending upon the facts of each case, expenses have to be apportioned between taxable and non-taxable income.



In light of this unequivocal view of the Supreme Court, arguments made to justify the business needs for making the investment to avoid disallowance under section 14A is no longer available and one will have to fall back / explore other arguments depending on the facts of its case.






CIT v/s. Essar Teleholdings Ltd.  [2018] 90 2 (SC)

Operation of Rule 8D – whether prospective or retrospective?

Held that Rule 8D was intended to operate prospectively and cannot be applied for AYs prior to AY 2008-09. While reaching its conclusion, the Supreme Court has applied:

  • the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute,
  • the nature and purpose of section 14A(2) and section 14A(3) of the Act,


  • the purpose and intent of Rule 8D of the Income-tax Rules, 1962;
  • the explanatory notes in the Finance Bill, 2006;


  • the departmental understanding as reflected by Circular dated 28 December, 2006.



This decision merely settles the issue since more or less there was a unanimous view that the provisions of Rule 8D cannot be applied retrospectively and the appellate authorities have directed the tax department to re-work the disallowance based on a reasonable basis.






Godrej & Boyce Manufacturing Company Ltd. v/s. DCIT [2017] 81 111 (SC)

Applicability of disallowance under section 14A in the case of dividend income on which tax is payable under section 115-O

The Supreme Court ruled in favour of Revenue and held that section 14A of the Act would apply to dividend income on which tax is payable under section 115-O since the liability to pay tax under section 115-O in respect of the dividend is on the dividend paying company and the shareholder / assessee has no connection with the same.



What is necessary for invoking the disallowance is the exemption of dividend income in the hands of the shareholder.




PCIT v/s. Adani Agro (P.) Ltd
[2018] 91 29 (Gujarat)

Can the disallowance under section 14A r.w. Rule 8D be in excess of total administrative expenditure claimed

Gujarat High Court has held that under no circumstances an Assessing Officer can attribute expenses for earning tax free income in excess of total administrative expenditure incurred by assessee.



This will help in avoiding mechanical disallowance by the application of the Rule 8D.



PCIT v/s. Reliance Capital Asset Management Ltd.  [2017] 86 200 (Bombay)


Recording of satisfaction as a pre-requisite for invoking disallowance under section 14A

The Bombay High Court held that where, Assessing Officer had not commented upon correctness or otherwise of assessee’s working of expenditure in respect of income not chargeable to tax, the formula prescribed in Rule 8D(2)(iii)  of the Income-tax Rules, 1962 could not have been applied to work out disallowance under section 14A of the Act.



While the decision does shift the onus on the Assessing Officer, however, this can be applied only in cases where the tax payer has arrived at an amount to be disallowed or claimed that no disallowance is required and the tax payer is able to justify its basis.



ACIT v/s. Vireet Investment (P.) Ltd.  [2017] 82 415 (Delhi – Trib.) (SB)

Applicability of 14A only on investments capable of yielding taxable income

Applicability of 14A while computing book profits under section 115JB

The Special Bench held that disallowance under Rule 8D2(iii) of the Rules shall be computed only on those investments which yielded tax free income during the year.

The Special Bench has held that disallowance computed under section 14A read with Rule 8D could not be imported for purpose of computing book profits u/s 115JB.



This may lead to re-working of section 14A disallowance different for computing income under the normal provisions of the Act and the “book profits” for section 115JB of the Act.

Also, the value of investments to be considered for applying the Rule 8D formula needs to be seen in light of the Special Bench decision.

As can be seen from the above, decisions on the issue are varied and are on either sides. Taxpayer(s) might have taken a particular line of argument in proceedings before lower authorities, which argument may not be available/ beneficial in light of the subsequent decisions. Hence it is imperative that all possible arguments are taken right from the beginning of the case.

To conclude, despite a plethora of judicial precedents attempting to clear the air on the controversial issues associated with section 14A of the Act, it cannot be said that there is complete clarity on the application of the said section, and the days to come will witness a few more such landmark cases on the subject.

Ketan Ved is Partner, and Rubal Arora is, Assistant Manager, Deloitte Haskins and Sells LLP
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of
2 comments on “Section 14A & Rule 8D: Analysis Of Recent Important Judgements
  1. vswami says:

    Just posted comment has disappeared, instantly, in thin air ?!

  2. vswam says:

    Wprt Sl.No.2,the SC decision as Gisted READs:

    “The Supreme Court has held that while determining the disallowance, the dominant purpose or the intention while making the purchase of such investment is not relevant.”

    If were viewed, reading in between lines but with a different stroke of thoughts: Quite rightly so; for, what is of relevance, with due emphasis on the terms of sec 36(1)(iii),is that the dominant purpose / intention of borrowing capital, was “for the “purposes of the business”. That,in fact, was what the taxpayer pleaded for deductibility of ‘the interest paid’; and,accordingly,accepted by the HC,in its wisdom, rightly so.

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