Category Archives: Others

If you are the one claiming tax benefit on interest payment on home loans, this is something for your attention.

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Amendment in Section 206C vide Finance Act 2016 –

Circular no. 22/2016 dated 08.06.2016

Clarifications regarding Section 206C of the Income-tax Act, 1961 (hereafter referred to as ‘Act’)

Prior to amendment by Finance Act,20 16 it was provided that the seller shall collect tax at source at specified rate from the buyer at the time of sale of specified items such as alcoholic liquor for human consumption, tender leaves, mineral being coal or lignite or iron ore etc. Read More

Cost inflation index for the purpose of computing the indexed cost of acquisition or indexed cost of improvement for the purpose of the income tax act, 1961

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Section 14A of Income tax Act, 1961 and amendments to Rule 8D by Income Tax (14th Amendment) Rules, 2016

Requirement of calculating disallowance of interest expenditure not directly attributable to any income or receipt eliminated. Considering investments, income from  which shall not form part of total income, for the purpose of disallowance remained as it is  . Standard disallowance to be based on annual average of monthly average of opening and closing balances of investments instead of  average of  investment as appearing in the balance sheet of the assessee, on the first and the last day of the previous  year . Quantum of disallowance to be 1% instead of ½%. Sub rule 3 defining meaning of “total asset” deleted due to its becoming redundant on elimination of formulae for calculating disallowance of interest expenditure not directly attributable to any income or receipt.

Section 14A  inserted by Finance Act, 2001( Text of Section 14A given in Appendix 1 below)  provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. It also provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. Right to determine the expenditure by prescribed method was also given  in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act

Accordingly in exercise of powers under  Section 14A,  Rule 8D was inserted w.e.f. 24.3.2008 ( Text of unamended rule 8 D is given as appendix 1) prescribing the manner to quantify the amount of expenditure in relation to exempt income liable to be disallowed. It provided that disallowance shall be aggregate of

• amount of  expenditure directly relating to   income which does not form part of  total income

• amount of interest expenditure not directly attributable to any particular income or receipt  calculated on the basis of formulae given in the rule

• amount equal to ½% of the average value of the investment the income from which does not or shall not form part of total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year

This Section 14A read with rule 8D  has resulted into excessive litigation due to disallowances worked out by applying rule 8D resulted in abnormal disallowances even exceeding the total expenditure claimed by the assessee particularly due to applying sub rule(2)(ii).

Vide notification No.43/2016 on 2nd June, 2016  Income Tax ( 14th Amendment) Rules, 2016 were notified. Vide these amendment rules  , sub rule 2 to Rule 8D has been substituted by the following sub rule 2 and sub rule (3) stands omitted:

“(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:—

• the amount of expenditure directly relating to income which does not form part of total income; and

• an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.”;

Thus  by these amendments in Rule 8D, now

• there will be no disallowance based on the formulae prescribed ( Rule 8D as existed before this amendment is reproduced below) of interest expenditure which is not directly attributable to the exempt income or receipt.

• Further standard disallowance of ½% has been increased to 1% and  calculation method has been changed to “annual average of the monthly averages of the opening and closing balances of the value of investment”.

• No  amendment has been made for not considering  the value of investment , income from which shall not form part of total income. This may continue to result in  litigations  in respect of investments made not for the purpose of earning dividend but made as strategic investments in unlisted companies. These strategic investments are generally sold at a future date and will be liable for capital gains being not covered by Section 10(38) due to absence of payment of  STT.  There may not be any dividend earning on such investments. But assessing authority may not be agreeing to this aspect and will be more inclined otherwise.

• A limit has been placed for disallowance to a maximum of total expenditure claimed by the assessee.

• Sub rule 3 defining meaning of “total asset” deleted due to its becoming redundant on elimination of formulae for calculating disallowance of interest expenditure not directly attributable to any income or receipt.

APPENDIX 1

Expenditure incurred in relation to income not includible in total income.

Section 14A.

(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed19, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub­section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

Method for determining amount of expenditure in relation to income not includible in total income.

Rule 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—

      (i) the correctness of the claim of expenditure made by the assessee; or

      (ii) the claim made by the assessee that no expenditure has been incurred,

in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub­rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :—

       (i) the amount of expenditure directly relating to income which does not form part of total income;

      (ii) in a case where the assessee has incurred expenditure by way of interest during the previous Year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely: 

Where

 A =amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ;

B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the  last day of the previous year ;

C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;

(iii) an amount equal to one­half per cent of the average of the value of investment, income which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.

(3.) For the purposes of this rule, the “total assets” shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.

Equalisation levy-Tax on nonresident conducting online activities like Facebook, Google, etc.

A googly by honorable finance minister Sh.Arun Jaitely Ji by introducing the Google Tax @6%

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