assessing officer had to enforce the provisions of sub section (1) of sec.14A. Computation of disallowance Rule 8D has three components. The first component is the amount of expenditure directly relating to income not forming part of total income (Direct expenditure). The second component is computed on the of the formula given therein. In the case of interest expenditure which is not directly attributable to any particular income or receipt, the formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in direct expenses as above), incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure namely, a half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of the three components which would constitute the expenditure in relation to exempt income and it is the amount of expenditure which would be disallowed under section 14A of the Act. There is a view that the method prescribed by Rule 8D seeks only to determine the notional cost for holding/maintaining investments
assessing officer had to enforce the provisions of sub section (1) of sec.14A. Computation of disallowance Rule 8D has three components. The first component is the amount of expenditure directly relating to income not forming part of total income (Direct expenditure). The second component is computed on the of the formula given therein. In the case of interest expenditure which is not directly attributable to any particular income or receipt, the formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in direct expenses as above), incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure namely, a half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of the three components which would constitute the expenditure in relation to exempt income and it is the amount of expenditure which would be disallowed under section 14A of the Act. There is a view that the method prescribed by Rule 8D seeks only to determine the notional cost for holding/maintaining investments
COMPILATION-OF-PRONOUNCEMENTS-US-14A-OF-THE-INCOME-TAX-ACT1961-CA.Satish-Trivedi-18-8-12.docx