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IMPORTANT TOPIC JUST FOR USE ON REAL TIME BASIS Model statement of facts and grounds of appeal on issue of disallowance under S. 14A

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IMPORTANT TOPIC JUST FOR USE ON REAL TIME BASIS Model statement of facts and grounds of appeal on issue of disallowance under S. 14A
By: C.A. DEV KUMAR KOTHARI
January 18, 2011
All Articles by: C.A. DEV KUMAR KOTHARI       View Profile
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Relevant links:

Various sub-sections of  sections 10 like S.S (2),( 2A) , (34),   (38) … etc. relating to exempt incomes,

section 14A, 115JB of Income-tax act, 1961.

Rule 8 D of Income -tax Rules,1962.

Disallowance of expenses under section 14A

Disallowance of expenses under section 14A is presently a big issue in assessments completed recently. It is noticed that depository charges should not be disallowed u/s 14A but many assesses added depository charges and demat charges in computation. Many Assessing Officers have made huge disallowances u/s 14A.

 Herein below model statement of facts and grounds of appeal are given in relation to disallowance u/s 14A. The readers can fruitfully use them and modify in accordance with the facts prevailing in any case.

Statement of Facts

About disallowance U/s 14A:

Assessee in return disallows Security Transaction Tax (STT) and also Depository charges. However  during hearing before AO assessee submitted that depository charges may be allowed as investment carrying cost however, learned AO has not allowed the same./ subsequently  it is learned that  depository charges may be allowed as investment carrying cost.

On enquiry by the AO assessee submitted that any borrowed funds have not been used to make any investment in shares, units, PPF, tax free bonds and investment in firms. Learned AO has also not found any contrary fact in this regard and he has not identified any interest payment  on capital borrowed for making such investment.

               Or

It was admitted or is matter of record that some interest payments have been made for capital borrowed for portfolio. The interest is portfolio carrying cost and not an expenditure incurred in relation to earn dividend or to earn LTCG (with STT). Furthermore, assessee has derived income of both type - taxable and exempt.  Therefore, it cannot be said that any interest is spent in relation to earn dividend or LTCG.

Earning of Dividend and LTCG (with STT) are very contingent, long-term and causal in nature. Whereas, earning of STCG (with or without STT) , hedging gains, intraday gains, security lending gains etc. are  relatively more frequent and less contingent. Therefore, it cannot be said that expenses for acquiring, holding and carrying portfolio is in relation to earning of income which is excluded in hands of assessee while computing income under Chapter IV.  

Investment in shares, particularly group companies are to control and manage them as special purpose vehicles for carrying business and not merely to earn dividend. Earning of dividend is a long-term and contingent aspect in such investments. On other dividends earned, dividend distribution tax has been paid by company / mutual funds.

From partnership firms taxable incomes are also derived by way of salary, commission and interest, and only share in profit is excluded in hands of assessee, because firm has already paid tax on profit before distribution.

Assessee earned short-term capital gains and intraday gains, security lending charges etc. which are taxable as business income.  

Thus, portfolio resulted into taxable and exempted income both. It cannot be said that any expenses have been incurred in relation to income exempt in hands of assessee and which is also not taxed under other provisions of the Income-tax Act by way of tax at distribution stage paid by companies, mutual funds and firms. LTCG (with STT) is also subjected to STT, which is in lieu of income -tax.

For company- Assessee being company LTVG (with STT) though exempt u/s 10 (38) is taxable by way of MAT u/s 115JB.

Only interest on relief bonds and PPF are such income which have not been taxed in overall context of the Income-tax Act. For these earnings, any expenses have not at all been incurred, either on account of interest, any direct or indirect expenses.

Investment carrying cost:

Investment carrying costs like demat charges , depository charges, insurance charges, safe keeping charges, are not in relation to earning of dividend or LTCG (with STT) but are incurred to acquire, hold and carry investments. Thus, they are not disallowable as they are not incurred in relation to earning of tax free income.

GROUNDS OF APPEAL

1.      For that learned AO was wrong in disallowing Rs.   /-  u/s 14A read with Ruled 8D without having a finding that any expenses were actually incurred in relation to earnings of income which did not form part of total income in hands of assessee or total income  in overall context of the Income-tax Act.

2.    For that learned AO was wrong in applying S. 14A in relation to income which have been subject matter of taxation on income in some other manner as per taxation policy in respect of security transaction tax or dividend distribution tax or tax in hands of firm etc. Thus, such incomes cannot be called as 'income which does not form part of total income under this  Act' as used in second limb of S.14A.

3.    For that the expenses for demat charges Rs.   for  Depository  Charges Rs…  and estimated overhead Rs…. Were  wrongly added by assessee in income and expenses on account of  interest Rs.    /  - and other expenses Rs.   /- have been wrongly disallowed by the AO. The same may be deleted fully. 

4.      For that without prejudice to earlier grounds in relation to disallowance u/s 14A, it is submitted that the disallowance made by the AO is  highly excessive and same may be reduced to say 1% of dividend earned, as per several decisions of  ITAT.

5.      For that S. 14A and Rule 8 D  cannot be applied in respect to the following investments:

a.     Investment in group companies,

b.     Investment in firms,

c.     Investment portfolio from  which taxable incomes have been earned by way of intraday gains, hedging gains, security lending charges,  etc. which are treated as business income and expenses are or for holding and carrying  such portfolio and STCG, LTCG (without STT)  because capital gains are also taxable.

d.     Long-term capital gains which are taxable under section 115JB.

e.     ……

The readers are also requested to send their feedback.

 

By: C.A. DEV KUMAR KOTHARI - January 18, 2011

 

 

 
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