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Section 14A of the Income Tax Act read with Rule 8D - Income Tax

#1 Issue Id: - 3614
Dated: 1-12-2011
By:- Amit Sharma
Section 14A of the Income Tax Act read with Rule 8D

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If interest has been paid on loan taken which was invested in shares and dividend income were earned on such investment. Then as per section 14A the interest amount shall be disallowed.

As per rule 8D calculation is make by using following formula if interest not directly related to exempted income.

Interest paid X average investment / average total assets

The average figures shall be taken as average of opening balance of total assets and investment and closing balance of total asset and investment.

My query is that if there is no opening balance of investment i.e. if investment made in current year say in the month of july then how we calculate average amount of investment  for the purpose of above formula however investment have closing value.

Example : Investment made in shares Rs. 60 lakhs.  (18-07-2009) Interest Rs. 8 Lakhs Average Total Assets Rs. 1 Crore. Closing balance of Investment of Rs. 500000

 

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#2 Dated: 2-12-2011
By:- Deepak Nagori

Dear Amit,

Rule 8D is very clear in giving the formula for disallowance. Accordingly, if there is no opening balance of investment, it shall be taken as NIL. So in the example you have given, the amount of interest to be disallowed u/s 14A shall be total of the following:

a) 800000 x [(0+500000) / 2] / [10000000] = 20,000

b) 1/2% of [(0+500000) / 2] = 1250

So total disallowance shall be Rs. 21,250

Hope this clarifies

Regards

CA Deepak Nagori


#3 Dated: 21-6-2012
By:- Anshuman Mishra

Dear Amit,

Rule 8D is very clear in giving the formula for disallowance. Accordingly, if there is no opening balance of investment, it shall be taken as NIL. So in the example you have given, the amount of interest to be disallowed u/s 14A shall be total of the following:

a) 800000 x [(0+500000) / 2] / [10000000] = 20,000

b) 1/2% of [(0+500000) / 2] = 1250

So total disallowance shall be Rs. 21,250

Hope this clarifies

Regards

CA Anshuman Mishra


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