Note on New Rule 8D issued by CBDT vide Notification No. 45/2008 dated 24-03-2008 which prescribes the method for determining amount of expenditure in relation to income not includible in total income. The said circular can be analyzed in brief as follows:
· Rule 8D(1) provides that where the A.O. is not satisfied with regard to the correctness of the claim of expenditure by the assessee or with regard to the claim that no expenditure has been incurred in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with sub-rule (2).
· Sub-rule (2) provides an artificial formula as the aggregate of the following :-
(i) Amount of expenditure directly relating to income which does not form part of total income.
(ii) Where the assessee has incurred interest expenditure which is not directly attributable to any particular income, in the ratio of average investment on the first day & last day of the previous year income from which does not or shall not form part of total income to the average of total assets as appearing on the first day & last day of the previous year.
(iii) 0.5% of the average value of investment on the 1st day & last day of previous year.
After detailed study, the following conclusions may arise on the above rule:-
Query
Reply
From which assessment year is the above rule applicable
From A.Y. 2007-08
Can it be applied prior to A.Y. 2007-08 in pending appeals/ assessment done for earlier years
Department may apply but as per the strict interpretation it has no applicability prior to A.Y. 2007-08 since it is a procedural amendment
Whether the above Rule is applicable in all cases
A.O. can go to the above Rule only if on the basis of the accounts he is not satisfied with the correctness of the claim of the assessee. Hence, it is suggested that at least some disallowance may be offered by the assessee in its return of income, which compels the A.O. to prove that the said amount offered is not correct and give reasons for the said belief.
Is the Rule applicable for Charitable Institution or in computing Book Profit u/s 115JB
No. Since Section 14A has been specified in relation to Chapter-IV of the Act the said rule is not applicable in computing Total Income under Chapter-III or in computing Book Profit u/s 115JB, which falls under Chapter-XII-B.
Will the investment shown as Stock in trade needs to be included in computing above disallowance
The department shall consider such stock in trade as investment only and consider the same for disallowance. The matter needs to be adjudicated before appeal forum.
Whether current liability needs to be reduced in computing Total Assets
No. Since in the Horizontal Balance Sheet, total assets are shown separately and current liability is shown on the liability side. Hence, the same is not required to be reduced in computing Total assets.
Whether all the assets i.e. intangible, deferred revenue expenditure not written off etc. needs to be included in total assets
Yes. Since there is no specific mention of their non-exclusion.
What are the other clarifications required from CBDT with regard to above Rule & why
· According to the above Rule, there is no limit on disallowance. Even if no exempted income has been earned during the year, there still can be disallowance on the basis of above rule.
· The meaning of the word “shall not” used in the rule on the basis of which the A.O. may consider those investment from which income has actually not been received but which may have generated exempted income.
· Rule 8D(1) provides that where the A.O. is not satisfied with regard to the correctness of the claim of expenditure by the assessee or with regard to the claim that no expenditure has been incurred in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with sub-rule (2).
· Sub-rule (2) provides an artificial formula as the aggregate of the following :-
(i) Amount of expenditure directly relating to income which does not form part of total income.
(ii) Where the assessee has incurred interest expenditure which is not directly attributable to any particular income, in the ratio of average investment on the first day & last day of the previous year income from which does not or shall not form part of total income to the average of total assets as appearing on the first day & last day of the previous year.
(iii) 0.5% of the average value of investment on the 1st day & last day of previous year.
After detailed study, the following conclusions may arise on the above rule:-
Query
Reply
From which assessment year is the above rule applicable
From A.Y. 2007-08
Can it be applied prior to A.Y. 2007-08 in pending appeals/ assessment done for earlier years
Department may apply but as per the strict interpretation it has no applicability prior to A.Y. 2007-08 since it is a procedural amendment
Whether the above Rule is applicable in all cases
A.O. can go to the above Rule only if on the basis of the accounts he is not satisfied with the correctness of the claim of the assessee. Hence, it is suggested that at least some disallowance may be offered by the assessee in its return of income, which compels the A.O. to prove that the said amount offered is not correct and give reasons for the said belief.
Is the Rule applicable for Charitable Institution or in computing Book Profit u/s 115JB
No. Since Section 14A has been specified in relation to Chapter-IV of the Act the said rule is not applicable in computing Total Income under Chapter-III or in computing Book Profit u/s 115JB, which falls under Chapter-XII-B.
Will the investment shown as Stock in trade needs to be included in computing above disallowance
The department shall consider such stock in trade as investment only and consider the same for disallowance. The matter needs to be adjudicated before appeal forum.
Whether current liability needs to be reduced in computing Total Assets
No. Since in the Horizontal Balance Sheet, total assets are shown separately and current liability is shown on the liability side. Hence, the same is not required to be reduced in computing Total assets.
Whether all the assets i.e. intangible, deferred revenue expenditure not written off etc. needs to be included in total assets
Yes. Since there is no specific mention of their non-exclusion.
What are the other clarifications required from CBDT with regard to above Rule & why
· According to the above Rule, there is no limit on disallowance. Even if no exempted income has been earned during the year, there still can be disallowance on the basis of above rule.
· The meaning of the word “shall not” used in the rule on the basis of which the A.O. may consider those investment from which income has actually not been received but which may have generated exempted income.
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