Tax Free Securities under Section 14 A and Rule 8D

The Finance Ministry of India is responsible for the preparation and presentation of the Finance Bill every year. At the helm of financial affairs in India, the Finance ministry’s Bill serves to be a collection guiding laws for the Income tax return registration and payment scheme. But not all rules and legislations can be made perfect at one go. Certain rules need to be amended upon retrospection of the original rule enforced earlier. Although exceptional, yet powerful; these amended laws more often than not are devised to invalidate the verdicts given various courts in certain issues of complicated nature. An example of a retrospective law is the introduction of Section 14 A.

Section 14A: Enacted vide the Finance Act of 2001 in Chapter IV and having effect from 01-04-1962, this Section was introduced to clarify the intention of the legislature on expenses relating to earning an exempted income. This was passed after the Supreme Court’s decision in Rajasthan Warehousing Corporation [242 ITR 450 (2000)], where it has held that an assessee having a composite and indivisible business and having elements of both taxable and non-taxable income, the total expenditure portion incurred with respect to the said business was deductible under income tax laws. Application of the principle of, apportionment of the total expenditure relating to the non-taxable income was not valid in such cases.

Rule 8D: Rule 8D was introduced by the Central Board of Direct Taxes vide Notification No. 45/2008, dated March 24, 2008 to take effect from Assessment Year 2008-09. It was observed that the sub-sections numbers (2) and (3) of Section14 A, remained of little use till Assessment Year 2008-09 because of the absence of any prescribed method for guidance for filing of both online ITR filing or offline tax return filing . Sub-section (2) of Section 14 A remained empty till the introduction of the Rule 8 D which gave content to the voidances in Section 14 A (2) of the Act. A significant step to Offline and ITR return online filing.

HDFC Bank Limited vs. DCIT (ITAT Mumbai)

A very important case may be cited wherein both these laws have been utilised to establish very important points of great business impact value. The case being referred to is, “HDFC Bank Limited vs. DCIT (ITAT Mumbai).”   In the appeal made before ITAT Mumbai, by M/s HDFC Bank Ltd., it claims that revenue, which was used as strategic investments in two or more companies of the same group, out of self generated funds, was to be exempted from taxable income tax. But the Honourable Court held that the borrowed capital as purely utilized as capital expenditure and inter-corporate deposits.

Both of the in-question funds being taxable incomes, the claim of M/s HDFC Bank Ltd. could not be upheld under Section 14 A and Rule 8 D respectively. Moreover, the Honourable Court also clarified that, ‘Dividend’ being income of the same species as of share-trading income with part of the income being Taxable and the remaining Non-Taxable; likewise a Bank’s income can be bifurcated as being composed of Taxable and Non-Taxable but the expenses incurred can be portioned-off the taxable part of Income in light of the Section 14 A and rule 8 D. The Honourable Court also cited the cases: CIT vs. Reliance Utilities and Power Ltd [2009] 313 ITR 340 (Bom); Godrej & Boyce (supra): while delivering its judgement upon the appeal.