Question : Whether business loss incurred in the course of purchase and sale of mutual fund units is an expenditure incurred for earning exempt dividend income and, hence, not allowable under section 14A of the Income-tax Act,1961 ?
Answer No, Section 14A can not be applied if no proximate cause exists between expenditure and exempt income
Where assessee received dividends on mutual fund units and claimed said dividend as exempt under section 10(33), in absence of a proximate cause between expenditure incurred by assessee and tax exempt income, section 14A could not be invoked
Note : Section 94(7) came into force only on 1-4-2002 whereas the present case belongs to FY 2000-2001
HIGH COURT OF MADRAS
Patco Investment & Consultancy Services (P.) Ltd.
v.
Assistant Commissioner of Income-tax
TAX CASE APPEAL NOS. 1174 & 1175 OF 2007
FEBRUARY 2, 2015
Section 14A of the Income-tax Act, 1961 – Expenditure incurred in relation to exempt income not includible in total income (Dividends) – Assessment year 2001-02 – Assessee was engaged in business of trading in stocks and shares – Assessee received dividends from various companies on mutual fund units and claimed said dividend as exempt under section 10(33) – Assessing Officer held that differential amount between purchase and sale price of units constituted expenditure incurred by assessee for earning tax-free income, hence, liable to be disallowed under section 14A – Whether for attracting section 14A, there has to be a proximate cause for disallowance, which is its relationship with tax exempt income – Held, yes – Whether in absence of such proximate, section 14A could not be invoked – Held, yes [Para 11] [In favour of assessee]