Proviso limiting disallowance caps notional disallowance to actual expenditure, reducing taxable adjustments in assessment practice for taxpayers.

Whether the proviso to Rule 8D limits a notional disallowance under section 14A is addressed: the proviso functions as a cap preventing the standard-formula disallowance from exceeding the assessee's total actual expenditure, and is treated as curative in operation so as to apply to the assessment year in question; applying that principle the computed notional disallowance (Rs. 1,40,28,010) is restricted to the assessee's total recorded expenditure (Rs. 4,47,278), inclusive of the assessee's suo moto reduction, resulting in a capped disallowance equal to the actual expenditure.

---

---

Issues: Whether the disallowance under section 14A of the Income-tax Act, 1961 computed by applying Rule 8D (standard working) and amounting to Rs. 1,40,28,010/- can be restricted by the proviso inserted by the Income-tax (Fourteenth Amendment) Rules, 2016 so that the disallowance does not exceed the total expenditure actually incurred during the year (Rs. 4,47,278/-) and whether that proviso applies to Assessment Year 2015-16.

Analysis: The proviso to Rule 8D introduced by the Income-tax (Fourteenth Amendment) Rules, 2016 provides that the amounts computed under the standard formulae shall not exceed the total expenditure claimed by the assessee. The standard formula under Rule 8D produces a notional calculation of disallowance which can exceed actual expenditures. The proviso functions as a cap on such notional disallowance. Although inserted w.e.f. 02.06.2016, the proviso is curative in nature and operates to prevent an artificial disallowance larger than the assessee's total year wise expenditure. Applying that principle to the facts, the notional disallowance of Rs. 1,40,28,010/- exceeds the assessee's total recorded expenses of Rs. 4,47,278/-, which includes the suo moto reduction already made by the assessee of Rs. 4,01,500/-. The proviso therefore requires the disallowance to be limited to the actual total expenditure of Rs. 4,47,278/-, inclusive of the suo moto disallowance.

Conclusion: The proviso to Rule 8D (Income-tax (Fourteenth Amendment) Rules, 2016) applies to cap the disallowance under section 14A and the disallowance is restricted to Rs. 4,47,278/-, inclusive of the assessee's suo moto disallowance; decision in favour of the assessee.

Ratio Decidendi: A proviso limiting disallowance under Rule 8D to the total expenditure claimed operates to cap any notional disallowance computed by the standard formula and applies to prevent a disallowance exceeding actual expenditure, and this rule is applicable to the assessment year in question.

---