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

[Amit Sharma]

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

 

[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

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

AI Summary

Disallowance under section 14A: when opening investment is nil, Rule 8D averages closing balance to apportion interest.
Under Section 14A read with Rule 8D, where interest is not directly linked to exempt income the disallowance equals interest multiplied by the ratio of average investment to average total assets, plus a separate small investment-linked balancing charge. If there is no opening investment balance because acquisition occurred during the year, treat opening investment as nil; compute average investment as (0 + closing balance)/2 and apply that average in both the interest apportionment formula and the balancing charge calculation.