Recently, the Central Board of Direct Taxes (CBDT) vide official gazette dated 2 June 2016 notified the amendment made to Rule 8D of the Income Tax Rules 1962 (IT Rules). One of the most litigative issues in direct taxation faced by business entities pertains to disallowances made under section14A of the Income Tax Act 1961 (IT Act) read with Rule 8D of the IT Rules. As per the Income Tax simplification Committee headed by Justice R.V. Easwar which issued its report in January 2016, it noted that around 15% of the tax litigation is attributed to determination of expenditure relating to exempt income.
Under the provisions of said section 14A, the expenditure incurred in relation to exempt income is to be disallowed while computing the total income. From Assessment Year (AY) 2008-09 and onwards, this disallowance of such expenditure is made following the mechanism as prescribed in Rule 8D of the IT Rules.
The amendment brought in Rule 8D is applicable from the date of its notification in the official gazette i.e. 2nd June 2016 and as such shall be applicable from the financial year 2016-17 and onwards.