An earlier post had noted that a recent decision of the Bombay ITAT could significantly affect the taxation of shares and securities, and group companies generally. To briefly summarise, it was a case involving a company dealing in shares and securities. It claimed that the interest it incurred on loans taken to finance the purchase of shares was deductible, although its dividend income was entirely exempt under the Act. The Tribunal held by a majority that s. 14A of the Act, which provides that expenditure incurred in relation to exempt income is not deductible, applied, and that ‘in relation to’ must be construed widely. Significantly for other disputes, the Tribunal observed that a ‘but-for’ test must be employed in this respect, so that any expenditure but for which the exempt income would not have been generated will be considered to be have been incurred ‘in relation’ to that income, and consequently not deductible.
Following this decision, Business Standard reports that the CBDT has asked its field formations to reopen all cases where similar claims are likely to have been allowed, such as a group company claiming deduction on expenses like interest on loans taken to invest in subsidiaries. The Department has been asked to review cases all the way back to 1997, which is when s. 14A was inserted into the Act. Further, in accordance with a change introduced by the 2008 Finance Act, cases can be reopened with retrospective effect from 1962.
This proposal is likely to affect all companies that invest in their group entities or in mutual funds, shares etc. It is expected to net the Department upto Rs. 20,000 crore. It is likely that the move will be challenged, but the law today appears to impose no bar on the enactment of retrospective tax legislation.
The Business Standard report is available here.