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Last Updated : Dec 19, 2013 10:57 AM IST | Source: Moneycontrol.com

Here is why all tax payers should know the new 8D rule

As per rule 8D, a formula has been given by the CBDT with regard to determination of the expenditure.


Subhash Lakhotia


Section 14 A of the Income-tax Act, 1961 specifically provides that for the purpose of computing total income no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act, 1961.


Thus, the said section specifically mentions that the Assessing Officer shall be empowered to determine the amount of expenditure incurred in relation to all such income which does not form part of total income based on such method as may be adopted by the Government. Based on this comparatively less know tax provision, the Government has been receiving lot of representation from different parts of India. Now comes the happy news. The Government has now come up with clear cut formula for determination of the amount of expenditure in relation to that income which is not includible in the total income of the assessee.


As per rule 8D a formula has been given by the CBDT with regard to determination of the expenditure. The Central Board of Direct Taxes vide Notification No. 45/2008 dated 24/3/2008 has clearly laid out the formula for the purposes of this determination. It is now mentioned in the newly inserted rule 8D(1) that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with �


(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred
in relation to income which does not form part of the total income under the Act for such previous year , he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule(2).


Let us now have a look at the rule 8D(2) wherein the formula has been mentioned for determining the amount of expenditure in relation to such income which is not includible in total income. This new rule further states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :-


(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:-
                          A�  B/C


Where A =   amount of expenditure by way of interest other than the amount of interest   
                     included in clause (i) incurred during the previous year;


             B=   the average of value of investment, income from which does not or shall 
                    not form part of the total income , as appearing in the balance sheet of the 
                     assessee, on the first day and the last day of the previous year;
             C=   the average of total assets as appearing in the balance sheet of the
                     assessee, on the first day and the last day of the previous year;


(iii) an amount equal to one � half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet  of the assessee, on the first day and the last day of the previous year.�


For the purpose of above rule the �total assets� shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. 


The above new rule 8D as explained above very clearly states that the formula for arriving at the quantum of expenditure incurred in relation to income not includible in the total income. All tax payers should comply with the provisions of the above new rules 8D to avoid any problem at a latter stage.

The author is tax & investment consultant at New Delhi for last 40 years. 
He can be reached at 
slakhotia@satyam.net.in He is also Director of Real Estate Strategy Group and R.N. Lakhotia & Associates.


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First Published on Dec 9, 2011 03:29 pm
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