18.

Various Examples :-

Illustration :- 1

Company having Business Income ( Other than Shares) and has earned Exempt Income, But has NO BORROWING
and accordingly NO INTEREST EXPENDITURE.

Profit and Loss Account of XYZ. Ltd

Particulars Amount Particulars Amount
Personnel Expenses 100,000 By Brokerage/Receipts 600,000
Administrative Expenses 300,000 By Interest Income 100,000
Interest - By Short Term Capital Gain 50,000
By Long Term Capital Gain 200,000
Net Profit 600,000 By Exempt Dividend 50,000

1,000,000 1,000,000

Balance Sheet of XYZ. Ltd

Liabilities P.Y. C.Y. Assets P.Y. C.Y.
Capital 250,000 250,000 Share Investment 250,000 800,000
Reserves 50,000 650,000
Borrowing - - Bank Balances 50,000 100,000

Creditors 100,000 100,000 Debtors 100,000 100,000

400,000 1,000,000 400,000 1,000,000

Method 1 :- Amount Disallowable U/s.14A read with Rule 8D

Average Investment 525,000

Average Total Assets 700,000

Interest PAID -

Calculation as per Rule 8D(2) :-

Clause :- I - Direct Expenditure Nil

Clause :- II - Interest * Average Invest Nil

Average Total Asset

Clause :- III - 0.5% of Avgerage 2,625

Investments.

Method II :- Applying Punjab and Haryana High Court Judgement :-

Since the Company has not Incurred any Expenditure to earn EXEMPT INCOME, there can be NO
DISALLOWANCE.
Illustration :- 2

Company having Business Income ( Other than Shares) and has earned Exempt Income, But has BORROWING and accordingly
INTEREST EXPENDITURE BUT BORROWING IS UTILISED FOR BUSINESS PURPOSE AND INVESTMENTS MADE OUT
OF OWN FUNDS.

Profit and Loss Account of XYZ. Ltd

Particulars Amount Particulars Amount
Personnel Expenses 100,000 By Brokerage/Receipts 600,000
Administrative Expenses 300,000 By Interest Income 100,000
Interest PAID 50,000 By Short Term Capital Gain 50,000
By Long Term Capital Gain 200,000
Net Profit 550,000 By Exempt Dividend 50,000

1,000,000 1,000,000

Balance Sheet of XYZ. Ltd

Liabilities P.Y. C.Y. Assets P.Y. C.Y.
Capital 250,000 250,000 Business Assets 450,000 400,000
Reserves 50,000 550,000 Share Investment 250,000 800,000
Borrowing 500,000 500,000 Bank Balances 100,000 100,000

Creditors 100,000 100,000 Debtors 100,000 100,000

900,000 1,400,000 900,000 1,400,000

Method 1 :- Amount Disallowable U/s.14A read with Rule 8D

Average Investment 525,000

Average Total Assets 1,150,000

Interest PAID
Gross Interest 50,000
Less :- Interest Received 100,000 Nil

Calculation as per Rule 8D(2) :- If INTEREST considered on Calculation as per Rule 8D(2) :- If INTEREST considered on
GROSS BASIS NET BASIS

Clause :- I - Direct Expenditure Nil Clause :- I - Direct Expenditure Nil

Clause :- II - Interest * Average Invest 22,826 Clause :- II - Interest * Average Invest Nil
Average Total Asset Average Total Asset

Clause :- III - 0.5% of Avgerage 2,625 Clause :- III - 0.5% of Avgerage 2,625
Investments. Investments.

TOTAL DISALLOWANCE 25,451 TOTAL DISALLOWANCE 2,625

Method II :- Applying Punjab and Haryana High Court Judgement :-

Since the Company has not Incurred any Expenditure to earn EXEMPT INCOME, there can be NO
DISALLOWANCE.
Illustration :- 3

Company having SHARE TRADING INCOME and has earned Exempt DIVIDEND

Profit and Loss Account of XYZ. Ltd

Particulars Amount Particulars Amount
Personnel Expenses 100,000 By Share Trading Income 850,000
Administrative Expenses 200,000 By Interest Income 100,000
Interest PAID 150,000 By Exempt Dividend 50,000

Net Profit 550,000

1,000,000 1,000,000

Balance Sheet of XYZ. Ltd

Liabilities P.Y. C.Y. Assets P.Y. C.Y.
Capital 500,000 500,000 Business Assets 450,000 400,000
Reserves 300,000 850,000 Stock - In - Trade 1,350,000 2,400,000
Borrowing 1,000,000 1,500,000 Bank Balances 100,000 100,000

Creditors 200,000 150,000 Debtors 100,000 100,000

2,000,000 3,000,000 2,000,000 3,000,000

Method 1 :- Amount Disallowable U/s.14A read with Rule 8D

Average Investment (Including Stock in Trade) 1,875,000

Average Total Assets 2,500,000

Net Interest PAID :-

Gross Interest 150,000
Less :- Interest Received 100,000 50,000

Calculation as per Rule 8D(2) :- If INTEREST considered Calculation as per Rule 8D(2) :- If INTEREST considered on
on GROSS BASIS NET BASIS

Clause :- I - Direct Expenditure Nil Clause :- I - Direct Expenditure Nil

Clause :- II - Interest * Average Invest 112,500 Clause :- II - Interest * Average Invest 37,500
Average Total Asset Average Total Asset

Clause :- III - 0.5% of Avgerage 9,375 Clause :- III - 0.5% of Avgerage 9,375
Investments. Investments.

TOTAL DISALLOWANCE 121,875 TOTAL DISALLOWANCE 46,875

Illustration :- 3

Company having SHARE TRADING INCOME and has earned Exempt DIVIDEND

Profit and Loss Account of XYZ. Ltd

Particulars Amount Particulars Amount
Personnel Expenses 100,000 By Share Trading Income 850,000
Administrative Expenses 200,000 By Interest Income 100,000
Interest PAID 150,000 By Exempt Dividend 50,000

Net Profit 550,000

1,000,000 1,000,000

Balance Sheet of XYZ. Ltd

Liabilities P.Y. C.Y. Assets P.Y. C.Y.
Capital 500,000 500,000 Business Assets 450,000 400,000
Reserves 300,000 850,000 Stock - In - Trade 1,350,000 2,400,000
Borrowing 1,000,000 1,500,000 Bank Balances 100,000 100,000

Creditors 200,000 150,000 Debtors 100,000 100,000

2,000,000 3,000,000 2,000,000 3,000,000

Illustration :- 3

Company having SHARE TRADING INCOME and has earned Exempt DIVIDEND

Profit and Loss Account of XYZ. Ltd

Particulars Amount Particulars Amount
Personnel Expenses 100,000 By Share Trading Income 850,000
Administrative Expenses 200,000 By Interest Income 100,000
Interest PAID 150,000 By Exempt Dividend 50,000

Net Profit 550,000

1,000,000 1,000,000

Balance Sheet of XYZ. Ltd

Liabilities P.Y. C.Y. Assets P.Y. C.Y.
Capital 500,000 500,000 Business Assets 450,000 400,000
Reserves 300,000 850,000 Stock - In - Trade 1,350,000 2,400,000
Borrowing 1,000,000 1,500,000 Bank Balances 100,000 100,000

Creditors 200,000 150,000 Debtors 100,000 100,000

2,000,000 3,000,000 2,000,000 3,000,000

Method II :- Proportionate Expense Basis

Net Interest PAID :-

Gross Interest 150,000
Less :- Interest Received 100,000 50,000

Total Receipts :-
Trading Income 850,000
Dividend 50,000
900,000

Exempt Income 50,000

Calculation on Proportionate Expenses Basis :- If Calculation on Proportionate Expenses Basis :- If

INTEREST considered on GROSS BASIS :- INTEREST considered on NET BASIS :-

Exempt Income * Total Expenditure 8,333 Exempt Income * Total Expenditure 2,778
Total Receipts Total Receipts

TOTAL DISALLOWANCE 8,333 TOTAL DISALLOWANCE 2,778