Clarification regarding disallowance of expenses under section 14A of the Income-Tax Act
Subject: – Clarification regarding disallowance of expenses under section 14A of the Income-Tax Act in cases where corresponding exempt income has not been earned during the FY -regarding.
“Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the _non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are’ relatable to the earning of taxable income”.
A*B/CWhere ……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;