Section 14A & Rule 8D - Expenditure in relation to income not includible in total income - Income Tax - Ready Reckoner - Income Tax

Expenditure in relation to income not includible in total income Through Finance Act, 2001, a new section 14A has been inserted so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. This amendment takes effect retrospectively from 1st April, 1962 and accordingly, applies in relation to the assessment year 1962-63 and subsequent assessment years Section 14A read with Rule 8D No deduction shall be allowed for any expenditure incurred in relation to any income which is exempt from tax under section 10 of Income Tax Act. Where the Assessing Officer, is not satisfied with the correctness of the claim of expenditure made by the assessee the claim made by the assessee that no expenditure has been incurred in relation to income which is exempt under section 10 , he shall determine the amount of expenditure in relation to such income. The expenditure in relation to income which is exempt under section 10 shall be the aggregate of following amounts namely i. the amount of expenditure directly relating to income which is exempt under section 10 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 x B/C Where, A = amount of expenditure by way of interest other than the amount of interest included in (i) incurred during the previous year B = the average of value of investment, income from which is exempt under section 10, 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 0.5% of the average of the value of investment, income from which is exempt under section 10, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. For the purposes of this 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 revelation of assets. Notes: Section 14A is applicable only for the incomes which are exempt under section 10 . It is not applicable for incomes for which deduction is available under Chapter VI-A . [ Commissioner Of Income-Tax Versus Kribhco 2012 (7) TMI 591 - Delhi HC ] Disallowance of expenditure under section 14A read with Rule 8D shall be made even if assessee has not earned any tax exempt income during the previous year. 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. [ Circular no. 05/2014 dated 11.02.2014 ] Circular No. 11/2001 , dated 23rd July, 2001, a direction was issued by the Central Board of Direct Taxes that the assessments where the proceedings have become final before the first day of April, 2001 should not be re-opened under section 147 of the Act to disallow expenditure relatable to the exempt income by applying the provisions of section 14A of the Act. This circular has been issued by the Board by exercising its powers to issue beneficial circular under section 119(2)( a ) of the Income-tax Act.