Circular No.
5/2014, F.No. 225/182/2013-ITA.II, dated 11th February, 2014
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
Section 14A of the
Income-tax Act, 1961 (`Act’) provides for disallowance of expenditure in
relation to income not “includible” in total income.
2. A controversy has arisen in certain
cases as to whether disallowance can be made by invoking section 14A of the Act
even in those cases where no income has been earned by an assessee which has
been claimed as exempt during the financial-year.
3. The matter has been examined in the
Board. It is pertinent to mention that section 14A of the Act was introduced by
the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose
for introduction of section 14A with retrospective effect since inception of the
Act was clarified vide Circular No. 14 of 2001 as under:
“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”.
Thus,
legislative intent is to allow only that expenditure which is relatable to
earning of income and it therefore follows that the expenses which are
relatable to earning of exempt income have to be considered for disallowance,
irrespective of the fact whether any such income has been earned during the
financial-year or not.
4. The above position is further
clarified by the usage of term ‘includible’ in the Heading to section 14A of
the Act and also the Heading to Rule 8D of I.T.Rules, 1962 which indicates that
it is not necessary that exempt income should necessarily be included in a
particular year’s income, for disallowance to be triggered. Also, section 14A
of the Act does not use the word “income of the year” but “income
under the Act”. This also indicates that for invoking disallowance under
section 14A, it is not material that assessee should have earned such exempt
income during the financial year under consideration.
5. The above position is further
substantiated by the language used in Rule 8D (2(ii) & 8D (2)(iii) of
I.T.Rules which are extracted below:
“(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……….
B= the average of value of
investment, income from which does
not or shall not form part of total income as appearing in the
balance sheet of the assessee, on the first and last day of the previous year :
(iii) an amount equal to one-half
percent 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.”
(Emphasis added)
6. Thus, in light of above,
Central Board of Direct Taxes, in exercise of its powers under section 119 of
the Act hereby clarifies that Rule 8D read with section 14A of the Act provides
for disallowance of the expenditure even where taxpayer in a particular year
has not earned any exempt income.
7. This may be brought to the
notice of all concerned.
8. Hindi version to follow.
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