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Circular No.
5/2014, Dated – 11th February, 2014
Subject:
– Clarification regardingdisallowance of expenses under section
14A of the Income-tax At 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
videCircular 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 ’tile 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.
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