Expenditure on Exempt Income – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.
Expenditure on Exempt Income – CA Final DT Question Bank
Question 1
Explain in brief, the treatment as to the taxability and / or allowability, under the provisions of Income-tax Act. 1961:
‘A’ Ltd., an investment company, received dividend income of ₹ 1,00,000 on its investment in shares. It incurred interest expenditure of ₹ 2,00,000 on the borrowed capital utilized in the investment of shares. [CA Final May 2010] [4 Marks]
Answer:
As per Sec. 14A(1), no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to incomes which do not form part of total income under this Act. Since, dividend income is exempt u/s 10(34), interest paid on borrowed capital used for investment in shares shall not be allowed as deduction.
Even, if the dividend income exceeds ₹ 10,00,000 and becomes taxable u/s 115BBDA, interest on borrowed capital shall be disallowed, since sec. 115BBDA provides that no deduction in respect of any expenditure shall be allowed to the assessee under any provision of this Act in computing the income by way of such dividends.
Question 2.
Mr. W has provided the following information regarding his income and expenditure for the year 2020-21:
| ₹ | |
| Income from business (computed) | 5,00,000 |
| Tax free interest | 1,25,000 |
| Share of profit from firm | 85,000 |
| Expenses in respect of tax free interest | 15,000 |
| Interest expenditure relating to both taxable and non-taxable income | 2,25,000 |
Annual average of the monthly averages of opening and closing balances of the value of investment, income from which does not or shall not form part of the total income is ₹ 4,00,000.
Mr. W claims that no expenditure was incurred by him for exempt income earned. The Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income.
You are required to compute the amount of expenditure incurred in relation to exempt income and resultant total income, assuming that Mr. W has no other income. [CA Final May 2012] [6 Marks]
Answer:
As per section 14A, no deduction shall be allowed in respect of | expenditure incurred by the assessee in relation to income which does not form part of total income. Thus, any expenditure made for the purposes of earning an exempt income, shall be ignored.
Further, the section also empowers the Assessing officer to determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed (See Rule 8D below), if the A.O., having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure.
Rule 8D provides .the following ‘Method for Determining Amount of Expenditure In Relation To Income Not Includible in Total Income:
Expenditure directly relating to the exempt income:
Expenses in respect of tax free interest = ₹ 15,000
1 % of average value of investment (income of which is exempt) disallowed:
1% of average value of investment = ₹ 4,00,000 × 1% = ₹ 4,000
Total Amount of Expenditure disallowable under section 14A (read with Rule 8D)
= ₹ 15,000 + ₹ 4,000
= ₹ 19,000
Computation of Total Income of Mr. W for A.Y. 2021-22
Income from Business (Computed) – ₹5,00,000
Add: Expenditure disallowed u/s 14A – ₹ 19,000
Total Income – ₹ 5,19,000
Notes: Share of profit from firm is exempt u/s 10(2).
Question 3.
Radhakrishna Cooperative Society, the assessee is engaged in marketing of fertilizers and purchase and processing of seeds. The assessee had claimed deduction u/s 80P(2)(d) on dividend income received from NAFED and one Co-operative bank and also on interest on deposits with Co-operative banks. The A.O. contended that the aforesaid income were not included in the total income and wants to invoke section 14A by disallowing the expenditure incurred with respect to earning income which is not liable to income tax. Discuss whether the action taken by the Assessing Officer is tenable in law. [CA Final Nov 2017, May 2010] [4 Marks]
Answer:
Issue involved: The issue under consideration is whether section 14A is applicable in respect of deductions, which are permissible and allowed under Chapter VI-A.
Provisions applicablerSec. 14A(1) provides that for the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to incomes which do not form part of total income under this Act. Thus, any expenditure made for the purposes of earning an exempt income, shall be ignored.
Analysis: The facts of the case are similar to the facts in CIT v. Kribhco (2012) (Delhi) wherein the Delhi High Court observed that section 14A is no applicable for deductions, which are permissible and allowed under Chapter VIA. The words “do not form part of the total income under this Act” used in section 14A are significant and important. Income which qualifies for deductions under sections 80C to 80U has to be first included in the total income of the assessee and then allowed as a deduction. However, income referred to in Chapter III (i.e. section 10 to section 13B) do not form part of the total income and therefore, as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income.
The Delhi High Court, therefore, held that no disallowance can be made under section 14A in respect of income included in total income in respect of which deduction is allowable under sections 80C to 80U.
Conclusion: Thus, applying the rationale of the Delhi High Court ruling to s the present case no disallowance can be made under section 14A in respect : of dividend income received by the Radhakrishna Cooperative Society as such income is allowed as deduction under section 80P(2)(d). Hence action taken by the A.O. is not tenable in law.