Section 14 A about deduction for expenditure to exempted income

No deduction for an expenditure incurred in relation to exempted income under section 14A of income tax act: - no deduction allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under income tax act.


The provision has been introduced by the finance act 2001 with retrospective effect from 1 April 1962. However the assessing officer is debarred either to re-assess under section 147 of income tax act or pass an order enhancing the assessment or reducing a fund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before 1 April 2001.

From the assessment year 2007-08 and onwards, if the assessing officer, having regard of the accounts of the assessee, is not satisfied with the correctness of the claim of the assesse about the expenditure incurred in relation to exempted income, he is required to determine the quantum of such expenditure in accordance with such methods as may be prescribed under section 14A (2) of income tax act.
The assessing officer is also required to exercise this power in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form of the total income under this act under section 14A(3) of income tax act.
Rule 8D (2) Provides that expenditure in respect of exempted income is the aggregate of the following amounts which are as under.
-          The amount of expenditure directly relating to exempted income.

-          Where the assessee has incurred expenditure by way of interest, which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula.
Such interest as is not directly incurred in respect of exempted income
*(Multiply by)
Average value of investment, generating exempted income appearing in the balance sheet of the assessee
Divided by
Average value of total assets, appearing in the balance sheet of the assessee.

-          The amount equal to .5% of the average value of investment, generating exempted income, appearing in the balance sheet of the assessee.
The following points may be noted in contrast of section 14A of income tax act.

-          Average value of investment generating exempted income is computed by adding their values, appearing in the balance sheet on the first day of the previous year and divided such total by two.
Average value of total assets is computed by adding their values appearing in the balance sheet on the first day and the last day of the previous year and divided such total by two.
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