No applicability of section 14A on LTCG exemption of Rs.1 Lakh

No applicability of section 14A on exemption of Rs.1,00,000/- (One Lakh) Long Term Capital Gain (LTCG) under Section 112A of Income Tax Act, 1961.

Section 14A shall not be applicable on LTCG income earned u/s 112A. The answer to the questions of applicability of section 14A for LTCG u/s 112A, as income covered under section 112A was formerly falling under the ambit of section 10(38) which was part of Chapter III which deals with incomes not includible in total income. Now with section 10(38) rendered inoperative, these incomes have been taken out of ambit of definition “incomes not includible in total income”. Hence, section 14A shall not apply to LTCG under the new regime.

Applicability of section 14A under new tax regime for LTCG u/s 112A on sale of shares

The Income Tax regime of India treats various incomes which are not taxable to tax such as agriculture income, tax free interest income and various other exemptions has been provided u/s section 10 of the act. Hence as the income is not taxable, logically the expense in respect to same shall also not be allowed in the profit and loss.

Accordingly section 14A of the income tax act, 1961 has been inserted which deal with the issue. As per Section 14A, the expenditure incurred by a taxpayer in relation to income that excludes total income as per the provisions of the Act should not be considered as deduction while computing the total income of the taxpayer.

Earlier the long term capital gain on sale of listed shares is exempt u/s 10(38). Hence any expenditure incurred in respect of earning such exempt income will be disallowed. However, with the introduction of section 112A of the income tax act under new tax regime LTCG on sale of the shares and other securities mentioned in section 112A, above 1 lacks shall be taxable @10%. Its means that long term capital gain up to Rs.1 Lacks will not be taxable.

Now, here the question arises whether section 14A will be applicable on LTCG income earned up to Rs. 1 lacks, as it is not taxable to tax under the income tax according to new tax regime. For this we have to check the applicability of section of Section 14A on the LTCG earned under the new tax regime i.e LTCG earned u/s 112A.

The legal text of section 14A is as under:-

“14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, 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 in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply 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 part of the total income under this Act:

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.”

On plain reading of section, we can understand that expenditure is disallowed only in relation to the income which does not form the part of the TOTAL INCOME. It means while computing the total income any income which do not form the part of total income will be covered here.  In other word, we can conclude that the basis of applicability of section 14A is that if the income is included in total income in the income tax computation then section 14A will not apply and there will be no disallowance.

According to section 112A of income tax act, the LTCG above 1 lac earned by the assessee on sale of listed shares will taxable @ 10% and in the income tax computation, whole income of LTCG will be included in total income.

For more clarity let understand this with an example:-

Mr. A earned the following income during the P.Y 19-20

House property Income= Rs. 2,00,000/-

STCG u/s 111A = Rs. 1,00,000/-

PGBP = Rs. 10,00,000/-

LTCG u/s 112A = Rs. 3,00,000/-

Income tax Computation Mr. A

Income Tax Computation

Now as we can see from the above illustration also, the income of LTCG u/s 112A amounting to Rs.3,00,000/- earned by the assessee has been wholly included while computing the total income and not Rs.2,00,000/- i.e after reducing the amount of Rs.1,00,000/- which I not taxable. Its means that whole LTCG income will form the part of total income and not after reducing Rs. 1,00,000/.

I would like to again highlight the fact that section 14A shall be applicable to only that income which does not form the part of total income as section specifies itself.

This completely clears the doubt that section 14A shall not applicable in case of LTCG income earned u/s 112A as the whole LTCG will form the part of total income, Rs.1,00,000/- will be reduced only at the time of calculating the tax amount and not at the time calculation of total income.

CONCLUSION

Section 14A shall not be applicable on LTCG income earned u/s 112A. The answer to the questions of applicability of section 14A for LTCG u/s 112A appear to be emphatic no as income covered under section 112A was formerly falling under the ambit of section 10(38) which was part of Chapter III which deals with incomes not includible in total income. Now with section 10(38) rendered inoperative, these incomes have been taken out of ambit of definition “incomes not includible in total income”. Hence, section 14A shall not apply to LTCG under the new regime.