CA Umesh Sharma
Arjuna (Fictional Character): Krishna, expenditure incurred in relation to exempt income is a controversial issue and matter of discussion in these days. But what is exempt income, deduction of expenditure incurred on exempt income. What should taxpayer learn at the time of calculating tax or filling of return from this?
Krishna (Fictional Character): Arjuna, exempt income and deduction of expenditure incurred on exempt income is a very debatable issue as there are various issues and interpretation to it. It is to be determined on the basis of situation of every taxpayer’s exempt income and expenditure. So there are various appeals, judgments on this Topic. The provisions related to this have been mentioned in section 14A of Income Tax Act. Many Taxpayers ignore this provision while filling Return of Income but later on in Assessment Penalty and Interest is levied on it.
Arjuna: Krishna, What is Exempt Income and expenditure incurred on it?
Krishna: Arjuna, Taxpayer get Exempt Income from various sources e.g. Dividend, Share of Profit from Partnership Firm, STT paid long term capital gain, Agriculture Income etc. For earning Exempt Income Investments are made and for making Investments Loans from Banks are taken or Loans taken for the Business purpose are used for making Investments. Interest Expenditure on this loan is Expenditure on Exempt Income. Also STT, Bank Charges etc. are the expenditure made for earning Exempt Income.
Arjuna: Krishna, What is section 14 A in Income Tax Act?
Krishna: Arjuna, According to section 14 of Income Tax Act, Income of person is calculated by taking Gross Total of Income from Salary, House Property, Profit and gains from Business and Profession, Capital Gains and Income from Other Sources. According to the provisions of section 14 A of Income Tax Act, no deduction of expenditure shall be made in respect of expenditure incurred in relation to income which does not form part of above stated heads of income. E.g. if a taxpayer has taken loan of Rs. 10 Lakhs for the purpose of business and from that he invested Rs. 2.5 Lakhs in Shares and received dividend of Rs. 50,000/- which is exempt and Interest on Loan amounted to Rs. 120,000/- then the Taxpayer should take deduction of interest of Rs. 90,000/- only and should not take deduction of Rs. 30,000 as it is expenditure for earning exempt income. That means taxpayer should avail deduction of Expenditure on taxable income only.
Arjuna: Krishna, how taxpayer should calculate Disallowance u/s 14 A of Income Tax Act?
Krishna: Arjuna, department has not mentioned method for calculating disallowance, but taxpayer should calculate it appropriately by considering the income and expenditure. Government has given the procedure for calculating the disallowance in Rule 8D of Income Tax Rules for Assessing Officer. Taxpayer can also calculate the Amount of disallowance by following this method. The method is as follows: The Disallowance will be aggregate of the following three:
Arjuna: Krishna, What are important points that taxpayer must consider while calculating disallowance u/s 14A?
Krishna: Arjuna, following are the important points arrived from various judgments of the courts on section 14 A:
Arjuna: Krishna, What one should learn from this?
Krishna: Arjuna, The taxpayer has to calculate and disallow the expenditure incurred on exempt income u/s 14A. The department has not mentioned how much disallowance should be made. But taxpayer should calculate it appropriately and take the decision. Further if required taxpayer should be able to justify the disallowance made. In life also it is same. Everyone have to take decisions. However, while taking decision all angles should be considered.