Income Tax - Disallowance of expenses under Section 14A - CBDT Clarifies
SECTION 14A was inserted in the Income Tax Act, 1961 (the Act), by the Finance Act, 2001, with effect from 1.4.1962, in order to clarify, that any expenditure incurred in relation to income not includible in total income will not be allowable as a deduction.
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.
CBDT has examined the matter and notes that legislative intent is to allow only that expenditure which 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.
Board further notes, “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 the 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.”
Therefore Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act 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.
CBDT Circular No. 5/2014 in F. No. 225/182/2013-ITA.II., Dated: February 11, 2014