Section 14A of the Income-tax Act, 1961, read with rule 8d of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Clarification on disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year
Circular 5/2014, dated 11-2-2014 was issued by the Central Board of Direct Taxes on 11 February 2014. Its subject is Section 14A of the Income-tax Act, 1961, read with rule 8d of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Clarification on disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year.
This grants an exemption or a relief under a provision that allows one. Read the conditions attached: an exemption notification is construed strictly, and a condition missed is the exemption lost.
Takes the Board's position on a controversy over section 14A read with Rule 8D: whether expenditure relatable to exempt income can be disallowed in a year in which no exempt income was actually earned. The Board holds that it can. The reasoning runs on the word "includible" in the heading to section 14A and in the heading to Rule 8D, on the fact that section 14A speaks of income "under the Act" and not income of the year, and on the purpose of the provision as stated in Circular No. 14 of 2001, that only expenditure relatable to the earning of taxable income may be allowed.
A controversy had arisen in certain cases as to whether a disallowance under section 14A could be made even where no income claimed as exempt had been earned by the assessee during the financial year.
.t4?:t, Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New dated the t{,-lof February, #i' SubiecrL: - Clarification regarding disallowance of expenses under section 1 the Inrcome-tax Adt in cases where corresponding exempt income has'not earnedl during the FY -regarding. Section L4Aof the Income-tax Act,!96'1. (?ct') provides for disallowance of expen in relatiion to income not "includible" in total income. 2. A controversy has arisen in certain cases as to whether disallowance can be m; inyoking section 144 of the Act even in those cases where no income has been earned assessee which has been claimed as exempt during the financial-year. 3. Ther matter has been examined in the Board. It is pertinent to mention that sectio of the Act was intnoduced by the Finance Act, i00L with :retrospective effect 01'.04.1962. The purpose for introduction of section 14A with retrospective effect inceptiorn of the Act was clarified vide circular No. L4 ofZ001 as under: "Certain t'ncomes are not includible while computing the total income, as these are exempt under provisions; of the Act There have been cases where deductions have been claimed in respect of such income. T'his in effect mea|ts that the tax incent-ive given by way of exemptions to certain categories of inco being used to reduce also the tax payable on the ion-exe^ptinro^" uy aeutrng the expenses incurred to the exemp't income against taxable income. This is againstlh" bosi, piniriit if li.rii, whereby onty i1;ome'_i'e'., gross income minus the expendi_ture,--is taxed. On the ,o^, arilogy,'the exemption is also in of the net income. Expenqes incuffed can be allowed only to the extent thty' are'rela,tonrc rc the earn taxable income". Thus, legislative intent is to allow only that expenditure whichis-relatable to ea of inconte and it therefore follows that the u*puni., which are relatable to earni exempt income have to be considered for disallowance, irrespectiveof the fact whether such income has been earned during the financial-year or not. 4' The above position is further clarified by the usage of term 'includible' in the He to se-cllqn 1-4A of the Act and-also-thelJeading-to"Rule 8D of-I-T.Rule s,!962which indi ;;#'i', i?;ffi:rli]' :l'J.ii :year's income, for disallowance to be triggered. Also, section 14A of the Act does not the wortl "income of the year" but "income under the Act". This also indicates that invoking disallowanc9 under section 14A, it is not material that assessee should t Circular No. , ) eby an lhi L4 of L4A m nce earn net ng of ny ing tes lar rse for lve earned such exempt income during the financialyear under consideration. 5. The above position is further substantiated BD(2J(iiii) of I.T.Rules Which are extracted below: "{;:1;,;:,tr:,,y!:t{::};:'r:':::,y^,:::l_expenditure not directly b4 way of interest durins the previous year axributable to any portirutoi inioi,*
In a scrutiny assessment or an appeal where a Rule 8D disallowance has been made for a year in which the assessee earned no dividend or other exempt income.
Rules it names. Rule 8D of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.