What are section 14A disallowances

What are section 14A disallowances

SECTION 14A DISALLOWANCES

Section 14A of the Income Tax Act, 1961 was inserted in Finance Act, 2001 with retrospective effect from 1-4-1962. This section provides for disallowance of expenditure incurred by an assessee in relation to earning of income which does not form part of total income of the assessee. In simple words, expenditure incurred for earning exempt income will be disallowed U/s disallowance 14A.

Sec 14A - Expenditure incurred in relation to income not includible in total income



(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.

Rule 8D of Income Tax Rules

Method for determining amount of expenditure in relation to income not includible in total income.

(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with



(a) the correctness of the claim of expenditure made by the assessee; or

(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely



(i) the amount of expenditure directly relating to income which does not form part of total income; and

(ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income :

Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.

Conclusion :
In recent times, it is seen that injudicious invocation of these provisions has become a cause of serious harassment for tax payers resulting in increased litigation. While the purpose of introducing the provisions of sec 14A was to ensure that net income is actually taxed and no expenditure incurred for earning exempt income is claimed as deduction. The plain application of this provision along with Rule 8D often results in a situation wherein even expenditure incurred for earning taxable income is disallowed.