If income not taxable, expenses not deductible- Section 14A & Rule 8D.

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If income not taxable, expenses not deductible- Section 14A & Rule 8D.

Section 14A & Rule 8D

Section 14A provides that no deduction shall be made in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the act. In case of composite business, expenditure pertaining to income exempt from tax shall be determined as prescribed method of Rule 8D.

Rule 8D of the Income tax Act 1961 provides the method for determining amount of expenditure in relation to income not includible in total income.

8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfie 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 incurre,

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:—

 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

(i) the amount of expenditure directly relating to income which does not form part of total income; and
(ii)
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.

14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allow in respect of expenditure incurre 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 incurre. 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 prescribe- Cellica Developers (P) ltd. v. CIT [2014] 63 SOT 255(kol.). 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 incurre 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.

Section 14A applies to all heads of income and aims at disallowance of expenditure incurred in relation to income. Which do not form part of total income-ITO v. Daga Capital management (P.) ltd. [2009] 117 ITD(Mum).

Section 14A & Rule 8D


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