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Sec. 14A Disallowance

Devendra (Chartered Accountant) (4775 Points)

21 June 2010

Which are the expenses disallowed u/s 14A?

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RAKESH (Almost CA) (2199 Points)
Replied 21 June 2010

As per Section 14A no deduction is given for the expenditure incurred in relation to income which does not form part of total income.

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vishnupriya (CA Final) (1418 Points)
Replied 21 June 2010

Yes Rakesh is correct.

Also read this article

Section 14A is applicable only when income does not form part of total income that is taxable income under the entire income tax Act.

By: C.A. DEV KUMAR KOTHARI : View Profile

Income-Tax Act:

As per preamble to the Act this is an "Act to consolidate and amend the law relating to income-tax and super-tax".

In this preamble it is not stated that it is for levying and collection of tax, but it is to consolidate the law relating to income-tax and super-tax. Therefore, without going in details for present purpose we assume that the law is in connection with tax on income and super-tax.

Therefore, any tax levied under this Act or any other relevant Central Act on income (whether directly or indirectly in lieu of income tax) is in nature of tax on income.

Expenditure not allowable in view of S.14A:

Sub-sections (1) and (2) being relevant to this study is reproduced below with highlights:

Expenditure incurred in relation to income not includible in total income.

14A.[(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.

Crucial wordings and aspects:

We find two sets of wordings in the sub-section (1) these are given in first column and in second column significance is discussed:

Words uses	Significance
total income under this Chapter,	This expression is used in relation to total income of assessee which is computed as per provisions of the Chapter IV that is Sections 14- 59.
which does not form part of the total income under this Act.	Here 'total income under this Act' means any income on which tax is not imposed under the entire Act whether directly or indirectly.
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	The AO can determine disallowable expenditure only when any 'income does not form part of total income under the Act' and not merely when any income is not included in total income of assessee.

We find use of first expressions 'total income under this chapter' which is used in relation to 'total income of assessee' which is to be computed under Chapter IV.

We find that the second expression 'total income under this Act' used in sub-section (1) and (2) both, this expression means chargeable or taxable income under the entire Income-tax Act.

If it was intended only in relation to the assessee whose income is to be computed, then similar expression could have been used that is 'which does not form part of total income under this chapter or 'which does not form part of total income of assessee' instead of words 'which does not form part of the total income under this Act.

The Income tax Act is a self contained and integrated code. As per scheme of the Act, some incomes are taxable in hands of the recipient of income whereas some incomes are taxable in hands of person who pays or distribute income. When a tax is finally collected (that is not in nature of tax deducted or collected on behalf of recipient of income) at distribution stage, then the income in respect of which such tax is collected is nothing but tax on income. Therefore, it cannot be said that such income does not form part of total income under this Act.

Once it is found that dividend forms part of 'total income under this Act', and a taxable income is computed, and tax is imposed and collected, then S.14A will not at all be applicable in relation to such income which has already been include in taxable income in some other scheme of imposing tax on income.

Similar is case in relation to share in profit of firm which is exempt in hands of partner, because tax has been paid by the firm. Other income of partner received from the same firm by way of interest, salary etc. is taxable in hands of partner as it is allowed to the firm as expenditure. Therefore, it can be said that the share in profit of the firm which has suffered tax in hands of the firm is not an income which does not form part of total income under the Income Tax Act. Therefore, S. 14A will not be applicable in respect of the same.

Readers may also refer to the following article:

DIVIDEND IS CHARGED WITH INCOME TAX AT DISTRIBUTION STAGE SO IT IS NOT EXEMPT INCOME IN CONTEXT OF INCOME TAX ACT 1961 AND THE INDIAN CONSTITUTION