Controversial Issues in

Section 14A
Presentation before
ICAI, Ahmedabad Branch
6th October, 2012

Tushar P. Hemani,
Advocate, High Court

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 Section 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.
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• (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.

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Rule 8D - 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).

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• (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;
(ii) in a case where the assessee has incurred
expenditure by way of interest during the previous
year which is not directly attributable to any
particular income or receipt, an amount computed
in accordance with the following formula, namely:-
A*B
C

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Where A = amount of expenditure by way of interest
other than the amount of interest included in
clause (i) incurred during the previous year ;
B = the average of value of investment, income
from which does not or shall not form part of the
total income, as appearing in the balance sheet of
the assessee, on the first day and the last day of
the previous year ;
C = the average of total assets as appearing in
the balance sheet of the assessee, on the first day
and the last day of the previous year ;

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    (iii) an amount equal to one-half per cent of the
average of the value of investment, income from
which does not or shall not form part of the total
income, as appearing in the balance sheet of the
assessee, on the first day and the last day of the
previous year.
• (3) For the purposes of this rule, the "total assets" shall
mean, total assets as appearing in the balance sheet
excluding the increase on account of revaluation of
assets but including the decrease on account of
revaluation of assets.

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 ACIT vs. Mohan Exports (P.) Ltd.
[138 ITD 108 (Delhi)]
• Facts:
• Assessee had made investments in shares of companies
and units of mutual funds for AY 2008-09. AO held that
the investments were made with a view to earn dividend
and hence, provisions of Sec. 14A and Rule 8D were
applicable. Consequently, disallowance was made
under Rule 8D(2)(ii) and 8D(2)(iii).
• On appeal, CIT(A) examined assessee’s bank account
and found that such investments had been made out of
interest free funds available with the assessee. Hence,
he held that no disallowance was warranted under Rule
8D(2)(ii).

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• Held:
• On Revenue’s appeal, it was held by the Hon’ble ITAT
that Rule 8D(2)(ii) deals with a case where assessee has
incurred expenditure by way of interest which is not
directly attributable to any particular income or receipt.
• Since CIT(A) has recorded a finding that interest is
not directly related to receipts by way of dividends,
it follows that payment of interest is in respect of
income other then dividend income. In such a
situation, interest can’t be said to be a kind of general
expenditure incurred for earning various kinds of
incomes. Hence, provisions contained in Rule 8D(2)(ii)
is not applicable.

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 ACIT vs. Torrent Pharmaceuticals Ltd.
[137 ITD 301 (Ahmedabad)]

• Facts:

• AO made disallowance of administrative expenses u/s

14A of the Act on estimated basis.

• On appeal, CIT(A) was also of the view that certain

administrative efforts were necessarily required for
earning the exempt income. Hence, the said addition
was confirmed by him.

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• Held:
• On appeal, following decision of Hon’ble Kerala High
Court in the case of CIT vs Catholic Syrian Bank Ltd
(207 Taxman2), the Hon’ble ITAT held that there is no
prescribed formula for disallowance of proportionate
administrative cost attributable to earning of tax free
income until Rule 8D came into force.
• It was further held that proportionate disallowance u/s
14A should be limited to only interest liability and not
to overhead or administrative expenditure.
• Accordingly, the impugned addition, being on estimate
basis was deleted.

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 ACIT vs. Novel Enterprises
[52 SOT 127 (Mumbai)]
• Facts:
• Assessee had utilized interest bearing funds for making
loan/capital contribution to a Partnership Firm in
which it was a partner. It had received interest income
and share in profits from the said Partnership Firm.
• AO was of the view that interest expenditure incurred
by assessee had resulted in taxable as well as tax free
income and hence, that portion of interest which related
to share of profit was liable to be disallowed u/s 14A for
A.Y.2005-06.
• On appeal, CIT(A) deleted the said disallowance after
noting that in the Partnership Deed, it was no where
stipulated that sharing of profit was dependent on
contribution of funds.

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• Held:
• Indian Partnership Act, 1932 does not contemplate or
stipulate capital contribution by the partner as one of
the conditions for a partnership firm.
• Sharing of profit/loss is the only condition (S.4 of P Act)
• Therefore, it cannot be said that contribution in the
capital of the Partnership Firm has resulted into share
of profit in the hands of the assessee.
• Therefore no disallowance is called for u/s 14A of the
Act.

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 Bayer Bio Science (P.) Ltd. vs. ACIT
[51 SOT 16 (Mumbai)]
• Facts:
• Assessee had earned dividend income from investments
made out of own funds as was evident from its reserves
and surplus account which has gone up by Rs.55.55
crores for A.Y.2007-08 .
• Still, assessee offered Rs.1,66,000/- as disallowance in
respect of other expenses which could be said to be
attributed to earning of dividend.
• AO rejected assessee’s explanation and made
disallowance of a higher amount u/s 14A.
• The said disallowance was confirmed by DRP also.

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• Held:
• On appeal, the Hon’ble ITAT found that assessee had
sufficient non-interest bearing funds for making the
concerned investments and hence, no direct costs were
involved in funding the said investments. [followed
Reliance Utilities (313 ITR 340)(Bom)]
• Assessee had offered Rs.1,66,000/- as direct and
indirect costs in earning dividend and neither AO nor
DRP pointed out any infirmities in the same.
• Hence, it was held that the disallowance offered by
assessee was fair and reasonable and AO ought to have
accepted the same.

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 CCI Ltd. vs. JCIT
[250 CTR 291 (Karnataka)]
• Facts:
• Assessee was a dealer in shares and securities. It had
purchased shares of a company by availing an interest-
free loan and had paid certain amount for brokering the
same.
• 63% of said shares were sold and income derived
thereon was offered to tax as business income.
Remaining 37% shares remained unsold on which the
assessee earned dividend income.
• AO held that the brokerage expenditure was directly
attributable to the earning of dividend income and
disallowed the same. On appeal, CIT(A) confirmed the
order passed by AO.
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• On second appeal, the Hon’ble ITAT held that the
expenditure which was relatable to earning of dividend
income, though incidental to trading of shares, was to
be disallowed u/s 14A.
• However, Hon’ble ITAT found that entire expenditure
was not relatable to dividend income only as the loan
was utilized for purchase of shares and profit earned on
sale of certain shares out of those shares (i.e. 63%
shares) had been offered as business income.
• Hence, Hon’ble ITAT directed AO to bifurcate all the
expenditure proportionately and allow the expenditure
in accordance with law.

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• Held:
• On appeal to the Hon’ble High Court, it was held that
when no expenditure is incurred in earning dividend
income, no notional expenditure could be deducted
from the said income.
• Assessee had earned dividend income on 37% shares
remaining unsold for which the assessee had not
incurred any expenditure at all.
• When the assessee has not retained shares with the
intention of earning dividend income and the dividend
income is incidental to the business of sale of shares, it

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 cannot be said that the expenditure incurred in
acquiring the shares has to be apportioned to the extent
of dividend income and that should be disallowed from
deductions.
• Accordingly, the impugned orders were set aside.

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 Gillette Group India P. Ltd. vs. ACIT
[16 ITR(Trib) 57 (Delhi)]
• Facts:
• Assessee had claimed total expenditure of
Rs.49,04,028/- in the profit and loss account. AO
disallowed Rs.2,37,59,757/- u/s 14A which was
reduced to Rs.1,78,83,842/- by the CIT(A).

• Held:
• On second appeal, the Hon’ble ITAT held that the
disallowance u/s 14A cannot exceed the expenditure
actually claimed by the assessee. Hence, AO and CIT(A)
were not justified in making disallowance in excess of
total expenditure debited to profit and loss account.

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 CIT vs. Kribhco
[252 CTR (Del) 374]
• Facts:
• Assessee had claimed deduction u/s 80P(2)(d) in
respect of dividend and interest received from a Co-
Operative society. AO held that the said incomes were
not included in total income of the assessee and hence,
he made disallowance u/s 14A out of interest
expenditure and employees benefit & remuneration.
• On appeal, both CIT(A) and the Hon’ble ITAT deleted the
said addition.

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• Held:
• On Revenue’s appeal, the Hon’ble High Court held that
no disallowance u/s 14A can be made against the
income which is entitled to deduction u/s 80P(2)(d).
• Firstly, income of an assessee is computed by applying
the provisions of Chapter IV, V and VI. From this
income, deductions are permitted and allowed in terms
of Chapter VI-A. Deduction under Chapter VI-A doesn’t
mean that deduction allowed has the effect that such
income ceases to be part of total income.
• The expression “Income which does not form part of
total income” refers to nature, character or type of
income and not the quantum.
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• Sec. 14A states that for the purposes of computing total
income under Chapter IV, no deduction shall be allowed
in respect of expenditure incurred in relation to income
which does not form part of total income.
• Since the incomes qualifying for deduction under
Chapter VI-A do form part of income, no disallowance
can be made u/s 14A.

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ACIT vs. Spray Engineering Devices Ltd.
[53 SOT 70 (Chandigarh)]
• Facts:
• Consequent to a disallowance of Rs.14,05,700/- u/s
14A, AO also re-computed Book Profits of the assessee
u/s 115JB by adding the sum of Rs.14,05,700/- being
adjustment as per Explanation 1(f) to S. 115JB for A.Y.
2006-07. On appeal, CIT(A) deleted the said addition.
• Further, assessee had adopted a business strategy
whereby it made investment by way of shareholding in a
sick sugar mill in order to take over the said company
for widening its operations of business. Assessee had no
intention to earn any dividend from such investment.
Still, AO made disallowance u/s 14A which was
confirmed by CIT(A).
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• Held:
• On Revenue’s appeal as regards first issue, the Hon’ble
ITAT held that as per Explanation to S. 115JB, book
profit is defined to be the net profit shown in profit and
loss account as increased/reduced by amounts
specified in clauses mentioned thereunder.
Disallowance u/s 14A is not covered by the aforesaid
clauses and hence, order of CIT(A) in deleting addition
of Rs.14,05,700/- made while computing book profits
u/s 115JB was upheld.

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• On second appeal by assessee as regards the second
issue, the Hon’ble ITAT held that once assessee has
been found to have made a business investment by way
of shares in related line of business, the said
investment though held by way of shares in the said
company cannot be subjected to disallowance u/s 14A.
• In the facts of present case, investment was purely of
business nature as the company in which the amount
was invested was a loss making company and there was
no question of earning any dividend income from such
investment. Hence, there is no merits in the orders of
the lower authorities in making disallowance u/s 14A.
 
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 Avshesh Mercantile (P.) Ltd. vs. DCIT
[148 TTJ (Mumbai) 607]
• Facts:
• Assessee paid premium to premium note holders and
invested proceeds of the said premium notes (OCPN) in
shares/debentures of a company. Dividend income and
long term capital gain from the said investment were
exempt from tax u/s 10(23G). Hence, AO held that
provisions of S. 14A were applicable and accordingly, he
disallowed entire premium paid by the assessee on
redemption of premium notes.
• On appeal, the CIT(A) upheld the said disallowance.

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• Held:
• On second appeal, the Hon’ble ITAT found that as per
the relevant notification issued u/s 10(23G), such
exemption was initially granted for specific period only
i.e. from Asst. Years 1999-00 to 2001-02 and later, it
was extended upto Asst. Year 2004-05.
• Thus, premium paid by assessee can’t be regarded as
an expenditure incurred exclusively in relation to
earning of exempt income. Moreover, the said
investment has the potential of generating taxable
income also in the form of short term capital gain, etc.

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• Further, the assessee had not earned any exempt
income during the years under consideration. Following
the decision of Delite Enterprise (ITA No.2983/M/2005)
as confirmed by the Mumbai High Court (IT Appeal
No.110 of 2009) it was held that when no exempt
income is earned at all, the question of disallowance
u/s 14A does not arise.
• Hence, it was held by the Hon’ble ITAT that the
disallowance made by AO u/s 14A and confirmed by
CIT(A) was to be deleted.

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 Auchtel Products Ltd. vs. ACIT
[52 SOT 39 (Mumbai)(URO)]
• Facts:
• The assessee earned certain exempt income without
offering any amount as disallowance u/s 14A for
A.Y.2008-09. AO computed disallowance by applying
Rule 8D.
• On appeal, assessee submitted that there was no nexus
between interest bearing funds and investments from
which such exempt income has been earned.
• CIT(A) was not convinced with the assessee’s
submission and hence, he confirmed the said
disallowance.

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• Held:
• On second appeal, the Hon’ble ITAT observed that a
bare perusal of sub-section (2) and (3) of S. 14A
indicates that AO shall determine amount disallowable
as per Rule 8D if he is not satisfied with the correctness
of claim of the assessee. Such satisfaction can be
reached only when claim of assessee has been verified.
• If AO gets satisfied with assessee’s claim, there is no
need to compute disallowance as per Rule 8D. It is only
when AO is not satisfied with the correctness of claim of
assessee in respect of such expenditure or no
expenditure having been incurred in relation to exempt
income that the mandate of Rule 8D will operate.
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• From the Asst. Order, it was observed that AO simply
kept assessee’s submission on record without properly
appreciating as to whether the same were correct or
not. AO proceeded on the premise as if disallowance as
per Rule 8D is automatic irrespective of the
genuineness of assessee’s claim. It is an incorrect
course adopted by the AO.
• Hence, the Hon’ble ITAT restored the matter to the file
of AO to re-compute disallowance, if any, in accordance
with above observations after duly examining assessee’s
claim in this regard.

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 Vishnu Anant Mahajan vs. ACIT
[137 ITD 189 (Ahmedabad)(SB)]
• Facts:
• Assessee was deriving income by way of share of profit
from a Partnership Firm, capital gains, interest,
dividend and house property. He had claimed certain
expenses and depreciation on motor car owned by him.
• AO was of the opinion that since share in profits of firm
is exempt in the hands of the assessee, provisions of
S.14A shall be applicable. Hence, he made disallowance
u/s 14A.
• On appeal, CIT(A) was of the view that expenses and
depreciation do not pertain to the assessee as an
individual, but pertain to the Partnership Firm.

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• Since the share in profits of firm is exempt in the hands
of a partner as per S.10(2A), provisions of S.14A are
applicable. Since the assessee derived 76% of
professional income as share from the firm and balance
amount by way of interest and remuneration from the
firm, CIT(A) allocated expenses proportionately. Thus,
76% of the expenditure was disallowed and business
income by way of remuneration and interest from the
firm was taxed in the hands of the assessee after
allowing 24% of the expenditure.

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• Held:
• On appeal, the Hon’ble ITAT held that as the share in
profits of firm is exempt in hands of partner, provisions
of S. 14A are rightly applicable. Hence, CIT(A) was right
in allocating the expenditure proportionately.
• Further, it was also held that S. 14A deals only with the
expenditure and not with any statutory allowance
admissible to the assessee. Depreciation is a statutory
allowance as per S. 32 and hence, provisions of S. 14A
would not apply in respect of depreciation.

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DCIT vs. Arihant Foundations & Housing Ltd.
[18 ITR(Trib) 588 (Chennai)]

• Facts:
• Assessee earned dividend income which was claimed as
exempt u/s 10(34). However, it had not attributed any
expenditure towards earning such income.
• Assessee had made huge investments in its sister
concern by way of “Share application money”.
• AO has noted in the Asst. Order that funds of the
assessee included share capital, shareholder earnings
and borrowed funds. The investments could have very
well been made out of such funds. There was no direct
nexus established between borrowed funds and
investments made by the assessee.

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• AO noted that assessee had incurred routine
expenditure for establishment and administrative
purposes. According to him, a portion of managerial
staff remuneration and director’s remuneration could
be attributed to such investments. He worked out
disallowance u/s 14A at Rs.70,38,725 as per Rule 8D.
• On appeal, CIT(A) observed for the impugned Asst. Year
i.e. AY 2006-07, Rule 8D could not apply. Hence,
disallowed u/s 14A must be made on a reasonable
basis. Accordingly, he held that a disallowance of
Rs.50,000/- shall be reasonable. 

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• Held:
• On Revenue’s appeal, the Hon’ble ITAT observed that
assessee had made huge investments in share
application money which, by itself, cannot yield any
dividend unless shares were allotted against such
money.
• Further, it found that CIT(A) was right in holding that
Rule 8D shall not apply to the impugned Asst. Year.
• Also, the assessee had sufficient interest free funds for
making such investments.
• Hence, in such circumstances, the Hon’ble ITAT upheld
the order of the CIT(A).

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 Justice Sam P. Bharucha vs. ACIT
[25 taxmann.com 381 (Mum-Trib)]
• Facts:

• For A.Y. 2006-07, Assessee had earned dividend income

from mutual funds and shares besides interest on RBI
tax-free bonds which are exempt income.
• AO made disallowance u/s 14A by applying Rule 8D.
• On appeal, CIT(A) confirmed the disallowance made by
AO.

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• Held:
• On further appeal, the Hon’ble ITAT held that when it is
possible to determine actual expenditure in relation to
exempt income or when no expenditure has been
incurred in relation to exempt income, then principle of
apportionment embedded in S. 14A has no application.
• There should be a live nexus between the expenditure
incurred and income not forming part of total income
for making disallowance u/s 14A.
• No notional expenditure can be apportioned for the
purpose of earning exempt income unless there is an
actual expenditure in relation to earning exempt
income.
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• Expenditure incurred and claimed by the assessee has
direct nexus with his professional income. AO has not
pointed out that certain expenditure is incurred for
earning exempt income or for inseparable and
indivisible activities comprising of professional as well
as activities on which exempt income has been earned.
• In absence of any such instance of expenditure, finding
of AO or any other material to show that expenditure
incurred by assessee against taxable income has any
relation with earning exempt income, provisions of
S.14A cannot be applied in assessee’s case.
• Hon’ble ITAT also held that Rule 8D is not applicable to
the year under consideration i.e. AY 2006-07.
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 Kirloskar Oil Engines Ltd. vs. DCIT
[24 taxmann.com 110 (Pune)]
• Facts:
• For A.Y. 1999-2000, Assessee had received dividend of
Rs.4,10,60,955 vide 5 dividend cheques. Assessee had
not incurred any interest expenditure for earning such
exempt income.
• AO disallowed Rs.20,53,048/- being 5% of the total
dividend income u/s 14A.
• On appeal, CIT(A) restricted the said disallowance to
Rs.50,000/- on the ground that ad hoc disallowance at
the rate of 5% of total dividend income was too high.

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• Held:
• On Revenue’s appeal, the Hon’ble ITAT held that CIT(A)
had restricted the disallowance to Rs.50,000/- on
account of employee cost, infrastructure cost, etc. for
earning the dividend income and the same being
reasonable, needs to be upheld.
• Since AO has not given any finding that assessee had
incurred any interest expenditure on borrowed funds
and has also not disputed the fact that the assessee
had received only 5 dividend cheques, disallowance @
5% is unjustified and order of CIT(A) in restricting the
same to Rs.50,000/- appears to be reasonable.

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 M/s Suzlon Energy Ltd. vs. DCIT
[ITA Nos.3911/Ahd/07 & 1367/Ahd/08]
• Facts:
• AO had included investment in foreign subsidiaries
while working out disallowance u/s 14A.
• Out of the total disallowance of Rs.3,06,48,988/- u/s
14A, disallowance of Rs.2,56,29,272/- was on account
of interest expenditure. Out of this interest expenditure,
interest considered by AO in respect of investment in
“Foreign subsidiaries” is to the extent of
Rs.1,63,36,353/- and balance Rs.92,92,919/-is in
respect of investment in “Indian Subsidiaries”.
• Further, assessee had sufficient own funds for making
such investments in its subsidiaries.
• On appeal, the said disallowance was deleted by CIT(A).
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• Held:
• On second appeal, the Hon’ble ITAT held that
disallowance u/s 14A out of interest expenditure with
respect to investment in “Foreign subsidiaries” is not
called for since dividend from foreign subsidiaries is
taxable in India.
• Regarding balance investments in “Indian subsidiaries”
also, since the assessee had sufficient own funds for
making the said investment and AO had not given any
finding regarding nexus between interest bearing funds
and investment in Indian subsidiaries, no disallowance
was justified.

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ACIT vs. Champion Commercial Co. Ltd.
[ITA No.644/Kol/12 & CO 55/Kol/12]
• Facts:
• For A.Y. 2008-09, Assessee had exempt dividend
income but had not offered any amount as disallowance
u/s 14A.
• AO was not in agreement with the contentions of the
assessee as regards non applicability of S.14A and
hence, he made disallowance by following Rule 8D.
• On appeal, the CIT(A) reduced the said disallowance
substantially by re-computing the same as per Rule 8D.
The disallowance was reduced on account of change in
calculation under Rule 8D(2)(ii).

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• Held:
• On further appeal, the Hon’ble ITAT observed that the
definition of variable “A” embedded in formula under
Rule 8D(2)(ii) is clearly incongruous inasmuch as while
it specifically excludes interest expenditure directly
related to “Exempt income”, it does not exclude interest
expenditure related to “Taxable income”.
• Resultantly, while Rule 8D(2)(ii) admittedly seeks to
allocate “expenditure by way of interest which is not
directly attributable to any income or receipt”, it ends
up allocating “expenditure by way of interest which is
not directly attributable to any income or receipt plus,
interest which is directly attributable to “Taxable
income”.
Tushar Hemani, Advocate 
www.lexpertsonline.com
• This incongruity arises because as per the wordings of
Rule 8D(2)(ii), out of total interest expenses, interest
expenses directly attributable to “Tax exempt income”
are excluded, while interest expenses directly
attributable to “Taxable income”, even if any, are not
excluded.
• Hence, interest expenses directly attributable to exempt
income as well as taxable income, both need to be
excluded from the definition of variable “A” in formula
as per Rule 8D(2)(ii) because it is only then that
“Common interest expenses” which are to be allocated
as indirectly relatable to taxable income and tax exempt
income can be computed.

Tushar Hemani, Advocate 
www.lexpertsonline.com
• Hon’ble ITAT made it clear that “Common expenses”
which are to be allocated in terms of formula under
Rule 8D(2)(ii) will only be such expenses as are neither
attributable to borrowings specifically used for tax
exempt income or receipts, nor are directly attributable
to borrowings specifically used for taxable income or
receipts. With these directions, the Hon’ble ITAT
restored the matter to the file of AO.

Tushar Hemani, Advocate 
www.lexpertsonline.com
 State Bank of Mauritius Ltd. vs. DDIT
[ITA No.2254 & 3005/Mum/2005]
• Facts:
• Assessee had invested Rs.10 crores in tax free bonds
out of borrowed funds and claimed exemption in
respect of interest from the same.
• Since assessee had not offered any amount as
disallowance u/s 14A, AO made disallowance by
applying 9% as interest on borrowed funds to the extent
of investment in tax free bonds.
• On appeal, CIT(A) deleted the said disallowance as the
assessee had demonstrated that it had sufficient
interest free funds for making the said investment.

Tushar Hemani, Advocate 
www.lexpertsonline.com
• Held:
• On Revenue’s appeal, the Hon’ble ITAT found that as
per Article 7(3) of the Indo-Mauritius DTAA, deduction
in respect of expenses which are incurred for the
purposes of business of the permanent establishment
shall be allowed. The said article does not provide for
limiting deductibility of expenses as per the provisions
of the Act.
• Hon’ble ITAT was of the view that benefit of such article
can be availed in respect of Sections like 40, 43B, 44C,
etc. but cannot be availed in respect of S.14A.

Tushar Hemani, Advocate 
www.lexpertsonline.com
• Sections 40, 43B, 44C, etc provide for disallowance in
respect of expenses which are otherwise allowable. It is
because of such limit or breach of stipulation that the
otherwise deductible expenses become non-deductible
or deductible at a lower rate.
• S.14A is quite different as it contains a fundamental
principle that any expenditure in relation to an income
not includible in total income shall not be allowed as
deduction. Thus, S.14A snatches away the deductibility
of expenses incurred in relation to exempt income.

Tushar Hemani, Advocate 
www.lexpertsonline.com
• It is not a case that expenses are otherwise deductible
but have become non-deductible due to the operation of
S.14A. Rather, such expenses do not qualify for
deduction at the very first instance. Hence,
disallowance u/s 14A is justified in assessee’s case.
• However, since the assessee had repaid the loan taken
out of own interest free funds on the very next day, AO
was directed to calculate disallowance u/s 14A on
Rs.10 crores for one day at the rate charged by RBI on
the loan advanced to the assessee.

Tushar Hemani, Advocate 
www.lexpertsonline.com
 
 

Thank You

Tushar Hemani, Advocate 
www.lexpertsonline.com