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CA Final · Direct Tax Laws & International Taxation · Incomes which do not form part of Total Income

Anita Ltd claimed total expenditure of only Rs 25,000 in its accounts. The Assessing Officer is not satisfied with its claim that no expenditure was incurred for exempt income and applies Rule 14 of the Income-tax Rules, 2026. Direct expenditure relating to exempt income is Rs 10,000. The annual average of the monthly averages of the opening and closing balances of exempt-income investments is Rs 3,00,00,000. What amount is disallowed?

Rs 25,000 is disallowed. The formula gives Rs 10,000 direct plus 1% of Rs 3,00,00,000, or Rs 3,10,000, but Rule 14(2) says the amount cannot exceed the total expenditure claimed by the assessee, which is Rs 25,000.

  1. ARs 10,000
  2. BRs 25,000Correct
  3. CRs 3,10,000
  4. DRs 3,00,000

Explanation

Under Rule 14(1) the amount is Rs 10,000 plus 1% of Rs 3,00,00,000, which is Rs 3,00,000, so Rs 3,10,000. Rule 14(2) caps this at the total expenditure claimed, Rs 25,000. Hence Rs 25,000 is disallowed. Rs 3,10,000 ignores the cap.

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