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

Deccan Holdings Ltd. earns income from investments that does not form part of its total income. The monthly average of the opening and closing balances of these investments was Rs 1,00,00,000 for each of the first six months of the tax year and Rs 2,00,00,000 for each of the last six months. Expenditure directly relating to this exempt income is Rs 80,000, and the total expenditure claimed by the company is Rs 5,00,000. The Assessing Officer is not satisfied with the company's claim that no expenditure was incurred for the exempt income. Applying Rule 14 of the Income-tax Rules, 2026, what amount is disallowed under section 14?

The disallowance is Rs 2,30,000. The annual average of the monthly averages is Rs 1.5 crore, and 1% of it is Rs 1,50,000. Adding the Rs 80,000 direct expenditure gives Rs 2,30,000, which is within the Rs 5,00,000 claimed, so Rule 14 allows no further reduction.

  1. ARs 1,50,000
  2. BRs 1,80,000
  3. CRs 2,30,000Correct
  4. DRs 2,80,000

Explanation

The annual average of the monthly averages is (6 x 1 crore + 6 x 2 crore)/12 = Rs 1,50,00,000. 1% of this is Rs 1,50,000. Adding direct expenditure of Rs 80,000 gives Rs 2,30,000, which is below the Rs 5,00,000 claimed, so the cap does not bite. Rs 2,80,000 wrongly uses the Rs 2 crore later-period balance, and Rs 1,50,000 omits the direct expenditure.

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