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CMA Intermediate · Direct and Indirect Taxation · Income which does not form part of Total Income

In tax year 2026-27, Meera Traders incurred ₹50,000 of expenditure in relation to an item of income that is exempt under the Act, but that income will accrue only in tax year 2027-28. How does Section 14 apply to the ₹50,000?

The ₹50,000 is disallowed in 2026-27. Section 14(3) applies the disallowance even if the exempt income has not accrued, arisen or been received in that tax year, so timing of the exempt income does not make the expenditure deductible.

  1. AIt is deductible in 2026-27 and the exempt income is taxed in 2027-28
  2. BIt is deductible in 2027-28 when the income accrues
  3. CIt is disallowed in 2026-27 even though the exempt income has not yet accrued, arisen or been receivedCorrect
  4. DIt is carried forward and set off against taxable income of 2027-28

Explanation

Section 14(3) states that the section applies where expenditure is incurred during a tax year in relation to income not forming part of total income, even if that income has not accrued, arisen or been received in that year. So the ₹50,000 is disallowed in 2026-27. Deferring the deduction to 2027-28 is not provided.

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