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

Kaveri Investments claimed that it incurred no expenditure in earning exempt income. The Assessing Officer is not satisfied with this claim, having examined the accounts. Its investments yielding exempt income had monthly averages of opening and closing balances whose annual average is Rs 50,00,000. Directly related expenditure is Rs 30,000. Total expenditure claimed in the books is Rs 2,00,000. Applying Rule 14 of the Income-tax Rules, 2026, what expenditure is disallowed?

Rs 80,000 is disallowed. Rule 14 adds directly related expenditure of Rs 30,000 to 1% of the annual average investment value, which is Rs 50,000. The total is below the Rs 2,00,000 claimed, so the cap does not reduce it.

  1. ARs 80,000Correct
  2. BRs 50,000
  3. CRs 30,000
  4. DRs 2,00,000

Explanation

Rule 14(1) sums (a) direct expenditure Rs 30,000 and (b) 1% of the annual average of monthly averages of investment balances: 1% of Rs 50,00,000 = Rs 50,000. Total is Rs 80,000, which does not exceed the Rs 2,00,000 claimed, so the cap in Rule 14(2) does not bite. Rs 50,000 alone ignores the direct expenditure.

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