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

Kaveri Ltd borrowed funds and incurred Rs 4,00,000 of expenditure in the tax year to acquire shares meant to yield income that does not form part of total income. No such income accrued, arose or was received in that tax year. Which statement is correct under section 14 of the Income-tax Act, 2025?

No deduction is allowed. Section 14 disallows expenditure incurred in relation to income that does not form part of total income. Under section 14(3), this applies even when no such income accrued, arose or was received in that tax year, so the lack of exempt income does not make the expenditure deductible.

  1. AThe expenditure is fully deductible because no exempt income arose in the year.
  2. BThe expenditure is deductible only in the year the exempt income is first received.
  3. CThe expenditure is deductible up to 1% of the investment value.
  4. DNo deduction is allowed for the expenditure, as section 14 applies even where the exempt income did not accrue, arise or get received in that year.Correct

Explanation

Section 14(1) bars deduction of expenditure incurred in relation to income not forming part of total income. Section 14(3) applies this even where such income has not accrued, arisen or been received during the tax year. So the absence of exempt income in the year does not allow the deduction. The 1% figure is only part of the Rule 14 method for determining the amount.

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