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

Meera Textiles Ltd earned exempt income and claimed total expenditure of ₹6,00,000 for the tax year. The Assessing Officer is not satisfied with its claim about the expenditure incurred in relation to the exempt income, so he applies Rule 14 of the Income-tax Rules, 2026. Expenditure directly relating to the exempt income is ₹40,000. The annual average of the monthly averages of opening and closing balances of the investment yielding exempt income is ₹30,00,000. What amount of expenditure is disallowed?

The disallowance is ₹70,000. Rule 14 adds expenditure directly relating to exempt income, ₹40,000, to 1% of the annual average of the monthly averages of investment, which is ₹30,000. The total is within the ₹6,00,000 claimed, so the cap does not apply.

  1. A₹30,000
  2. B₹70,000Correct
  3. C₹3,40,000
  4. D₹40,000

Explanation

Under Rule 14(1), the expenditure is the sum of the direct expenditure and 1% of the annual average of the monthly averages of investment. That is ₹40,000 plus 1% of ₹30,00,000 (₹30,000), giving ₹70,000. This is below the ₹6,00,000 claimed, so the cap in Rule 14(2) does not bite. Taking only the 1% amount gives ₹30,000, which omits the direct expenditure.

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