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

Meera Textiles Ltd earned Rs 12,00,000 of income that does not form part of its total income under the Income-tax Act, 2025. Its books show total expenditure of Rs 5,00,000, none of which is separately identifiable with that exempt income. The Assessing Officer is not satisfied with the company's claim of expenditure relating to the exempt income and applies the prescribed method in the Income-tax Rules, 2026 (Rule 14). The company holds no investment that yields exempt income. What is the expenditure disallowed in relation to the exempt income?

The disallowance is nil. Rule 14 adds expenditure directly relating to exempt income and 1% of the annual average of monthly averages of investment yielding exempt income. With no direct expenditure and no such investment, both components are zero, so nothing is disallowed.

  1. ANilCorrect
  2. BRs 12,000
  3. CRs 1,20,000
  4. DRs 5,00,000

Explanation

Under Rule 14(1), the amount is the sum of (a) expenditure directly relating to the exempt income and (b) 1% of the annual average of monthly averages of opening and closing investment balances yielding exempt income. Here (a) is nil because nothing is directly identifiable, and (b) is nil because there is no such investment. The total is nil. Rs 1,20,000 wrongly applies 10% to the income, and Rs 12,000 wrongly applies 1% to the income.

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