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

Meera Textiles Ltd earns interest of Rs 4,00,000 that is exempt under the conditions of the relevant Schedule, and its books show no expenditure incurred for earning it. The Assessing Officer is not satisfied with the claim that no expenditure was incurred. Under section 14 of the Income-tax Act, 2025, what is the position?

The Assessing Officer must determine the expenditure by the prescribed method and disallow it. Section 14(2)(b) applies where he is not satisfied with a claim that no expenditure was incurred for earning exempt income, and section 14(1) bars the deduction. The exempt income itself remains outside total income.

  1. AThe Assessing Officer must determine the expenditure by the prescribed method, and that amount is disallowedCorrect
  2. BThe whole of the exempt income becomes taxable because the claim of nil expenditure is rejected
  3. CNo disallowance can be made as the books show no expenditure
  4. DThe Assessing Officer may disallow only expenditure that is directly related, and has no power to estimate it

Explanation

Section 14(2)(b) says that where the Assessing Officer is not satisfied with the claim that no expenditure has been incurred in relation to income not forming part of total income, he shall determine the amount by the prescribed method. Section 14(1) then bars the deduction of that amount. The exempt income itself stays exempt, so the option making it taxable is wrong.

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