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

Ravi Traders earns Rs 5,00,000 of income that does not form part of total income and also earns taxable business income. It claims total expenditure of Rs 3,00,000, of which Rs 40,000 directly relates to the exempt income. The Assessing Officer is not satisfied with the claim and applies Rule 14 of the Income-tax Rules, 2026. The annual average of the monthly averages of the opening and closing balances of investments yielding exempt income is Rs 20,00,000. What expenditure is disallowed under section 14?

Rs 60,000 is disallowed. Rule 14 adds direct expenditure of Rs 40,000 to 1% of the average investment value of Rs 20,00,000, which is Rs 20,000. The total is within the Rs 3,00,000 claimed, so no cap applies.

  1. ARs 40,000
  2. BRs 60,000Correct
  3. CRs 20,000
  4. DRs 3,00,000

Explanation

Rule 14(1) sums direct expenditure of Rs 40,000 and 1% of Rs 20,00,000, which is Rs 20,000, giving Rs 60,000. This is below the total claim of Rs 3,00,000, so the cap in Rule 14(2) does not bind. Rs 40,000 omits the 1% component.

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