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CMA Intermediate · Direct and Indirect Taxation · Income which does not form part of Total Income

Rohan Industries Ltd earned exempt income of ₹4,00,000 in tax year 2026-27 and incurred ₹30,000 of expenditure directly related to earning it. The AO is satisfied that the amount is correct. What is the effect of Section 14 on the computation of total income?

The ₹30,000 expenditure is disallowed and the ₹4,00,000 stays outside total income. Section 14(1) bars deduction of expenditure relating to income not forming part of total income, and the exempt income does not become taxable merely because costs were incurred.

  1. A₹30,000 is deducted from the business income
  2. B₹30,000 is not deductible, and the exempt ₹4,00,000 is excluded from total incomeCorrect
  3. C₹30,000 is deducted from the exempt income, and ₹3,70,000 is taxed
  4. DThe ₹4,00,000 becomes taxable because expenditure was incurred

Explanation

Exempt income of ₹4,00,000 does not form part of total income. Section 14(1) disallows the ₹30,000 expenditure related to it, so no deduction is made against taxable income. Taxing ₹3,70,000 is wrong because exempt income is not netted and taxed; the exempt income stays excluded.

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