Section14A of the Income-Tax Act, 1961 (Act) inserted by the Finance Act, 2001 in the Act with effect from April 1, 1962, provides that no deduction shall be made in respect of expenditure incurred by an assessee in relation to income, which shall not form part of total income under the Act.
Income may not be part of total income because it is exempt under the provisions of Section10 or other Sections or because it becomes deductible from the total income, thus, not forming part of it, by virtue of other sections of the Act like Sections 80C, 80CCA, 80CCB, 80CCD, 80P, etc.
The issue, being examined, is whether the disallowance under Section 14A would be only in respect of ‘exempted' incomes or also concerning incomes which do not form part of total income as the same are deductible in computing the taxable income of an assessee — the impact of two situations being the same namely freedom from tax.
the Case
The Income-Tax Appellate Tribunal, Delhi (D-Bench) in the case of
In the case before the Tribunal, the assessee society earned dividend and interest from co-operative banks. According to the assessee, the dividend so received was taxable receipt.
The assessee further submitted that it had claimed deduction under section 80P and not under section 10, which deals with exempt income.
The A.O. rejected the assessee's explanations. According to the A.O., it did not make any difference as to whether the income was exempt or deductible; the same being non-taxable, Section14A was applicable.
On appeal, the Commissioner (Appeals), holding that Section14A was not applicable to the assessee's case, deleted the addition made by the A.O.
tribunal's decision
The assessee's view was accepted by the Tribunal on the ground that the income was derived by the assessee from co-operative banks and the same was not exempt under section 10.
Deduction, if any, was to be given by the statute under section 80P, which pertains to deduction of income.
The terms ‘exempt income' and ‘deduction from income' are different propositions and a deduction from income will not amount to an exemption from income.
Since the receipts of the assessee were not exempt and includible in income merely because deduction under section 80P was provided, it could not be assumed to be hit by Section14A.
Therefore, the order of the Commissioner (Appeals) was to be upheld.
Critique
The decision of the Tribunal drawing distinction between ‘exemption' and ‘deduction', it needs to be said with respect, does not seem correct looking to the wordings of Section14A.
The words ‘exemption' or ‘deduction' have not been used in the Section.
In the heading (title) of the section, the words used are ‘not includible in total income'. In the body of the section, the words used are “ … income, which does not form part of the total income under this Act.”
Thus, expenditure, attributable to income, ‘which does not form part of the total income under the Act', shall become ineligible for deduction irrespective of the fact that non-inclusion in total income is on account of exemption or deduction. Mere non-inclusion in total income will attract Section14A of the Act and expenditure relateable to such non-included income will become disallowable, whatever may be the reason for non-inclusion in total income. Hence, the Tribunal's decision needs to be reviewed by the High Court.
(The author is a former chairman of CBDT.)