Heads of Income

SECTION 14A l expenditure incurred in relation to
income not includible in total income

178. Clarification regarding restriction on re-opening of completed assessments on account of provisions of section 14A

1. The Finance Act, 2001 has inserted section 14A in the Income-tax Act, 1961 wherein it was specifically provided that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act. The amendment takes effect from 1-4-1962.

2. Section 14A was introduced retrospectively in order to clarify and state the position of law that any expenditure relatable to income which does not form part of total income cannot be set off against other taxable income. This section was not introduced with prospective effect, as that would have implied that before the introduction of the said provisions, expenditure incurred to earn exempt income was allowable.

3. Instances of reopening of old assessments, which had attained finality, after insertion of section 14A in the Act, have come to the notice of the Board. Reopening of past completed assessments, having attained finality, on the basis of newly inserted provisions of section 14A is likely to cause hardship to a large number of taxpayers and would result in increasing avoidable litigation.

4. The Board have considered this matter and hereby directs that the assessments where the proceedings have become final before the first day of April, 2001 should not be re-opened under section 147 of the Act to disallow expenditure incurred to earn exempt income by applying the provisions of newly inserted section 14A of the Act.

Circular : No. 11/2001, dated 23-7-2001.