Indian Kanoon - Search engine for Indian Law

The basic principle of taxation is to tax the net income, i.e., gross income minus expenditure. On the same analogy, exemption is also in respect of net income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A.

A pay back is not an expenditure in the scheme of section 14A ; for attracting section 14A there has to be a proximate cause for disallowance, which is in relationship with the tax exempt income. Pay back or return of investment is not such proximate cause.

(d) the basic principle of taxation is to tax net income. This principle applies even for the purposes of section 14A and expenses towards non-

taxable income must be excluded ;

(e) once a proximate cause for disallowance is established-which is the relationship of the expenditure with income which does not form part of the total income-a disallowance has to be effected.

All expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed under section 14A. Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation. The plain meaning of section 14A is that no deduction can be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act.