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Dec 18, 2025
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Taxpayer earned Rs 81 crore tax-exempt income; I-T dept disallowed tax exemption on Rs 17 crore; Taxpayer fights and wins case in ITAT Delhi
Section 14A of the Income Tax Act, 1961 prevents taxpayers from claiming any tax deductions for expenses related to income that is exempt from income tax, which is known as disallowance.
The main reason for this is that expenses linked to tax-free income can't be deducted from taxable income. However, when a taxpayer tried to do just that-claiming Rs 50 lakh disallowance on Rs 81 crore of tax-exempt income-the income tax department issued a notice and added Rs 17 crore to the taxpayer's income under Rule 8D of the Income Tax Rules, 1962.
The background of this case is that the taxpayer reported a tax-exempt income of Rs 81.567 crore in their income tax return (ITR) and claimed finance costs of Rs 117.28 crore. In the ITR, the taxpayer disallowed Rs 49.51 lakh under Section 14A based on a certificate from a chartered accountant dated March 19, 2021. The CA confirmed that the common indirect expenses amounted to Rs 1.874 crore.
The taxpayer's auditor also noted that the exempt income made up 18% of the total income declared, so he suggested disallowing direct expenses of Rs 15.41 lakh along with 18% of the indirect expenses of Rs 1.874 crore as the disallowance under Section 14A. Consequently, the taxpayer reported a total disallowance of Rs 49,51,789 in the ITR.
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