Section 14A of the Income Tax Act

[Amit Sharma]

One of my client had taken a mortgage loan from bank of Rs. 1 crore. The entire laon amount was invested in units of mutual funds. On this investment he earned Rs. 2.50 Lakhs as dividend. However the mutual fund duly paid dividend distribution tax on dividend payments. The interest due on above loan was Rs. 15 Lakhs.

Later on the assessee comes under scrutiny assessment and the AO willing to make disallownace of entire interest amount on account of that this interest was incurred in relation to income which does not form part of the total income.

My queries are as under:

1.     Whether AO can disallowed the entire interest or not?

2.     When mutual fund paid dividend distribution tax then dividend income said to be exempted income as far as section 14A of the Income Tax Act, 1961 is concerned?

3.     Can dis-allowance exceeds the dividend income?

 Waiting for your prompt and valueable replies.

[SUBRAMANYA KARANTH]

1.AO can disallow the entire inerest in this case.

2.If he income is exempted under any section of IT act the related expenses shall be disllowed u/s 14A

3.Yes.It need not be equal or less than the income.

AI Summary

Expenditure disallowance for exempt income: interest on borrowed funds used to buy mutual fund units may be fully disallowed. Interest on a loan used to purchase mutual fund units that yield exempt dividends (after dividend distribution tax) is attributable to exempt income and may be disallowed under the statutory provision addressing expenses relating to exempt income; such disallowance can extend to the entire interest incurred and need not be limited by the amount of exempt dividend received.