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.

AI Summary

Loan Interest Disallowed Under Section 14A Exceeds Dividend Income; Expenses Related to Exempt Income Denied A client took a mortgage loan of Rs. 1 crore to invest in mutual funds, earning Rs. 2.50 lakhs in dividends, with the mutual fund paying the dividend distribution tax. The interest on the loan amounted to Rs. 15 lakhs. During scrutiny assessment, the Assessing Officer (AO) considered disallowing the entire interest, arguing it relates to income not part of the total income. The queries raised were whether the AO can disallow the entire interest, if dividend income is exempt under Section 14A, and if disallowance can exceed the dividend income. The reply confirmed the AO can disallow the interest, related expenses are disallowed under Section 14A, and disallowance can exceed dividend income.