Denial of tax sop on exempt income spend causes anxiety

MUMBAI: The Finance Bill has ‘clarified’ that where any expenditure has been incurred for earning exempt income, such expenditure will not be allowed as a deduction even in those cases where no exempt income was accrued or received in that particular year.

The provisions of the Income Tax Act provide that if an income is exempt in the hands of a taxpayer, any expenses in relation to such income are also not deductible. The need for the ‘clarification’ stems from the fact that in certain cases, courts have allowed the expenditure as a deduction in those years where there was no exempt income. To illustrate: Up to financial year 2019-20, dividends received from an Indian company were exempt in the hands of shareholders. The issue of deductibility of interest on loans taken to purchase shares, has been the subject matter of litigation.

The main issue is whether this ‘clarification’ would apply to past cases. Gaurav Singhal, partner at the tax boutique firm Heads Up Consulting, said, “While the amendment is proposed to take effect from financial year 2021-22, it should be noted that it has been drafted as a clarificatory explanation, that has been inserted for ‘removal of doubts’.”


“In such cases, it is often observed that the tax authorities tend to rely upon such prospective changes in appeals that relate to years that pre-date the actual amendment. Such an approach can be particularly disconcerting, if it results in reopening of past assessments,” adds Singhal.