Sec 14a read with rule 8d

This query is : Resolved

Meenakshi Aggarwal (Querist)
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04 February 2012 Dear Sir,

Please inform about the applicability of sec 14A and Rule 8D in case of a doctor who has professional receipt from his personal clinical practices of Rs. 25,00,000/- and tax free interest from PPF of Rs. 1,70,000/- and dividend of Rs. 75,000/-. He has not actually incurred any expenditure to earn tax free income. Whether any disallowance is required to be made u/s 14A read with Rule- 8D in his case?

Looking forward to your valuable advise.

CA. Hari Kishan

CA. Hari Kishan (Expert)
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04 February 2012 On earning interest on PPF and dividend income, as you have mentioned that he has not incurred any expenses.. then no disallowance shall be attracted..

Meenakshi Aggarwal

Meenakshi Aggarwal (Querist)
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06 February 2012 But as per Rule 8D, the disallowance is also attracted when the assessee claims that he has not incurred any expenditure in relation to earn a income which does not form part of your income. and as per rule 8d, the disallowance is 1/2% of average investments. Please clarify....

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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23 July 2025 ### Applicability of Section 14A and Rule 8D for a Doctor with Tax-Free Income

Under **Section 14A** of the Income Tax Act, 1961, any expenditure **incurred to earn exempt income** is **not deductible** while computing total income. The section seeks to prevent taxpayers from claiming a deduction on expenses incurred for earning exempt income (such as tax-free interest, dividends, etc.).

The section also provides a method for determining the amount of disallowance under **Rule 8D** of the Income Tax Rules, 1962, which is to be followed if the Assessing Officer (AO) believes that there is a reasonable relationship between the income and the expenses incurred.

### Key Points:

1. **Section 14A Applicability**:
Section 14A applies if there is **tax-free income** (like PPF interest or dividends) earned during the financial year.

2. **Rule 8D**:
Rule 8D provides a detailed method for calculating the disallowance related to **exempt income**. Even if the taxpayer claims that no expenses were incurred in relation to the tax-free income, the rule mandates a **disallowance** based on a specified formula.

### **In this case (Doctor's case with PPF and Dividend income):**

* **Professional Income**: ₹25,00,000/- (subject to regular taxation).
* **Tax-Free Income**: ₹1,70,000/- (interest from PPF) and ₹75,000/- (dividend income).

### 1. **Interest from PPF**:

* Interest from **Public Provident Fund (PPF)** is exempt from tax under **Section 10(11)**.

### 2. **Dividend Income**:

* **Dividend income** (subject to certain conditions) is also exempt from tax under **Section 10(34)**.

### 3. **Disallowance under Section 14A and Rule 8D**:

#### **Section 14A**:

* **If no expenditure is incurred** to earn the tax-free income, the taxpayer may argue that **no disallowance should be made** under Section 14A.

#### **Rule 8D**:

* Rule 8D applies to ensure that taxpayers do not **avoid disallowance** by simply claiming that no expenses were incurred to earn exempt income.

According to **Rule 8D**, the disallowance is calculated using the following components:

1. **Part A (Interest Expense)**:

* This is calculated as a proportion of **interest expense** incurred to earn exempt income. If the doctor did not incur any interest expense, this part would be **nil**.

2. **Part B (Indirect Expenses)**:

* This component involves calculating a **disallowance of 1/2% of the average value of the investments** that generate **exempt income**.
* The **average value of investments** is calculated as the average of the opening and closing balances of such investments (e.g., in PPF, dividend-paying stocks, etc.) during the year.

3. **Part C (Other Expenditures)**:

* This part takes into account any other **direct or indirect expenditure** that is clearly attributable to the earning of tax-free income.

### **Practical Impact**:

* **If no direct expenses are incurred**, but the doctor has investments that generate tax-free income (e.g., PPF, dividend stocks), **the AO can apply Rule 8D** and compute the disallowance based on the average value of such investments.

* **In this case**, since the doctor claims that no expenses were incurred, the **disallowance would be calculated as 1/2% of the average investment value** in tax-free income-generating assets (like PPF and dividend stocks).

### **Conclusion**:

While Section 14A may suggest that no disallowance should be made in the absence of actual expenses, **Rule 8D mandates a disallowance calculation** based on average investments in tax-free income-generating assets. The disallowance is 1/2% of the average value of such investments.

Therefore, the **doctor will need to disclose the details of the investments** in tax-free instruments, and the disallowance will be computed accordingly based on Rule 8D, even if no actual expenditure was incurred.

If the **doctor's total tax-free investments** are minimal, the disallowance might be quite low, but technically, **Rule 8D applies**.

It would be advisable to seek further **clarification from the Assessing Officer (AO)** if there is any ambiguity in the facts or calculations.

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