Under the provisions of the Income-tax Act, 1961, certain incomes such as dividend from domestic companies, interest from specified bonds, etc., are not includible while computing the total income, as they are exempt. As per Section 14A, any expenditure incurred by the taxpayer in relation to earning tax-free income is not allowed as a deduction. As only net income is exempt from tax, identification of expenses incurred in relation to earning such tax-free income has always posed a challenge. Present-day business is quite complex and it often becomes difficult to maintain a separate identity between the various sources of income and the expenses incurred thereto.
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