Meaning of “Expenditure Incurred”

The meaning of expenditure incurred under section 14A of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble Supreme Court tried to explain the meaning of expenditure incurred.

Meaning of expenditure incurred defined by court

The phrase ‘expenditure incurred’ used in section 14A of the Income Tax Act came up before hon’ble Supreme Court in CIT Vs. Walfort Share & Stock Brokers (P.) Ltd. [2010] 192 Taxman 211/326 ITR 1/233 CTR 42 (SC) and it explained.

Meaning : Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words ‘expenditure incurred’ in section 14a refers to expenditure on rent, taxes, salaries, interest, etc., In respect of which allowances are provided for. Every pay-out is not entitled to allowances for deduction.

These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. A pay-back does not constitute an expenditure incurred in terms of section 14a. Even applying the principles of accountancy, a pay-back in the strict sense does not constitute an expenditure as it does not impact the profit and loss account.

Pay-back or return of investment will impact the balance-sheet whereas return on investment will impact the profit and loss account. Cost of acquisition of an asset impacts the balance sheet. Return of investment brings down the cost. It will not increase the expenditure. Hence, expenditure, return on investment, and cost of acquisition are distinct concepts.

Therefore, one needs to read the words ‘expenditure incurred’ in section 14a in the context of the scheme of the act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the ‘total income’ for the purpose of chargeability to tax. A return of investment or a pay-back is not such a debit item as explained above and, hence, it is not ‘expenditure incurred’ in terms of section 14a.

Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of section 14a. For attracting section 14a, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income and since pay-back or return of investment is not such proximate cause, section 14a is not applicable in such a case.

Return of investment could not be construed to mean ‘expenditure’ and if it is construed to mean ‘expenditure’ in the sense of physical spending, still the expenditure is not such as could be claimed as an ‘allowance’ against the profits of the relevant accounting year under sections 30 to 37 and, therefore, section 14a could not be invoked.

Section 14A of Income Tax Act

Expenditure incurred in relation to income not includible in total income.

14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed63, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

In this article, you can get guidance from supreme court on the meaning of expenditure incurred under section 14A of the Income Tax Act.

Updated up to Finance Act 2021