The provisions of the Income Tax Act provide that if income is exempt in the hands of a taxpayer, expenses related to that income are also not deductible. The need for the “clarification” stems from the fact that in some cases the courts have allowed the expense to be deducted in years where there was no exempt income. As an example: until the 2019-2020 financial year, dividends received from an Indian company were exempt in the hands of the shareholders. The question of the deductibility of interest on loans taken out to buy shares has been the subject of litigation.
The main question is whether this “clarification” would apply to past cases. Gaurav Singhal, partner at tax consultancy firm Heads Up Consulting, said: “Although the amendment is proposed to take effect from the 2021-22 financial year, it should be noted that it was drafted as a clarifying explanation, which was inserted for “removal of doubts”.
“In such cases, it is often observed that tax authorities tend to rely on such prospective changes in appeals that relate to years prior to the actual change. Such an approach can be particularly disconcerting if it results in the reopening of past assessments,” adds Singhal.