Section 14A disallowance fails where no exempt income is earned, reinforcing the Delhi High Court view.

Section 14A disallowance cannot be sustained where no exempt income is earned in the relevant year. The ITAT Bangalore followed the Delhi High Court view that the provision applies only to expenditure incurred in relation to exempt income, and held that a CBDT circular did not alter that position. On that basis, the absence of exempt income took the case outside the disallowance mechanism, and the deletion of the disallowance was upheld.

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Issues: Whether disallowance under section 14A could be sustained in the absence of any exempt income for the relevant assessment year.

Analysis: The appeal turned on the applicability of section 14A where no exempt income had been earned during the year. The Tribunal followed the existing Delhi High Court view that the provision is attracted only to expenditure incurred in relation to exempt income and that the CBDT circular did not displace that position. It held that the absence of exempt income took the case outside the disallowance mechanism.

Conclusion: The disallowance under section 14A was rightly deleted and the revenue's appeal failed.

Ratio Decidendi: In the absence of exempt income, no disallowance can be made under section 14A.

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