Section 14A disallowance barred where no exempt income is earned, reinforcing the nil exempt income principle.

Section 14A disallowance under the Income-tax Act cannot be made in a year in which the assessee has earned no exempt income, because there is no expenditure attributable to income not forming part of total income. The Delhi High Court followed its earlier rulings on this point and distinguished Revenue reliance on other Supreme Court authorities, noting that those decisions did not decide the specific question of nil exempt income. Later decisions, including Maxopp Investment Ltd., were treated as not displacing the settled view. The Revenue's challenge therefore failed, the deletion of the disallowance was sustained, and no substantial question of law arose.

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Issues: Whether disallowance under section 14A of the Income-tax Act, 1961 can be made in a year in which the assessee has not earned any exempt income.

Analysis: The appeal arose under section 260A of the Income-tax Act, 1961 against deletion of a disallowance made under section 14A. The Court followed its earlier decisions holding that section 14A applies only when there is exempt income and that, in the absence of such income, no disallowance can be computed. The Court distinguished the Revenue's reliance on other Supreme Court decisions, holding that those authorities did not decide the precise question whether disallowance is permissible where no exempt income was earned during the relevant year. The Court also noted that the later decisions and connected cases, including Maxopp Investment Ltd., did not displace the settled view that no disallowance arises in a nil exempt income situation.

Conclusion: Disallowance under section 14A could not be made because the assessee had not earned any exempt income during the assessment year, and no substantial question of law arose.

Final Conclusion: The Revenue's challenge failed, and the deletion of the disallowance was sustained.

Ratio Decidendi: Section 14A disallowance cannot be invoked in a year in which no exempt income is earned, because there is then no expenditure attributable to income not forming part of total income.

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