Section 14A disallowance limited to exempt income actually earned, with Tribunal upholding the restriction on facts.

Disallowance under section 14A was confined to expenditure relatable to exempt income, and could not exceed the exempt income actually earned on the facts. The assessee had only nominal exempt income, and the CIT(A) restricted the addition accordingly after applying the settled position that section 14A operates only in relation to income not forming part of total income. The Tribunal found that this restriction was consistent with the prevailing judicial position and saw no reason to interfere. The Revenue's challenge therefore failed, and the disallowance was upheld only to the extent of the exempt income received.

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Issues: Whether disallowance under section 14A could be sustained beyond the exempt income actually earned, and whether the disallowance had to be restricted to the amount of exempt income.

Analysis: The assessee had only nominal exempt income, and the CIT(A) examined the applicability of section 14A in the light of the settled position that the provision operates only in relation to income which does not form part of total income. On the facts, the addition was restricted to the amount of exempt income actually received. The Tribunal noted that this view was consistent with the prevailing judicial position and saw no reason to interfere with the restriction made by the CIT(A).

Conclusion: The disallowance under section 14A was rightly restricted to the exempt income actually earned, and the Revenue's challenge failed.

Ratio Decidendi: Disallowance under section 14A must be confined to expenditure relatable to exempt income, and cannot be sustained beyond the exempt income actually earned on the facts of the case.

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