Section 14A disallowance capped at exempt income; related-party management fee disallowance was also rejected on consistent facts.

Management fee paid to a related entity was held not to warrant disallowance under section 40A(2)(b) because the facts matched earlier years, where the payment had been accepted as revenue in nature for operational and management rights, and no fresh distinguishing circumstance was shown. The section 14A disallowance was confined to the amount of exempt income, reflecting the settled principle that such disallowance cannot exceed the exempt income earned and the consistent treatment followed in the assessee's own earlier years. The first appellate relief was sustained on both substantive issues, and the cross-objection did not survive.

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Issues: (i) Whether the management fee paid to a related entity was liable to disallowance under section 40A(2)(b); (ii) whether the disallowance under section 14A could exceed the exempt income earned by the assessee.

Issue (i): Whether the management fee paid to a related entity was liable to disallowance under section 40A(2)(b).

Analysis: The payment was examined in the light of the assessee's own earlier years, where identical disallowance had already been deleted on the basis that the payment was for operational and management rights and was revenue in character. The facts for the year under consideration were found to be identical, and no distinguishing circumstance was shown to warrant a different view.

Conclusion: The disallowance under section 40A(2)(b) was rightly deleted and the issue was decided against the Revenue.

Issue (ii): Whether the disallowance under section 14A could exceed the exempt income earned by the assessee.

Analysis: The disallowance under section 14A was restricted by the first appellate authority to the amount of exempt income. The restriction was supported by the settled view that the disallowance cannot be more than the exempt income and by the consistent approach followed in the assessee's own earlier years.

Conclusion: The restriction of the disallowance to the exempt income was upheld and the issue was decided against both sides to the extent their challenge failed.

Final Conclusion: The appellate relief granted by the first appellate authority was sustained on the substantive issues, and the challenge to the section 14A restriction also failed. The appeal and the cross-objection did not survive.

Ratio Decidendi: A disallowance under section 14A cannot exceed the exempt income earned, and a recurring factual issue already decided in earlier years should ordinarily be followed in the absence of material change in facts.

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