Disallowance of expenditure related to exempt income: apportionment required and actual exempt income is a prerequisite.

Disallowance of expenditure relating to exempt income requires identification and apportionment of expenses attributable to non taxable receipts; only expenditure expended to earn taxable income may be claimed. Courts interpret "in relation to" expansively and reject reliance on the spender's dominant purpose. The existence of actual exempt income is necessary to invoke the disallowance rule, and post enactment explanatory amendments that alter prior law are not retrospective.

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