Section 14A of the Income-tax Act,1961 provides for disallowance of expenses which are not includible in the total income (Exempt Income).
There were many controversies in the same as to whether the disallowance can be made even though there was no Exempt Income earned during the year.
In this regard, the CBDT has issued a new circular No 5/2014 dtd 11th February 2014, wherein it is clarified that the Section 14A uses the term “income under the act” and does not use the word “income of the year” while referring to the exempted income. In view of the above, it has been clarified that even though there is no exempt income during the financial year under consideration, section 14A can be invoked and disallowance of expenditure relating to exempt income under section 14A of the Income tax act, shall be made.
The relevant circular is reproduced below :-