Section 14A of the Income Tax Act, 1961 provides that no expenditure incurred in relation to income, , which is exempt from tax, shall be allowed deduction from the taxable income of the assessee. Now, this Section has to read with Rule 8D of the Income Tax Rules, 1962 which provides the computation mechanism for disallowance under the said Section. For the sake of convenience, the said Section is extracted hereafter:
"14A. Expenditure incurred in relation to income not includible in total income.—For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.".
Section 14A of I.T. Act has been litigated since several years in Courts/Tribunals. One of the aspects which was debated was as to whether Section 14A of the Act can be invoked even when no exempt income has been earned by the assessee in the relevant AY? Conflicting position had been taken by various Courts/Tribunals in this respect. However, in the case of ‘Cheminvest Limited vs. Commissioner of Income Tax-VI’, (2015) 378 ITR 33 (Del), the Court reversed the decision of the Tribunal in Cheminvest Ltd v. ITO (2009) 121 TTD 318 (SB) (Delhi) (Trib.), and held that, "the expression "does not form part of the total income‟ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year."
The abovementioned decision has been followed by several Tribunals/Courts including the case of PCIT v. GVK Project and Technical Services Ltd. in ITA 646/2018 by the Delhi High Court. The SLP, filed vis-a-vis this judgement, was dismissed by the apex court on merits. [Also see: M/s Redington (India) Ltd vs CIT  77 taxmann.com 257 (Madras) , PCIT v. Ballapur Industries Ltd (ITA No. 51 of 2016, dt.13.10.2016) (Bom.) (HC), PCIT v. Oil Industries Development Board (2019) 262 Taxman 102 (SC)]
P.S. : CBDT vide a circular dated 11.02.2014 clarified that Rule 8D of the I.T. Rules read with Section 14A of the I.T. Act can be invoked even when no exempt income is earned by the assessee in the relevant AY. To be noted, circulars issued by CBDT are not binding on Courts/Tribunals.