Section 14A computation excludes genuine share application money from the rule 8D investment base, subject to verification.

Share application money, when genuinely pending allotment, is not an investment or asset capable of yielding exempt income and therefore cannot form part of the investment base for rule 8D computation under section 14A. Disallowance under section 14A read with rule 8D remains applicable where exempt dividend income is earned, but the computation must exclude share application money if its character is established on verification. The Assessing Officer must recompute the disallowance after factual examination and pass a speaking order after hearing the assessee.

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Issues: (i) Whether share application money could be included in the investment base for computing disallowance under section 14A read with rule 8D. (ii) Whether disallowance under section 14A read with rule 8D was otherwise attracted in respect of exempt dividend income.

Issue (i): Whether share application money could be included in the investment base for computing disallowance under section 14A read with rule 8D.

Analysis: Share application money, where it is truly such, represents only an application amount pending allotment of shares. It does not constitute an investment in shares or an asset capable of yielding exempt income, and any interest that may arise on such amount would be taxable. On that basis, it cannot form part of the qualifying investment base for the purpose of rule 8D(ii) and rule 8D(iii). As the record did not contain adequate details to verify the assessee's claim, the matter required factual examination by the Assessing Officer.

Conclusion: Share application money was to be excluded from the computation base under rule 8D, subject to verification of the assessee's claim.

Issue (ii): Whether disallowance under section 14A read with rule 8D was otherwise attracted in respect of exempt dividend income.

Analysis: Section 14A read with rule 8D applies mandatorily where the assessee earns income claimed as exempt, including dividend income. The assessee's objection was therefore only to the manner of computation, not to the applicability of the provision itself. The Assessing Officer was directed to recompute the disallowance after excluding share application money and to pass a speaking order after giving the assessee an opportunity of hearing.

Conclusion: The applicability of section 14A read with rule 8D was upheld, but the disallowance had to be recomputed after exclusion of share application money, subject to verification.

Final Conclusion: The appeal succeeded only to the extent of requiring fresh computation of the section 14A disallowance after verification and exclusion of share application money; the matter was restored to the Assessing Officer for limited reconsideration.

Ratio Decidendi: For computing disallowance under section 14A read with rule 8D, only investments or assets capable of yielding exempt income can be included, and share application money, being merely application money pending allotment, must be excluded if its character is established on verification.

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