Section 14A disallowance must be reasonable, as Rule 8D is not retrospective for earlier assessment years.

Rule 8D does not apply retrospectively to assessment year 2007-08, so disallowance under section 14A had to be computed on a reasonable basis having regard to the facts. Where the assessee had already bifurcated expenses attributable to exempt income and the record did not show any nexus between borrowed funds, administrative s and dividend income, the restricted disallowance accepted by the first appellate authority was sustainable. The interest expenditure was also not shown to be attributable to investment activity, so the Revenue's challenge to the deletion of the larger disallowance failed.

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Issues: Whether, for assessment year 2007-08, the disallowance under section 14A could be recomputed by applying Rule 8D, and whether the restricted disallowance accepted by the first appellate authority was sustainable.

Analysis: Rule 8D applies only from assessment year 2008-09 onwards and is not retrospective. For the year in question, the disallowance had to be made on a reasonable basis having regard to the facts. The assessee had itself bifurcated the expenses attributable to exempt income, and the material on record did not show any nexus between the borrowed funds or administrative es and the earning of dividend income. The interest expenditure was also not shown to be attributable to investment activity.

Conclusion: The restricted disallowance was held to be reasonable and the Revenue's challenge to the deletion of the larger disallowance failed.

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