Section 14A disallowance requires proximate nexus with exempt income; related book profit adjustment falls once the disallowance is deleted.

Disallowance under section 14A read with Rule 8D was unwarranted because the assessee showed that the investments were old, no fresh investment was made in the year, dividend income was received directly, and the Revenue produced no material of expenditure having a proximate nexus with exempt income; the disallowance was deleted. The corresponding adjustment to book profit under section 115JB also failed because it was entirely dependent on the section 14A disallowance and could not survive independently. The Tribunal further upheld reworking of the written down value and allowance of depreciation in line with earlier appellate orders in the assessee's own case, rejecting the Revenue's objection.

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Issues: (i) Whether disallowance under section 14A read with Rule 8D was warranted where the assessee claimed that no expenditure was incurred to earn the exempt dividend income. (ii) Whether the amount disallowed under section 14A could be added back while computing book profit under section 115JB. (iii) Whether the Revenue was justified in disputing the direction to allow depreciation by reworking the written down value of assets in accordance with earlier appellate orders.

Issue (i): Whether disallowance under section 14A read with Rule 8D was warranted where the assessee claimed that no expenditure was incurred to earn the exempt dividend income.

Analysis: The assessee had shown that the investments were made long earlier in group concerns, no fresh investment was made in the relevant year, and the dividend was received directly without any identified direct or indirect expenditure. The Revenue did not bring on record material showing that any expenditure was incurred in relation to exempt income. Section 14A applies only where there is a proximate nexus between the expenditure and exempt income, and the principle of apportionment does not operate where no such expenditure is shown.

Conclusion: The disallowance under section 14A read with Rule 8D was deleted in favour of the assessee.

Issue (ii): Whether the amount disallowed under section 14A could be added back while computing book profit under section 115JB.

Analysis: Once the disallowance under section 14A was deleted, the foundation for making a corresponding adjustment to book profit no longer survived. The adjustment was therefore consequential to the fate of the section 14A disallowance.

Conclusion: The addition made while computing book profit under section 115JB was deleted in favour of the assessee.

Issue (iii): Whether the Revenue was justified in disputing the direction to allow depreciation by reworking the written down value of assets in accordance with earlier appellate orders.

Analysis: The issue was already covered by earlier orders in the assessee's own case, and the Tribunal followed that consistent view. The written down value had to be determined after giving effect to the earlier appellate directions, and the Revenue could not successfully challenge the consequential reworking.

Conclusion: The Revenue's objection to the reworking of written down value and allowance of depreciation was rejected.

Final Conclusion: The assessee succeeded on the disallowance under section 14A and the related book profit adjustment, while the Revenue's appeal on depreciation failed, resulting in a partly allowed disposal of the cross appeals overall.

Ratio Decidendi: Disallowance under section 14A can be made only where expenditure is shown to have a proximate nexus with exempt income, and a corresponding adjustment to book profit cannot survive independently once the underlying disallowance is deleted.

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