Section 14A disallowance requires evidence of actual expenditure linked to exempt dividend income; mere investment holdings are not enough.

A disallowance under section 14A read with Rule 8D cannot be sustained merely because exempt dividend income was earned and investments existed; the Revenue must bring positive material showing actual expenditure incurred in relation to that exempt income. In the absence of evidence establishing a nexus between expenditure and exempt income, the disallowance fails. The addition was therefore deleted in favour of the assessee.

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Issues: Whether disallowance under section 14A read with Rule 8D was sustainable in the absence of material showing actual expenditure incurred for earning exempt dividend income.

Analysis: The assessee earned dividend income exempt under section 10 of the Income-tax Act, and the Revenue did not bring positive material to show that any expenditure was actually incurred in relation to such exempt income. The disallowance could not rest merely on conjecture, assumption, or the fact that investments existed. In the absence of evidence establishing expenditure relatable to exempt income, the basis for sustaining the disallowance failed.

Conclusion: The disallowance under section 14A was not sustainable and was deleted in favour of the assessee.

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