Section 14A disallowance cannot exceed exempt dividend income; Rule 8D computation must be confined to actual exempt earnings.

Expenditure disallowance under section 14A read with Rule 8D(2)(iii) was considered in relation to exempt dividend income, and the Tribunal applied the principle that such disallowance is confined to expenditure relatable to the exempt income actually earned. Where the assessee had already made a suo motu disallowance and the computation was enhanced by including investments, the disallowance was directed to be restricted to the amount of exempt income received. The operative effect is that section 14A cannot be used to make a disallowance exceeding the exempt income itself.

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Issues: Whether the disallowance of expenditure relating to exempt dividend income under section 14A read with Rule 8D(2)(iii) can exceed the amount of exempt income earned by the assessee.

Analysis: The assessee had earned dividend income exempt under section 10(34) and had made a suo motu disallowance. The disallowance was enhanced by taking the average value of investments, including strategic investments. Relying on the view that section 14A is intended to disallow only expenditure relatable to exempt income, the Tribunal applied the principle that the disallowance cannot be higher than the exempt income actually earned.

Conclusion: The disallowance under section 14A was directed to be restricted to the exempt income earned by the assessee.

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