Section 14A disallowance under rule 8D is limited to exempt-income investments and cannot exceed exempt income.

For section 14A read with rule 8D, the computation of disallowance was confined to investments that actually yielded exempt income during the relevant year. The Tribunal also accepted that the resulting disallowance cannot exceed the exempt income earned. On that basis, the section 14A disallowance was directed to be recomputed by applying rule 8D only to such exempt-income investments and by restricting the final figure to the lower of the exempt income and the amount determined under the rule. The assessee therefore obtained partial relief and the matter was remanded for fresh computation on the restricted basis.

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Issues: Whether disallowance under section 14A read with rule 8D could exceed exempt income and whether, for computing disallowance under rule 8D, only investments yielding exempt income were to be considered.

Analysis: The assessee's challenge was confined to the quantum of disallowance under section 14A and the method of computation under rule 8D. The Tribunal followed the Special Bench ruling that, for clause (iii) of rule 8D, the average value of investments must be restricted to investments which yielded exempt income during the year. It further accepted the proposition that the disallowance under section 14A cannot be more than the exempt income earned.

Conclusion: The disallowance was directed to be recomputed by limiting it to the lower of the exempt income and the amount determined under rule 8D, after considering only those investments which yielded exempt income.

Final Conclusion: The assessee obtained partial relief, and the matter was sent back for fresh computation of the section 14A disallowance on the restricted basis.

Ratio Decidendi: For the purpose of rule 8D, only investments yielding exempt income during the relevant year are to be included in the computation, and the resulting disallowance under section 14A cannot exceed the exempt income.

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