Section 14A disallowance limited to exempt dividend income actually earned, with excess disallowance rejected.

ITAT Chandigarh held that disallowance under section 14A read with Rule 8D cannot exceed the exempt dividend income actually earned by the assessee. Where only a small amount of tax-free income was received, the Assessing Officer's larger disallowance was not sustainable. Applying the settled principle that the disallowance must be confined to expenditure attributable to exempt income, the Tribunal restricted the disallowance to the amount of exempt income received and the Revenue's challenge failed.

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Issues: Whether disallowance under section 14A read with Rule 8D could exceed the exempt dividend income earned by the assessee.

Analysis: The assessee had earned only a small amount of tax-free dividend income, while the Assessing Officer made a much larger disallowance under section 14A read with Rule 8D. The Tribunal followed the settled view that where exempt income is earned, the disallowance attributable to such income cannot exceed the amount of exempt income itself. Applying that principle, the Tribunal held that the disallowance had to be restricted to the tax-free income actually received.

Conclusion: The disallowance under section 14A read with Rule 8D was rightly confined to the exempt income earned, and the Revenue's challenge failed.

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