Section 14A disallowance capped at exempt income where expenditure is linked only to exempt earnings.

Section 14A disallowance read with rule 8D is confined to expenditure incurred in relation to exempt income and cannot exceed the exempt income actually earned. The assessee's contention that the disallowance must be capped at the amount of exempt income was accepted as consistent with the settled principle underlying section 14A. The Revenue's challenge therefore failed, and the restriction of the disallowance to the exempt income was upheld.

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Issues: Whether the disallowance under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 could exceed the exempt income earned by the assessee.

Analysis: The assessee's claim that the disallowance should be confined to the amount of exempt income was accepted by reference to the settled legal position that section 14A operates only to disallow expenditure incurred in relation to exempt income. On that basis, the amount of disallowance could not be permitted to go beyond the exempt income actually received.

Conclusion: The disallowance under section 14A was rightly restricted to the exempt income of Rs. 3,380, and the Revenue's challenge failed.

Ratio Decidendi: A disallowance made under section 14A read with rule 8D cannot exceed the exempt income to which it relates.

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