Section 14A disallowance barred where no exempt income is earned in the relevant year.

Section 14A read with Rule 8D could not be applied where the assessee had not earned any exempt income during the relevant assessment year. The Court followed its earlier binding view that Section 14A operates only when expenditure is incurred in relation to income not forming part of total income, and noted that the assessee had no dividend income for the year. It also held that Circular No. 5/2014 did not govern the assessment year in question. On that basis, the disallowance was held impermissible and the assessee's position was left undisturbed.

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Issues: Whether disallowance under Section 14A read with Rule 8D can be made when the assessee had not earned any exempt income during the relevant assessment year.

Analysis: The issue was answered by following the earlier decision on the same question. The governing principle applied was that Section 14A operates only where expenditure is incurred in relation to income not forming part of total income. The Court noted that the assessee had not earned dividend income in the relevant year and that Circular No. 5/2014 did not govern the assessment year in question. On the basis of the earlier binding view relied upon, the Court held that the provision could not be invoked in the absence of exempt income.

Conclusion: Disallowance under Section 14A read with Rule 8D was held to be impermissible in the absence of exempt income, in favour of the assessee.

Final Conclusion: The revenue's challenge failed and the connected appeals were dismissed, leaving the assessee's position undisturbed.

Ratio Decidendi: Section 14A disallowance is attracted only where exempt income exists or expenditure is shown to relate to such income; in the absence of exempt income, the provision cannot be applied.

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