Section 14A disallowance fails when no exempt income is earned during the year, even if investments exist.

Section 14A read with rule 8D cannot be invoked where the assessee has not earned any exempt income during the relevant previous year. Mere investment holdings or a possibility of future exempt income do not by themselves justify a disallowance, because the provision applies only to expenditure incurred in relation to actual exempt income. On that basis, no computation under rule 8D was warranted and the disallowance was deleted.

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Issues: Whether disallowance under section 14A read with rule 8D was sustainable when the assessee had not earned any exempt income during the relevant assessment year.

Analysis: The assessee had made investments, but no dividend or other income not forming part of total income was earned during the year. The Tribunal followed the settled view that section 14A applies only to expenditure incurred in relation to actual exempt income and cannot be invoked in a vacuum on the basis of mere investments or anticipated exempt income. In the absence of exempt income, no computation of disallowance under rule 8D was warranted.

Conclusion: The disallowance under section 14A read with rule 8D was not sustainable and was rightly deleted.

Ratio Decidendi: Section 14A read with rule 8D cannot be applied where no exempt income is earned during the relevant previous year.

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