Section 14A disallowance requires actual exempt income; absence of dividend income defeated the Rule 8D adjustment.

Disallowance under section 14A read with Rule 8D was held unwarranted where no exempt or dividend income was received or receivable during the relevant year. The decisive principle applied was that section 14A operates only when exempt income exists in the relevant previous year, so mere investment capable of generating such income does not justify a disallowance. On that basis, the deletion of the disallowance was upheld in favour of the assessee.

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

Analysis: The appeal concerned deletion of a disallowance made under section 14A read with Rule 8D on the footing that the assessee had made investments capable of generating exempt income. The decisive fact was that no dividend or other exempt income had been received during the year. Following the binding principle that section 14A applies only where exempt income is actually received or receivable in the relevant year, the absence of such income meant that no corresponding disallowance could be made.

Conclusion: The disallowance under section 14A read with Rule 8D was not warranted and the deletion was upheld in favour of the assessee.

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