Section 14A disallowance fails where no exempt income is earned or received during the relevant year.

Section 14A disallowance was found unsustainable because the assessee had not earned or received any exempt income during the relevant previous year. The analysis noted that section 14A applies only to expenditure incurred in relation to income not forming part of total income, and that the provision presupposes actual exempt income for the year. On that basis, the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) was deleted.

---

---

Issues: Whether disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income-tax Rules, 1962 could be sustained when the assessee had not earned or received any exempt income during the relevant previous year.

Analysis: The relevant previous year was found to be one in which no exempt income had been earned or received by the assessee. Section 14A applies only to expenditure incurred in relation to income which does not form part of total income, and the provision contemplates actual receipt of such income during the year. Following the principle that disallowance cannot be made in the absence of exempt income, the earlier disallowance was held to be unsustainable.

Conclusion: The disallowance under section 14A was deleted and the assessee succeeded on this issue.

Ratio Decidendi: Disallowance under section 14A cannot be made for a previous year in which no exempt income is received or receivable.

---