No exempt income means no section 14A disallowance, and no automatic adjustment to book profit under section 115JB.

Where no exempt income is earned and no exemption claim is made, section 14A read with Rule 8D does not permit a disallowance because the provision operates only against expenditure relating to income excluded from total income. The Tribunal also stated that book-profit computation under section 115JB is to be made independently and section 14A disallowance cannot be mechanically imported into clause (f) of Explanation 1. On that reasoning, no adjustment to book profit was permissible on account of the section 14A computation.

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Issues: (i) Whether disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 could be sustained when the assessee had earned no exempt income and had made no claim for exemption; (ii) whether any corresponding adjustment could be made while computing book profit under section 115JB of the Income-tax Act, 1961.

Issue (i): Whether disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 could be sustained when the assessee had earned no exempt income and had made no claim for exemption.

Analysis: The material on record showed that the assessee had not earned any exempt income in the relevant years. The Tribunal followed the settled view that section 14A applies only to expenditure incurred in relation to income not forming part of total income, and where no such exempt income is earned during the year, no disallowance can be made. Reliance was placed on binding High Court authority adopting this principle.

Conclusion: The disallowance under section 14A read with Rule 8D was not sustainable; the Revenue's appeals on this aspect failed.

Issue (ii): Whether any corresponding adjustment could be made while computing book profit under section 115JB of the Income-tax Act, 1961.

Analysis: The Tribunal applied the principle that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made independently and not by importing the disallowance mechanism of section 14A read with Rule 8D. On that basis, additions made to book profit on account of section 14A disallowance could not stand where no exempt income had arisen.

Conclusion: No adjustment under section 115JB on account of section 14A read with Rule 8D was permissible; the assessee's appeal succeeded on this aspect.

Final Conclusion: The Tribunal upheld deletion of the disallowance where no exempt income was earned and rejected the attempt to import the section 14A computation into book-profit assessment under section 115JB, resulting in dismissal of the Revenue's appeals and allowance of the assessee's appeal.

Ratio Decidendi: Where an assessee has not earned exempt income during the relevant year, no disallowance under section 14A can be made, and such disallowance cannot be mechanically carried into the computation of book profit under section 115JB.

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