Section 14A cannot disallow expenses linked to treaty-relieved dividend income that still forms part of total income.

Section 14A does not apply to expenditure linked to dividend income from an overseas company where that income is included in total income under the Act, even if tax sparing credit or treaty relief is later available under the India-Oman DTAA. The Delhi High Court reasoned that Section 14A is confined to expenditure relating to income that does not form part of total income, and income that remains chargeable in the computation cannot be treated as exempt merely because relief is granted at a later stage under Section 90(2) and Article 25. The disallowance was therefore not attracted, and the Revenue's challenge failed.

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Issues: Whether expenditure incurred in relation to dividend income from an overseas company, on which tax sparing credit was available under the India-Oman DTAA, could be disallowed under Section 14A of the Income-tax Act, 1961.

Analysis: Section 14A applies only to expenditure incurred in relation to income which does not form part of the total income. Dividend received from the overseas company was chargeable to tax in India and formed part of the total income, even though rebate of tax was available under Section 90(2) read with Article 25 of the India-Oman DTAA. Income which enters the computation of total income but is later relieved by treaty credit does not become income the total income for the purposes of Section 14A. The cited precedent on the scope of Section 14A reinforced that the provision does not extend to income which is included in total income but receives a deduction, exemption, or relief at a later stage of computation.

Conclusion: The disallowance under Section 14A was not attracted, and the Revenue's challenge failed.

Ratio Decidendi: Section 14A cannot be invoked where the income, though relieved by treaty credit or rebate, forms part of the assessee's total income in the computation under the Act.

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