Section 14A disallowance fails without exempt income; mere investment holding does not trigger Rule 8D.

Section 14A disallowance could not be sustained where the assessee earned no exempt income during the relevant year; mere holding of investments capable of yielding exempt income was insufficient. The Tribunal applied the settled position that the section 14A machinery cannot operate in the absence of exempt income, and noted that no contrary operative order was produced to displace that principle. The deletion of the disallowance under Rule 8D was therefore upheld in favour of the assessee.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained when the assessee had not earned any exempt income during the relevant assessment year.

Analysis: The assessee had not earned dividend or any other income not includable in total income during the relevant assessment year. The disallowance under section 14A was made only because investments were held which were capable of yielding exempt income. The Tribunal followed the settled position that the machinery of section 14A cannot be invoked in the absence of exempt income, and noted that the Department had not placed any contrary operative order on record to dislodge that position.

Conclusion: The disallowance under section 14A read with Rule 8D was not sustainable and the deletion made by the first appellate authority was upheld in favour of the assessee.

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