Section 14A disallowance fails where no exempt dividend income is earned during the year.

Disallowance under section 14A read with Rule 8D was not sustainable because no exempt dividend income was earned during the year. The Tribunal accepted the appellate finding that, in the absence of exempt income, section 14A could not be invoked merely on the basis of investments, and the Revenue did not show any infirmity in that conclusion. The deletion of the disallowance 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 dividend income during the relevant year.

Analysis: The Assessing Officer applied Rule 8D and made a disallowance under section 14A on the basis of investments made by the assessee. The appellate authority deleted the disallowance after recording that no exempt dividend income had been received during the year. The Tribunal found that the revenue did not point out any infirmity in that finding and relied on the settled view that section 14A cannot be invoked in the absence of exempt income.

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

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