Section 14A disallowance barred when no exempt income arises; CBDT circular cannot override the statute.

Disallowance under Section 14A read with Rule 8D was held impermissible where no exempt income was received or receivable during the relevant year. The governing principle applied was that Section 14A operates only when income not forming part of total income actually arises in the previous year, so a nil exempt-income year cannot attract the disallowance machinery. CBDT Circular No. 5/2014 could not override the statute, and the later explanatory amendment to Section 14A was treated as non-retrospective. On that basis, the tax disallowance failed.

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Issues: Whether disallowance under Section 14A read with Rule 8D can be made in a year in which no exempt income was received or receivable, and whether CBDT Circular No. 5/2014 can override the statutory position.

Analysis: The authorities below had concurrently found that the assessee earned no dividend or other exempt income during the relevant year. The governing legal position was taken from the binding precedent that Section 14A applies only when income not forming part of total income is actually received or receivable during the previous year. It was also noticed that the departmental circular cannot override the express language of the statute and that the later amendment to Section 14A, stated to be for removal of doubts, is not retrospective.

Conclusion: Disallowance under Section 14A read with Rule 8D was not permissible in the absence of exempt income, and the appeal was dismissed.

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