Section 14A disallowance fails where no exempt income arose and the later explanation applies prospectively only.

For Assessment Year 2018-19, the Finance Act 2022 explanation to section 14A, effective from 1 April 2022, was treated as prospective and inapplicable. Where no exempt income was earned during the relevant previous year, disallowance of expenditure under section 14A read with rule 8D was unsustainable. The revisionary direction requiring that disallowance was consequently set aside.

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Issues: Whether revisionary directions requiring disallowance under section 14A read with rule 8D were sustainable for Assessment Year 2018-19 where no exempt income was earned.

Analysis: The explanation to section 14A inserted by the Finance Act, 2022 with effect from 01.04.2022 was prospective and could not govern Assessment Year 2018-19. In the absence of exempt income during the relevant previous year, the proposed disallowance under section 14A read with rule 8D was therefore unsustainable.

Conclusion: The revisionary direction for disallowance under section 14A read with rule 8D was set aside in favour of the assessee.

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