No exempt income means no section 14A disallowance and no related book profit adjustment under MAT.

ITAT Mumbai held that disallowance under section 14A read with rule 8D was not sustainable where the assessee earned no exempt income during the year, because the provision applies only to expenditure incurred in relation to exempt income actually earned and cannot be extended to notional income. On the same facts, the adjustment to book profit under section 115JB also failed, as clause (f) of Explanation 1 covers only expenditure relatable to exempt income debited to the profit and loss account. Both the normal computation adjustment and the MAT adjustment were deleted.

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Issues: (i) Whether disallowance under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 was sustainable when no exempt income was earned during the year; (ii) Whether any addition could be made to book profit under section 115JB of the Income-tax Act, 1961 on the basis of the same disallowance or under clause (f) of Explanation 1 thereto.

Issue (i): Whether disallowance under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 was sustainable when no exempt income was earned during the year.

Analysis: The record showed that the assessee had not earned any exempt income during the relevant assessment year. In such a situation, section 14A was held to operate only where expenditure is incurred in relation to exempt income actually earned, and rule 8D could not extend the scope of the main provision to notional or anticipated income. The absence of exempt income therefore negatived the basis for any disallowance under section 14A.

Conclusion: The disallowance under section 14A was not sustainable and was directed to be deleted.

Issue (ii): Whether any addition could be made to book profit under section 115JB of the Income-tax Act, 1961 on the basis of the same disallowance or under clause (f) of Explanation 1 thereto.

Analysis: The addition to book profit was founded on the very same disallowance under section 14A. The provision in clause (f) of Explanation 1 to section 115JB applies only where expenditure relatable to exempt income is debited to the profit and loss account. Since no exempt income had been earned, no such relatable expenditure arose on the facts of the case, and the consequential adjustment under section 115JB could not survive.

Conclusion: The addition to book profit under section 115JB was not sustainable and was directed to be deleted.

Final Conclusion: Both the normal computation adjustment and the book profit adjustment were set aside, resulting in complete relief to the assessee.

Ratio Decidendi: Disallowance under section 14A, and any corresponding adjustment to book profit under section 115JB, cannot be made in the absence of exempt income actually earned during the year.

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