Section 14A disallowance barred without exempt income; later Explanation held prospective and inapplicable to the year.

Disallowance under Section 14A read with Rule 8D was held unsustainable where the assessee had earned no exempt income during the relevant year. The binding precedent applied was that Section 14A disallowance cannot be made in the absence of exempt income. The Explanation inserted with effect from 01.04.2022 was treated as prospective and therefore did not apply to the assessment year in question. The disallowance was deleted 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 year, and whether the Explanation inserted with effect from 01.04.2022 could apply retrospectively.

Analysis: The assessee had not earned any exempt income during the year. The binding precedent relied upon holds that no disallowance under Section 14A is warranted where there is no exempt income. The later Explanation to Section 14A was treated as prospective in operation and therefore could not govern the assessment year in question.

Conclusion: The disallowance under Section 14A was deleted and the issue was decided in favour of the assessee.

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