Section 14A disallowance capped at exempt income, and cannot be added to book profit under MAT rules.

Disallowance under Section 14A read with Rule 8D is confined to expenditure relating to exempt income and cannot exceed the exempt income earned during the year; the restriction of the disallowance to that amount was upheld. A further adjustment of the same disallowance to book profit under Section 115JB was not permitted because MAT computation can be modified only by the specific items in Explanation 1, and Section 14A disallowance cannot be imported absent express statutory authorisation. The Revenue's challenge failed, and the Commissioner (Appeals)'s order was sustained.

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Issues: (i) Whether disallowance under Section 14A read with Rule 8D of the Income-tax Rules, 1962 could exceed the exempt income earned during the year; (ii) whether an amount computed under Section 14A read with Rule 8D could be added back while computing book profit under Section 115JB of the Income-tax Act, 1961.

Issue (i): Whether disallowance under Section 14A read with Rule 8D of the Income-tax Rules, 1962 could exceed the exempt income earned during the year.

Analysis: The disallowance under Section 14A is confined to expenditure incurred in relation to income not forming part of total income. Rule 8D prescribes only the method for quantification and cannot enlarge the substantive scope of Section 14A. The authorities relied on held that when exempt income is earned, the disallowance cannot go beyond such exempt income, and the Commissioner (Appeals) had accordingly restricted the disallowance to the amount of exempt income.

Conclusion: The restriction of the disallowance to the exempt income was upheld, and the Revenue's challenge failed.

Issue (ii): Whether an amount computed under Section 14A read with Rule 8D could be added back while computing book profit under Section 115JB of the Income-tax Act, 1961.

Analysis: Book profit under Section 115JB can be adjusted only in accordance with the specific items set out in Explanation 1. The Special Bench view in Vireet Investment and the jurisdictional Tribunal's approach were followed to hold that a disallowance computed under Section 14A read with Rule 8D cannot be imported into the MAT computation unless expressly permitted by the statute.

Conclusion: The addition to book profit was rightly deleted and the Revenue's ground was rejected.

Final Conclusion: The order of the Commissioner (Appeals) was sustained in full and the Revenue's appeal did not succeed.

Ratio Decidendi: A disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned during the year, and such disallowance cannot be automatically added to book profit under Section 115JB unless the statute specifically authorises that adjustment.

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