Section 14A disallowance must be recomputed using only investments yielding exempt income, not the entire portfolio.

Section 14A disallowance must be confined to expenditure relatable to exempt income, and Rule 8D can be applied only on an investment base linked to investments actually yielding such income. A computation that includes the entire investment portfolio is incorrect when it does not distinguish between exempt and taxable income sources. The ITAT therefore held the Assessing Officer's working unsustainable as framed and remanded the matter for fresh computation after identifying the relevant investments and bifurcating dividend and interest income. The assessee obtained partial relief, subject to recomputation under the correct Rule 8D basis.

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Issues: Whether the disallowance under section 14A read with Rule 8D required recomputation by considering only those investments which yielded exempt income, and whether the Assessing Officer's computation by taking the entire investment was sustainable.

Analysis: The disallowance under section 14A is confined to expenditure relating to income which does not form part of total income. Rule 8D can be applied only for a correct computation of such expenditure, and the investment base used for the formula must correspond to the investments which actually gave rise to exempt income. Since the Assessing Officer's computation included the entire investment portfolio, the computation was found to be incorrect. The matter was therefore sent back for fresh working after bifurcation of dividend and interest income and identification of investments yielding exempt income.

Conclusion: The disallowance was not sustained as computed and the issue was remanded to the Assessing Officer for recomputation in accordance with Rule 8D; the assessee obtained partial relief.

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