Section 14A disallowance capped at exempt income, while CSR-linked donations may still qualify for section 80G relief.

Disallowance under section 14A read with Rule 8D was confined to expenditure relatable to exempt income and could not be carried beyond the exempt income earned in the year or the assessee's own suo motu disallowance; the restriction adopted by the appellate authority was upheld. Donations made as part of corporate social responsibility expenditure were not barred from deduction under section 80G merely because they were incurred to meet a CSR obligation; where the recipient was an approved donee and the section 80G conditions were satisfied, the deduction remained available. The Revenue's appeal failed on both issues.

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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 or the assessee's suo motu disallowance; (ii) Whether donations forming part of corporate social responsibility expenditure were eligible for deduction under section 80G 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 or the assessee's suo motu disallowance.

Analysis: The settled position applied was that disallowance under section 14A is confined to expenditure relatable to exempt income and cannot be enhanced beyond the exempt income earned during the relevant year. The appellate authority had restricted the disallowance to the amount already disallowed by the assessee, and this approach was consistent with the binding judicial view relied upon in the order.

Conclusion: The restriction of the disallowance to the extent of exempt income and the assessee's own disallowance was upheld, and the Revenue failed on this issue.

Issue (ii): Whether donations forming part of corporate social responsibility expenditure were eligible for deduction under section 80G of the Income-tax Act, 1961.

Analysis: The statutory bar on CSR expenditure operates only in relation to business deduction under section 37(1) and does not create an express prohibition under section 80G. Where the donation is otherwise made to an approved donee and the conditions of section 80G are satisfied, the deduction cannot be denied merely because the payment also answers the description of CSR expenditure. The reasoning also maintained the distinction between disallowance under the business head and allowance under Chapter VI-A, avoiding unintended double disallowance.

Conclusion: The claim for deduction under section 80G in respect of CSR-linked donations was upheld, subject to statutory eligibility, and the Revenue failed on this issue as well.

Final Conclusion: The Revenue's appeal was rejected in entirety, and the order of the first appellate authority allowing the assessee's relief on both issues was affirmed.

Ratio Decidendi: Disallowance under section 14A cannot exceed exempt income earned during the year, and CSR-linked donations are not barred from deduction under section 80G merely because they are incurred in discharge of a CSR obligation, provided the statutory conditions for the deduction are otherwise met.

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