Section 14A disallowance cannot exceed exempt income; excess Rule 8D computation deleted as unsustainable.

Section 14A disallowance must remain confined to expenditure incurred in relation to exempt income and cannot exceed the exempt income itself. Where the assessee had already disallowed the exempt dividend income in its computation, a further disallowance computed under Rule 8D(2)(ii) on average investments, and resulting in an amount far above the exempt income, was held unsustainable. The added amount was therefore deleted, reaffirming that the statutory disallowance cannot be expanded so as to swallow the exempt income.

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Issues: Whether the disallowance under section 14A read with Rule 8D(2)(ii) could be sustained beyond the amount of exempt income earned by the assessee.

Analysis: The assessee had itself disallowed the exempt dividend income in its computation. The remaining disallowance was made by applying Rule 8D(2)(ii) to the average investments and resulted in a figure far exceeding the exempt income. The applicable principle is that section 14A permits disallowance only of expenditure incurred in relation to exempt income, and the disallowance cannot be expanded so as to swallow the exempt income itself. On that basis, the sustained addition was held to be unsustainable.

Conclusion: The disallowance under section 14A read with Rule 8D(2)(ii) was deleted and the ground of the assessee was accepted.

Ratio Decidendi: A disallowance under section 14A cannot exceed the exempt income and must remain confined to expenditure incurred in relation to such income.

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