Section 14A disallowance fails where dividend income is taxable and no exempt income exists in the relevant year.

Section 14A applies only to expenditure incurred in relation to income that does not form part of total income. Because dividend income became taxable from assessment year 2021-22 onwards under the Finance Act, 2020 amendment to section 10(34), the foundational condition for invoking Rule 8D was absent in the relevant year. Even if dividend income had arisen, it was not exempt income for that year. Accordingly, disallowance under section 14A read with Rule 8D was not sustainable and was deleted.

---

---

Issues: Whether disallowance under section 14A read with Rule 8D could be sustained when dividend income was taxable and no exempt income existed in the relevant year.

Analysis: Section 14A applies only where expenditure is incurred in relation to income that does not form part of total income. The amendment to section 10(34) by the Finance Act, 2020 made dividend income taxable in the hands of the shareholder from assessment year 2021-22 onwards. On that premise, even if dividend income had arisen, it would not have constituted exempt income in the relevant assessment year. The foundational condition for invoking section 14A was therefore absent.

Conclusion: Disallowance under section 14A read with Rule 8D was not sustainable and was deleted.

Ratio Decidendi: Section 14A disallowance can be made only in relation to expenditure connected with income that is exempt from tax; where the relevant income is taxable, the section cannot be invoked.

---