Section 14A disallowance capped at exempt income; retrospective effect of the 2022 Explanation rejected.

Section 14A disallowance was held to be capped at the amount of exempt income earned for the relevant year. The Tribunal followed the binding Delhi High Court view and held that disallowance under section 14A read with Rule 8D cannot exceed the dividend and long-term capital gains treated as exempt income. It further noted that the Explanation inserted by the Finance Act, 2022 applies prospectively and does not change the position for the year under appeal. Accordingly, the disallowance was restricted to the assessee's exempt income.

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Issues: Whether the disallowance under section 14A read with Rule 8D could be restricted to the amount of exempt income earned by the assessee.

Analysis: The assessee earned exempt income by way of dividend and long-term capital gains, while the Assessing Officer computed disallowance under section 14A read with Rule 8D and restricted it to the actual expenditure claimed. The Tribunal held that, for the relevant assessment year, the binding view of the Delhi High Court governed the controversy and that the disallowance under section 14A cannot be more than the exempt income earned. The Tribunal also noted that the Explanation inserted in section 14A by the Finance Act, 2022 operates prospectively and does not alter the position for the year under appeal.

Conclusion: The disallowance under section 14A was restricted to the exempt income of the assessee, and the assessee succeeded to that extent.

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