Section 14A disallowance cannot stand without exempt income; the inserted explanation was held prospective.

Section 14A disallowance under Rule 8D was held unsustainable where no tax-exempt income was earned during the relevant year, because the provision does not trigger in the absence of exempt income. The Tribunal also followed binding High Court authority that the explanation inserted to section 14A operates prospectively and could not justify the disallowance for the year in question. Applying judicial hierarchy, it preferred the High Court view over a contrary tribunal decision and deleted the disallowance in favour of the assessee.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained where no tax-exempt income was earned during the relevant assessment year, and whether the explanation inserted to section 14A operated retrospectively.

Analysis: The assessee had not derived any exempt income during the year, and the disallowance was made only on the basis of investments. The Tribunal noted that the High Court authorities relied upon by the assessee held that in the absence of exempt income, disallowance under section 14A is not attracted. On the rival submission regarding the newly inserted explanation, the Tribunal followed the binding High Court view that the explanation is prospective and cannot justify the disallowance for the year under consideration. Applying judicial hierarchy, the Tribunal preferred the High Court ruling over the contrary tribunal view.

Conclusion: The disallowance under section 14A was not sustainable and was deleted, in favour of the assessee.

Ratio Decidendi: Section 14A does not warrant disallowance where no exempt income is earned in the relevant year, and the explanation inserted to that section is prospective in operation.

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