Section 14A disallowance fails when no exempt income is earned; Finance Act 2022 amendment applies prospectively.

Section 14A disallowance under Rule 8D was held unsustainable where no exempt income was earned or receivable during the year and no exemption under section 10(34) was claimed; the disallowance was deleted. The Finance Act, 2022 amendment was treated as prospective and applicable only from assessment year 2022-23, so it did not apply to the year under appeal.

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Issues: Whether disallowance under section 14A read with Rule 8D was sustainable when no exempt income was earned during the relevant year.

Analysis: The assessee had not earned any exempt income and had not claimed exemption under section 10(34). Relying on the view that section 14A does not apply where no exempt income is received or receivable during the relevant previous year, the disallowance was found to be unsustainable. The amendment inserted by the Finance Act, 2022 was treated as prospective and applicable only from assessment year 2022-23 onwards, and therefore did not govern the year under appeal.

Conclusion: The disallowance under section 14A read with Rule 8D was deleted and the issue was decided in favour of the assessee.

Ratio Decidendi: Section 14A disallowance cannot be sustained for a year in which no exempt income is earned, and the Finance Act, 2022 amendment applies prospectively.

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