Section 14A disallowance cannot stand without exempt income; prospective amendment to the Explanation did not apply for the year.

Disallowance under section 14A read with Rule 8D was held unsustainable where the assessee had not earned any exempt income during the relevant assessment year. The amendment inserting the Explanation to section 14A with effect from 1 April 2022 was treated as prospective and not applicable to assessment year 2020-21. On that basis, the absence of exempt income meant that no disallowance under section 14A could be made, and the deletion of the disallowance was upheld.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained when the assessee had not earned any exempt income during the relevant assessment year.

Analysis: The assessee had not earned any exempt income during the year. The amendment inserting the Explanation to section 14A with effect from 01.04.2022 was treated as prospective and not applicable to assessment year 2020-21. In the absence of exempt income, the disallowance under section 14A was held to be impermissible.

Conclusion: The deletion of the disallowance was upheld and the Revenue's ground was rejected.

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