S. 14A:Business expenditure- Disallowance-Exempted income- Rule 8D Disallowance Cannot

In AY 2008-09, the assessee earned tax-free dividend income. Its’ total expenditure as per the P&L A/c
was Rs. 49 lakhs. The AO applied Rule 8D and made a disallowance u/s 14A of Rs. 2.37 crores which
was reduced by the CIT (A) to Rs. 1.78 crores. Before the Tribunal, the assessee claimed that even
assuming that the entire expenditure had been incurred to earn the dividend, the disallowance u/s 14A
& Rule 8D could not exceed the expenditure incurred. held accepting the plea:
U/s 14A read with Rule 8D, disallowance can be made for the expenditure incurred for earning of
exempt income. From the assessee’s P&L A/c, it is evident that the total expenditure incurred was Rs.
49 lakhs only which was claimed as a deduction. The disallowance u/s 14A & Rule 8D cannot exceed
the expenditure actually claimed by the assessee. Accordingly, the action of the AO & CIT (A) in
making disallowance in excess of total expenditure debited to P&L A/c is unjustified.
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