INCOME TAX ACT, 1961

Section 14A Rule 8D

Disallowance under section 14A - Expenditure against exempt income - Applicability of rule 8D -

Assessee earned tax-free dividend income and made suo moto disallowance of expenses under section 14A @ 0.1% of exempted income. AO adopted computation mechanism provided in rule 8D(2) and made additional disallowance.Held: During the year under consideration, i.e., assessment year 2007-08, computation mechanism provided in rule 8D(2) could not be made applicable as it was introduced only with effect from 24-3-2008 relevant to assessment year 2008-09 and was held to be prospective in operation. AO was directed to make disallowance under section 14A @ 1% of exempt income.