S. 14A: For Rule 8D(2)(i) only expenditure relating to investments resulting in tax-free income can be considered. For Rule 8D(2)(iii) all investments, whether yielding tax-free income or not, have to be considered

The Tribunal had to consider whether in computing the figure of disallowance under Rule 8D(2)(i) and 8D(2)(iii), it was necessary that the investments had to have yielded income which was not chargeable to tax. HELD by the Tribunal:

Rule 8D(2)(i) speaks of expenditure directly relating to income which does not form part of “total income”. In the context of s. 2(45) & s. 5, the expression ‘total income’ in Rule 8D(2)(i) must relate to an income which is sought to be assessed. Therefore, only expenditure directly relating to income which is earned either on receipt basis or on accrual basis and which does not form part of total income of a particular assessment year can be disallowed under clause (i) of Rule 8D(2). However, while computing disallowance under Rule 8D(2)(iii), the average of the total investment of the assessee as appearing in the balance sheet on the first day and last day of the year irrespective of the fact whether it has yielded income or not can be considered for the purpose of disallowance.