Section 14A and Rule 8D disallowance requires fresh fund-flow verification and segregation of admissible interest costs.

Disallowance under section 14A read with rule 8D required fresh verification of the assessee's fund flow and balance-sheet materials before any common interest or administrative expenditure could be computed. Direct interest relatable to allowable income under section 57(iii) had first to be segregated, and interest linked to car loans, housing loans, interest-bearing advances, and taxable investments had to be identified separately. Investments that did not yield dividend or long-term capital gains were also to be examined on the record. The matter was restored for recomputation after proper verification, and any disallowance under rule 8D(2)(iii) could not exceed the actual expenditure claimed.

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Issues: Disallowance under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962, including the allocation of interest and administrative expenditure and the need for fresh examination of fund flow and balance-sheet materials.

Analysis: The assessee relied on balance-sheets and fund flow statements to contend that interest expenditure attributable to car loans, housing loans, interest-bearing advances, and investments yielding taxable income had to be separately identified before applying section 14A and rule 8D. It was also contended that investments which had not yielded dividend or long-term capital gains should be excluded, and that direct interest relatable to income allowable under section 57(iii) must first be segregated. The authorities below had not examined the material now placed on record. The matter therefore required verification of the fund flow, identification of the source and use of funds, segregation of direct admissible and inadmissible interest, and then computation of any balance common interest and administrative expenditure for rule 8D purposes. The assessee was to be given an opportunity to substantiate the administrative expenditure claim, and any disallowance under rule 8D(2)(iii) could not exceed the actual expenditure claimed.

Conclusion: The disallowance issue was restored to the Assessing Officer for fresh adjudication and computation in accordance with the stated principles, with appropriate verification of the assessee's accounts.

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