Objective satisfaction and own-fund availability govern section 14A and interest disallowance; proportionate housing deduction and house property valuation also addressed.

Disallowance under section 14A read with rule 8D(2)(ii) was deleted because the Assessing Officer had not recorded objective satisfaction from the accounts and no nexus was shown between borrowed funds and exempt investments. Disallowance under rule 8D(2)(iii) was set aside for fresh examination on the same satisfaction requirement. Proportionate deduction under section 80-IB(10) was allowed unit-wise for qualifying residential units within the prescribed built-up area. Interest disallowance under section 36(1)(iii) was not sustained where own funds were sufficient and no diversion of borrowings was established. Notional annual value of the school property was treated as taxable under income from house property.

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Issues: (i) Whether disallowance under section 14A read with rule 8D(2)(ii) was justified; (ii) whether disallowance under section 14A read with rule 8D(2)(iii) was sustainable; (iii) whether deduction under section 80-IB(10) was allowable on a proportionate basis for residential units not exceeding the prescribed built-up area; (iv) whether interest under section 36(1)(iii) could be disallowed in respect of advances and deposits said to have been made out of borrowed funds; and (v) whether notional annual value of the school property was taxable under the head income from house property.

Issue (i): Whether disallowance under section 14A read with rule 8D(2)(ii) was justified.

Analysis: The Assessing Officer applied rule 8D without recording objective satisfaction that the assessee's claim of no expenditure for exempt income was incorrect having regard to the accounts. The material also showed availability of substantial interest-free funds and advances from customers, while the revenue did not establish a nexus between borrowed funds and the tax-exempt investments.

Conclusion: The disallowance under rule 8D(2)(ii) was rightly deleted and the issue is decided in favour of the assessee.

Issue (ii): Whether disallowance under section 14A read with rule 8D(2)(iii) was sustainable.

Analysis: The assessee's claim of no expenditure incurred for exempt income was not tested by an objective satisfaction based on the accounts before resorting to the prescribed method. Following the earlier view in the assessee's own case, the matter required fresh examination by the Assessing Officer in accordance with law.

Conclusion: The disallowance under rule 8D(2)(iii) was set aside and restored to the Assessing Officer for fresh consideration, in favour of the assessee for statistical purposes.

Issue (iii): Whether deduction under section 80-IB(10) was allowable on a proportionate basis for residential units not exceeding the prescribed built-up area.

Analysis: The projects had mixed unit sizes, but the consistent view in the assessee's own earlier years was that the deduction is to be computed unit-wise and denied only for units exceeding the statutory built-up area limit. The same projects and facts had already been accepted by earlier appellate decisions.

Conclusion: Proportionate deduction under section 80-IB(10) for qualifying residential units was allowable, and the revenue's challenge failed.

Issue (iv): Whether interest under section 36(1)(iii) could be disallowed in respect of advances and deposits said to have been made out of borrowed funds.

Analysis: The assessee's own funds were more than sufficient to cover the advances and deposits, and the revenue did not establish a clear diversion of interest-bearing borrowings for non-business purposes. The advances were also found to be in the normal course of the real-estate business.

Conclusion: The disallowance of interest under section 36(1)(iii) was not sustainable and the revenue's objection failed.

Issue (v): Whether notional annual value of the school property was taxable under the head income from house property.

Analysis: The assessee had allowed the completed portion of the property to be used by the foundation without a sale arrangement, and no evidence was produced to displace the revenue's estimation of annual letting value. The property benefit was therefore assessable as house property income.

Conclusion: The addition on account of annual value was sustained and the issue was decided against the assessee.

Final Conclusion: The revenue's appeal was rejected, while the assessee succeeded on the principal dispute relating to section 14A and interest disallowance, with the remaining reliefs granted only to the extent indicated above.

Ratio Decidendi: Disallowance under section 14A and rule 8D requires objective satisfaction by the Assessing Officer based on the accounts, proportionate section 80-IB(10) relief applies unit-wise to qualifying residential units, and interest under section 36(1)(iii) cannot be disallowed where sufficient own funds exist and no nexus with borrowed funds is shown.

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