Section 43B and section 14A disallowances fail where prior-year facts control and no nexus to exempt investments is proved.

ITAT Delhi held that a section 43B disallowance could not be sustained where the assessee's own earlier years had already ined the issue on indistinguishable facts and the statutory dues were paid during the relevant year, so the deletion was upheld. On section 14A read with Rule 8D(2)(ii) and (iii), the record did not establish any nexus between borrowed interest-bearing funds and exempt investments, and the appellate finding that the disallowance was not warranted on the facts was affirmed, with recomputation limited only to the excluded investment category. The revenue's appeal failed and the assessee obtained relief on the surviving issues.

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Issues: (i) Whether the assessee was entitled to deduction in respect of the disallowance made under section 43B of the Income-tax Act, 1961; (ii) Whether the disallowance made under section 14A read with Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income-tax Rules, 1962 was sustainable.

Issue (i): Whether the assessee was entitled to deduction in respect of the disallowance made under section 43B of the Income-tax Act, 1961.

Analysis: The same issue had been decided in the assessee's own case for earlier assessment years in favour of the assessee, and the factual position for the year under consideration was found to be indistinguishable. The appellate findings accepted that the statutory dues were paid during the relevant year and that the conditions for denial of deduction were not made out.

Conclusion: The disallowance under section 43B was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the disallowance made under section 14A read with Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income-tax Rules, 1962 was sustainable.

Analysis: On the question of interest disallowance, the finding was that the revenue failed to establish, with documentary evidence, that the borrowed interest-bearing funds were used for making investments yielding exempt income. The materials placed showed sufficient funds and restricted end-use conditions, and the claim that investments in certain excluded categories should not enter the Rule 8D(2)(iii) computation was accepted in principle. The appellate authority nevertheless directed recomputation for the excluded investments, and the Tribunal found no infirmity in the deletion sustained by the first appellate authority on the facts of the case.

Conclusion: The disallowance under section 14A and Rule 8D was not sustained to the extent deleted by the appellate authority, and the issue was decided in favour of the assessee.

Final Conclusion: The revenue's appeal failed, while the assessee obtained relief on the substantive issues that survived adjudication, resulting in partial success for the assessee overall.

Ratio Decidendi: A disallowance under section 14A read with Rule 8D cannot be sustained unless the nexus between borrowed funds and exempt investments is established on the record, and a deduction under section 43B cannot be denied where the issue is covered by earlier binding factual determinations in the assessee's own case.

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