Section 14A interest disallowance deleted where own funds covered investments and no nexus with borrowed funds was shown.

Disallowance under section 14A read with Rule 8D(2)(ii) for proportionate indirect interest was deleted where the assessee showed investments were made from own funds and reserves, and no specific diversion of interest-bearing borrowings to exempt investments was established. General fund-flow observations were insufficient because the revenue did not identify any direct nexus between borrowed funds and the investment activity. The deletion was upheld.

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Issues: Whether the disallowance made under section 14A of the Income-tax Act, 1961 read with Rule 8D(2)(ii) of the Income-tax Rules, 1962, on account of proportionate indirect interest, was liable to be deleted where the assessee claimed that investments were made out of own funds and no specific diversion of interest-bearing funds was established.

Analysis: The assessee maintained that investments in mutual funds and shares were made from its own funds and reserves, while interest-bearing borrowings were used for specified non-exempt business purposes. The Assessing Officer made only general observations on fund flow and did not identify any specific transaction or establish a direct nexus between borrowed funds and the investment activity. The appellate finding accepted that the revenue authorities had not controverted the availability of sufficient own funds or demonstrated diversion of interest-bearing funds to exempt investments.

Conclusion: The deletion of the disallowance under section 14A read with Rule 8D(2)(ii) was upheld and the issue was decided in favour of the assessee.

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