Section 14A interest disallowance fails where non-interest-bearing funds cover investments; standard assets deduction allowed for rural bank.

Disallowance under section 14A read with Rule 8D could not be sustained for interest expenditure where the assessee had sufficient non-interest-bearing funds and no net interest cost was shown; that part was deleted, while the administrative disallowance was sustained for want of explanation and supporting details. A rural bank's provision for standard assets was deductible under section 36(1)(viia) read with Rule 6ABA where the issue was already covered by its earlier year decision on identical facts; the entire addition was deleted.

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Issues: (i) Whether disallowance under section 14A read with Rule 8D could be sustained in respect of interest expenditure and administrative expenditure attributable to exempt dividend income. (ii) Whether provision for standard assets was deductible under section 36(1)(viia) in the case of a rural bank.

Issue (i): Whether disallowance under section 14A read with Rule 8D could be sustained in respect of interest expenditure and administrative expenditure attributable to exempt dividend income.

Analysis: The assessee had sufficient non-interest bearing funds and the investments were lower than such funds. The material also showed net interest income for the year, so no cost of funds was attributable to the exempt income. On that footing, the interest component of the disallowance was not justified. As regards the administrative component, no explanation or supporting details were furnished before the authorities.

Conclusion: The interest disallowance was deleted, but the administrative disallowance was sustained; the issue was partly decided in favour of the assessee.

Issue (ii): Whether provision for standard assets was deductible under section 36(1)(viia) in the case of a rural bank.

Analysis: The issue was covered by the assessee's own earlier year decision. The provision under section 36(1)(viia), read with Rule 6ABA, was held to allow deduction in respect of the relevant provision and the earlier disallowance had already been deleted on identical facts. Following that binding approach, the addition could not survive.

Conclusion: The entire addition was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded on the provision for standard assets issue and failed in part on the section 14A disallowance, resulting in partial relief to the assessee.

Ratio Decidendi: Disallowance under section 14A cannot be sustained for interest expenditure where the assessee has sufficient non-interest bearing funds and no net interest cost is shown, while a duly covered claim for deduction under section 36(1)(viia) for provision made by a rural bank cannot be denied on the basis adopted by the lower authorities.

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