Interest-free funds defeat section 14A interest disallowance, while bank deduction computations follow settled judicial method.

Interest disallowance under section 14A read with Rule 8D(2)(ii) is not warranted where the assessee has sufficient interest-free funds to cover investments yielding exempt income, because the presumption of use of borrowed funds does not survive on those facts. Deduction for banks under sections 36(1)(viia) and 36(1)(viii) must be computed in line with the settled judicial method applied to the relevant income base, including the approach accepted in earlier years. The stated position is that the Revenue's challenge failed and the appellate relief to the assessee was sustained.

---

---

Issues: (i) Whether disallowance of interest expenditure under section 14A read with Rule 8D(2)(ii) was sustainable where the assessee had sufficient interest-free funds; and (ii) Whether the deduction under section 36(1)(viia) and section 36(1)(viii) was to be computed in the manner directed by the first appellate authority.

Issue (i): Whether disallowance of interest expenditure under section 14A read with Rule 8D(2)(ii) was sustainable where the assessee had sufficient interest-free funds.

Analysis: The dispute was already covered by earlier decisions in the assessee's own case and there was no contrary material brought before the Tribunal. The factual finding accepted by the first appellate authority was that the assessee-bank's interest-free funds exceeded the investments yielding exempt income, so the presumption in favour of a nexus with borrowed funds did not survive. In that situation, the interest disallowance made by the Assessing Officer could not be sustained.

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

Issue (ii): Whether the deduction under section 36(1)(viia) and section 36(1)(viii) was to be computed in the manner directed by the first appellate authority.

Analysis: The computation of eligible deduction for a banking entity had already been settled by the Tribunal in earlier decisions, and the appellate authority applied that settled method. The reasoning also aligned with the principles recognised by the Supreme Court on the scope of deduction available to banks. No contrary authority was shown, and the assessee's stated method had also been accepted in later assessment years.

Conclusion: The direction to recompute the deductions under section 36(1)(viia) and section 36(1)(viii) was upheld and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenge failed on both issues, and the appellate order granting relief to the assessee was sustained in full.

Ratio Decidendi: Where an assessee has sufficient interest-free funds to cover investments yielding exempt income, a disallowance of interest under section 14A read with Rule 8D(2)(ii) is not warranted; and deductions for banks under section 36(1)(viia) and section 36(1)(viii) must be computed in accordance with the settled judicial method applied to the relevant income base.

---