Appeal allowed, disallowance under Rule 8D deleted. Investments from interest-free funds justified.

The appeal was allowed, and the disallowance under Rule 8D amounting to Rs. 1,59,430 was deleted. The Tribunal concluded that investments were made out of interest-free funds due to the substantial shareholders' fund available, following precedents cited, including the decision of the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd.

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Issues:
Confirmation of disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D.

Analysis:
The appeal was filed against the CIT(A)'s order for the assessment year 2015-16, specifically challenging the disallowance of Rs. 1,59,430 made by the Assessing Officer under section 14A. The assessee had earned dividend income of Rs. 2,24,707, claimed as exempt, without offering any disallowance under section 14A for taxation. The AO computed the disallowance under Rule 8D at Rs. 1,59,430, being one half of the average value of investments. The CIT(A) upheld this decision, stating that the presumption of investments being financed by own funds did not hold true in this case post the insertion of Rule 8D. Despite the absence of the assessee during the hearing, it was established that the investments yielding exempt income were Rs. 98.45 lakh, while the shareholders' fund stood at Rs. 58.16 crore.

The Tribunal referred to the decision of the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd., where it was held that if an assessee possessed sufficient interest-free funds apart from substantial shareholders' funds, the presumption was that investments were made out of interest-free funds. This principle was supported by judgments of the Supreme Court and the Delhi High Court. In this case, with investments at Rs. 98.45 lakh and shareholders' fund at Rs. 58.16 crore, the Tribunal concluded that the investments were significantly less than the shareholders' fund. Following the precedent, the Tribunal ordered the deletion of the disallowance under Rule 8D amounting to Rs. 1,59,430.

Therefore, the appeal was allowed, and the disallowance under Rule 8D was deleted based on the principle that investments were made out of interest-free funds due to the substantial shareholders' fund available, as established by the precedents cited.

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