Own-funds funding, corporate guarantee pricing, depreciation and forex loss treatment all ruled in the assessee's favour.

Where investments yielding exempt income were financed from sufficient own funds, no disallowance under section 14A was warranted and no corresponding adjustment could be made while computing book profit under section 115JB. Directors' salary and handover facility expenses were treated as general business overheads, so capitalisation to work-in-progress was deleted. The arm's length price of corporate guarantee commission at 0.3523% was upheld on the interest-saving and credit-risk benchmarking adopted. Depreciation on a sample flat treated as a temporary structure was allowed at the claimed rate, and foreign exchange loss on construction materials was held to be revenue expenditure not capitalisable to project cost.

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Issues: (i) Whether disallowance under section 14A could be sustained where the assessee had sufficient own funds and whether any corresponding adjustment could be made while computing book profit under section 115JB; (ii) Whether directors' salary and handover facility expenses were liable to be capitalised to work-in-progress; (iii) Whether the arm's length price of corporate guarantee commission was correctly determined at 0.3523%; (iv) Whether depreciation on the sample flat, treated as a temporary structure, was allowable at the claimed rate; and (v) Whether foreign exchange loss on purchase of construction materials was to be capitalised to project cost.

Issue (i): Whether disallowance under section 14A could be sustained where the assessee had sufficient own funds and whether any corresponding adjustment could be made while computing book profit under section 115JB.

Analysis: The investments yielding exempt income were found to have been made out of own funds, which exceeded the relevant investment base. For the computation under section 14A, only investments yielding exempt income during the year were relevant for the indirect expenditure component. The adjustment under section 115JB was also not permissible in view of the settled position followed in the assessee's own case.

Conclusion: The disallowance under section 14A and the related adjustment under section 115JB were deleted, in favour of the assessee.

Issue (ii): Whether directors' salary and handover facility expenses were liable to be capitalised to work-in-progress.

Analysis: These expenses were held to be general overheads incurred for the business as a whole and not attributable to any specific project. They were neither capital in nature nor deferred revenue expenditure, and similar expenditure had been treated as revenue outgo in earlier decisions followed by the Tribunal.

Conclusion: The disallowance towards capitalisation was deleted, in favour of the assessee.

Issue (iii): Whether the arm's length price of corporate guarantee commission was correctly determined at 0.3523%.

Analysis: The guarantee was treated as an international transaction, and the benchmarking adopted the interest-saving approach, credit-risk analysis, and adjustment for tenor and comparable borrowing conditions. The rate of 0.3523% was consistent with the co-ordinate bench view in the assessee's own matter and there was no infirmity in the adoption of that rate.

Conclusion: The transfer pricing adjustment was not sustained, in favour of the assessee.

Issue (iv): Whether depreciation on the sample flat, treated as a temporary structure, was allowable at the claimed rate.

Analysis: The sample flat was accepted as a temporary structure used for business purposes, and temporary structures are entitled to 100% depreciation under the applicable depreciation schedule. Since the asset had already been put to use and partial depreciation had been allowed in the first year, the balance claim for the year in question could not be denied.

Conclusion: The disallowance of depreciation was deleted, in favour of the assessee.

Issue (v): Whether foreign exchange loss on purchase of construction materials was to be capitalised to project cost.

Analysis: The foreign exchange loss was held to be a revenue item arising on settlement of monetary liabilities and not part of the cost of inventory or work-in-progress. It was therefore not required to be added to project cost.

Conclusion: The addition by capitalisation was deleted, in favour of the assessee.

Final Conclusion: The Revenue's appeals failed on all disputed issues, and the relief granted by the first appellate authority was sustained.

Ratio Decidendi: Where investments are demonstrably funded from sufficient own funds, no disallowance under section 14A is warranted on the borrowed-funds theory; exempt-income related disallowance must be confined to relevant investments, book-profit adjustment under section 115JB is impermissible on that account, and guarantee commission benchmarking may be upheld on the interest-saving method where supported by credit-risk and comparable analysis.

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