Section 14A disallowance limited where own funds exceeded exempt investments and only income-yielding investments counted under Rule 8D.

Disallowance under section 14A read with Rule 8D was restricted where the assessee's own non-interest-bearing funds exceeded the exempt-income investments, supporting the presumption that such investments were made from interest-free funds. On those facts, the interest component under Rule 8D was not justified because borrowed funds were deployed in the lending business. For the administrative expense component, only investments that actually yielded exempt income could be included in the Rule 8D base, not the full investment portfolio. The appellate recomputation on that basis was upheld.

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Issues: Whether the disallowance made under section 14A read with Rule 8D was sustainable when the assessee had sufficient own funds and the exempt-investment base had to be restricted to investments yielding exempt income only.

Analysis: The assessee showed that its own non-interest-bearing funds exceeded the investments giving rise to exempt income, while the borrowed funds were deployed in its lending business. On these facts, the presumption favoured investment out of interest-free funds, and the interest component under Rule 8D was not justified. As regards the administrative expenditure component, only investments yielding non-taxable income could be considered for the Rule 8D computation, not the entire investment portfolio. The appellate authority's recomputation on that basis was found to be correct.

Conclusion: The disallowance under section 14A was rightly restricted and the Revenue's challenge failed.

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