Section 14A disallowance needs factual finding on attributable exempt-income cost before Rule 8D can be applied

Section 14A read with Rule 8D cannot be applied mechanically where the assessee claims that investments in sister concerns were made from its own non-interest bearing funds and the record contains no finding on any cost attributable to earning exempt income. On those facts, the disallowance could not be sustained without proper factual examination. The ITAT therefore set aside the disallowance and remitted the matter to the Assessing Officer for fresh consideration.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained when the assessee claimed that investments in sister concerns were made out of its own non-interest bearing funds and no finding was recorded on the cost attributable to earning exempt income.

Analysis: The investments were stated to have been made in sister companies out of non-interest bearing funds. The record did not contain a finding by the Assessing Officer on whether any cost was attributable to earning exempt income before invoking section 14A and Rule 8D. In those circumstances, the matter required reconsideration on facts and the issue could not be upheld without such examination.

Conclusion: The disallowance was set aside and the issue was remitted to the Assessing Officer for fresh consideration.

Ratio Decidendi: Section 14A and Rule 8D cannot be applied mechanically where the assessee asserts use of own non-interest bearing funds for investment and there is no recorded finding on attributable cost of earning exempt income.

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