Interest-free funds and book profit computation limit section 14A disallowance under Rule 8D and section 115JB.

Where the assessee's own interest-free funds exceeded the investments, a proportional interest disallowance under section 14A read with Rule 8D(2)(ii) was held unwarranted because the Revenue did not rebut the presumption that the investments came from such funds. The adjustment to book profit under section 115JB on account of a section 14A disallowance was also found unsustainable, as section 115JB operates as a self-contained computation code and section 14A cannot be mechanically imported into that exercise. The exclusion of investments not yielding exempt income for Rule 8D(2)(iii) was treated as consistent with the settled approach.

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Issues: (i) Whether disallowance of interest under section 14A read with Rule 8D(2)(ii) was warranted where the assessee's own funds exceeded the investments; (ii) Whether the adjustment made while computing book profit under section 115JB on account of section 14A disallowance was sustainable.

Issue (i): Whether disallowance of interest under section 14A read with Rule 8D(2)(ii) was warranted where the assessee's own funds exceeded the investments.

Analysis: The assessee's own funds were substantially higher than the investments and the Revenue did not rebut the factual presumption that the investments were made out of interest-free funds. In a mixed-funds situation, where interest-free funds are sufficient to cover the investments, the presumption favours the assessee and a proportionate interest disallowance cannot be mechanically made under section 14A read with Rule 8D(2)(ii).

Conclusion: The disallowance under Rule 8D(2)(ii) was not warranted and was deleted in favour of the assessee.

Issue (ii): Whether the adjustment made while computing book profit under section 115JB on account of section 14A disallowance was sustainable.

Analysis: Section 115JB was treated as a self-contained code for computation of book profit, and the section 14A disallowance was held not to be automatically importable into that computation. The exclusion of investments not yielding exempt income while applying Rule 8D(2)(iii) was also upheld as consistent with the settled approach.

Conclusion: The adjustment to book profit was unsustainable and the assessee's relief was affirmed.

Final Conclusion: The Revenue's challenge failed on both the interest disallowance and the book-profit adjustment, leaving the assessee's relief intact.

Ratio Decidendi: Where the assessee's interest-free funds are sufficient to cover the investments, a section 14A disallowance of interest under Rule 8D(2)(ii) is not justified, and section 14A disallowance cannot be mechanically applied to book-profit computation under section 115JB.

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