Exempt-income disallowance follows the own-funds presumption, while administrative expenses require verification of investments generating exempt income.

Disallowance of exempt-income expenditure requires application of the own-funds presumption where own funds exceed investments, excluding interest disallowance while permitting verification-based administrative expense disallowance limited to investments generating exempt income. Approved in-house research facilities qualify for weighted research deduction without expenditure certification for the relevant year. Deduction for an eligible undertaking requires allocation only of common expenses attributable to that undertaking. Opening stock may require corresponding adjustment where the preceding year's closing stock was altered, subject to verification. Education cess is not deductible following the Finance Act, 2022 amendment. Rental receipts are taxable as income from house property, while service charges are taxable as income from other sources.

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Issues: (i) Whether disallowance under section 14A could be made under Rule 8D; (ii) whether weighted deduction for approved in-house research and development expenditure under section 35(2AB) required certification of the expenditure by DSIR; (iii) whether common corporate-office and research-and-development expenses were allocable in computing deduction under section 80IC; (iv) whether opening stock could be enhanced by the CENVAT/MODVAT amount added to the preceding year's closing stock; (v) whether education cess was deductible; and (vi) whether rental income and service-charge income were assessable respectively as income from house property and income from other sources.

Issue (i): Whether disallowance under section 14A could be made under Rule 8D.

Analysis: As own funds substantially exceeded the investments, the presumption was that investments were made from own funds; consequently, no interest disallowance under Rule 8D(2)(ii) was warranted. The assessment order nevertheless contained sufficient discussion to make the Assessing Officer's dissatisfaction with the claim of no expenditure discernible, permitting disallowance of administrative expenditure under Rule 8D(2)(iii). Only investments yielding exempt income were relevant, subject to verification of the factual position concerning exempt income.

Conclusion: Interest disallowance was deleted, while the administrative-expenditure disallowance was sustained in principle and remitted for factual verification; this issue was partly in favour of the assessee.

Issue (ii): Whether weighted deduction for approved in-house research and development expenditure under section 35(2AB) required certification of the expenditure by DSIR.

Analysis: For the relevant assessment year, section 35(2AB) required approval of the in-house research and development facility, not approval or certification of the quantum of eligible expenditure. The later requirement for quantification of expenditure could not govern the year under consideration.

Conclusion: DSIR certification of expenditure was not mandatory for weighted deduction under section 35(2AB); the matter was remitted to allow eligible deduction on that basis, in favour of the assessee.

Issue (iii): Whether common corporate-office and research-and-development expenses were allocable in computing deduction under section 80IC.

Analysis: Common expenditure not specifically attributable to an eligible undertaking need not be allocated, but expenditure attributable in part to that undertaking must be deducted in computing its eligible profit. The requisite factual examination of whether, and to what extent, the stated expenses related to the Baddi undertaking had not been undertaken.

Conclusion: The computation of deduction under section 80IC was remitted for fresh examination of allocable expenses; this issue was partly in favour of the assessee.

Issue (iv): Whether opening stock could be enhanced by the CENVAT/MODVAT amount added to the preceding year's closing stock.

Analysis: A change in the closing-stock value of the immediately preceding year ordinarily produces a corresponding change in the current year's opening-stock value. The entitlement depended on whether the preceding-year addition had been accepted or had been deleted in appellate proceedings.

Conclusion: The claim was remitted for verification of the preceding-year addition and consequential determination, in favour of the assessee.

Issue (v): Whether education cess was deductible.

Analysis: The claim was rendered inadmissible by the amendment made by the Finance Act, 2022.

Conclusion: Deduction of education cess was denied, against the assessee.

Issue (vi): Whether rental income and service-charge income were assessable respectively as income from house property and income from other sources.

Analysis: The classification adopted by the first appellate authority followed the Tribunal's decision for an earlier assessment year on the same facts, and no material justified departure from that settled treatment.

Conclusion: Rental income was assessable as income from house property and service charges as income from other sources, in favour of the assessee.

Final Conclusion: The assessment requires consequential recomputation and factual verification on the remitted claims, while the legal treatment of research deduction, cess, and the rental and service-charge receipts stands determined as stated.

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