Section 14A disallowance fails where own funds cover investments and no fresh investment is made.

Where an assessee has substantial own funds in the form of share capital and reserves, no long-term borrowings, and no fresh investment during the year, a presumption arises that investments yielding exempt income were made from those own funds. On those facts, the basis for disallowance under section 14A read with Rule 8D does not survive, because the funding nexus for invoking the rule is not established. The note states that the disallowance was therefore not sustainable and that the issue was decided in favour of the assessee.

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Issues: Whether disallowance under section 14A read with Rule 8D was sustainable when the assessee had sufficient own funds and no fresh investment was made during the year.

Analysis: The assessee's balance sheet reflected substantial share capital and reserves and surplus, with no long-term borrowings and no change in investments during the relevant assessment year. Where own funds are sufficient to cover the investments yielding exempt income, a presumption arises that such investments are made from those own funds. On those facts, the basis for making a disallowance under section 14A read with Rule 8D did not survive.

Conclusion: The disallowance was not sustainable and the issue was decided in favour of the assessee.

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