Section 14A disallowance deleted where interest-free funds exceeded investments and Rule 8D satisfaction was defective.

Additional disallowance under section 14A read with Rule 8D was deleted because the assessee's own interest-free funds exceeded the investments, so the presumption applied that the investments were made from those funds and Rule 8D(2)(ii) was not attracted. For the computation under Rule 8D(2)(iii), only dividend-yielding investments could be included. The Assessing Officer's satisfaction was also defective, as the assessment order proceeded on the incorrect basis that no disallowance had been made by the assessee. The issue was decided in favour of the assessee.

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Issues: Whether the additional disallowance made under section 14A of the Income-tax Act, 1961 read with Rule 8D was sustainable.

Analysis: The assessee's own interest-free funds were more than the investments, attracting the presumption that the investments came out of such funds, so disallowance under Rule 8D(2)(ii) was not warranted. For the component under Rule 8D(2)(iii), only dividend-yielding investments could be considered for computing the disallowance. The Assessing Officer's satisfaction was also found to be defective because the assessment order proceeded on the premise that no disallowance had been made by the assessee at all.

Conclusion: The additional disallowance under section 14A was deleted and the issue was decided in favour of the assessee.

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