Section 14A disallowance fails where investments come from own funds and no nexus with exempt income is shown.

Under section 14A read with Rule 8D, no interest disallowance survived where investments were made from own funds and there were no interest-bearing borrowings. The identified expenses, including professional, legal, consultancy, travel and compliance costs, were treated as relating to amalgamation and statutory compliance rather than to earning exempt income, so a further disallowance was not justified absent a demonstrated nexus with exempt income. An ad hoc sustenance of 50% of the disallowance was also found to have no basis in section 14A or Rule 8D, and the suo motu disallowance was accepted.

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Issues: Whether the disallowance made under section 14A read with Rule 8D could be sustained when the assessee had no interest-bearing borrowings, had made a suo motu disallowance, and the appellate authority had further enhanced the disallowance on an ad hoc basis.

Analysis: The assessee's investments were found to have been made out of own funds, so no interest disallowance could survive under Rule 8D(2)(ii). The expenditure identified by the assessment authorities, including professional and legal charges, consultancy charges, and travel and compliance expenses, was held to be connected with amalgamation and statutory compliance rather than with earning exempt income. In the absence of demonstrated nexus between such expenditure and exempt income, a disallowance under section 14A could not be justified. The further direction to sustain 50% of the disallowance on an ad hoc basis was held to have no support either in section 14A or in Rule 8D.

Conclusion: The disallowance under section 14A read with Rule 8D was deleted and the assessee's suo motu disallowance was accepted.

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