Section 14A and independent deduction principles shape recomputation of exempt-income disallowance and banking deduction relief.

Disallowance under section 14A read with Rule 8D was upheld in principle because the Assessing Officer validly recorded dissatisfaction with the assessee's own computation, but the administrative disallowance had to be restricted to investments that actually yielded exempt income and the interest component was remanded for fresh verification of fund sources. The deduction under section 36(1)(viia) was held to operate independently of section 36(1)(viii), so the latter could not first be reduced from the base for the former. The section 36(1)(viia) disallowance was therefore deleted.

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Issues: (i) Whether disallowance under section 14A read with Rule 8D was sustainable and how the interest and administrative components were to be computed; (ii) Whether the deduction under section 36(1)(viia) had to be computed after reducing the deduction under section 36(1)(viii).

Issue (i): Whether disallowance under section 14A read with Rule 8D was sustainable and how the interest and administrative components were to be computed.

Analysis: The Assessing Officer had examined the assessee's own disallowance, recorded dissatisfaction with the basis adopted, and validly invoked Rule 8D. However, while Rule 8D(2)(iii) applies once section 14A is triggered, only those investments which actually yielded exempt income during the year can be considered for the administrative disallowance. On the interest component, the source of investments was not conclusively verified from fund-flow and supporting records, and that factual aspect required fresh examination.

Conclusion: The objection to invocation of section 14A and Rule 8D failed, the administrative disallowance was required to be recomputed in the manner indicated, and the interest disallowance was restored to the Assessing Officer for fresh adjudication.

Issue (ii): Whether the deduction under section 36(1)(viia) had to be computed after reducing the deduction under section 36(1)(viii).

Analysis: The two deductions operate independently. For the purpose of the ceiling under section 36(1)(viia), the deduction under section 36(1)(viii) cannot be first reduced from the total income. The assessee's computation of the base for section 36(1)(viia), without reducing the deduction under section 36(1)(viii), was therefore in accordance with law.

Conclusion: The disallowance under section 36(1)(viia) was not sustainable and was directed to be deleted.

Final Conclusion: The appeal succeeded on the deduction under section 36(1)(viia), while the section 14A issue was only partly accepted with a remand on the interest component and a restricted recomputation of the administrative component.

Ratio Decidendi: Deductions under separate clauses of section 36(1) are independently allowable, and under section 14A read with Rule 8D, the expenditure attributable to exempt income must be determined on a reasoned satisfaction and with reference to investments that actually yielded exempt income.

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