Interest-free funds presumption prevents interest capitalisation, while rule 8D disallowance cannot independently increase book profit computation.

Sufficient interest-free funds support a presumption that investments were financed from those funds, so interest relating to an existing building already put to use need not be capitalised. The notes also state that a disallowance calculated under section 14A read with rule 8D cannot, by itself, be used to increase book profit under section 115JB. The key principles concern the nexus between available interest-free funds and investments, and the distinct treatment of disallowances when computing book profit.

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Issues: (i) Whether interest expenditure attributable to capital work in progress was liable to be capitalised where the assessee had sufficient interest-free funds and the building was already put to use; (ii) Whether disallowance computed under section 14A read with rule 8D could be added to book profit under section 115JB.

Issue (i): Whether interest expenditure attributable to capital work in progress was liable to be capitalised where the assessee had sufficient interest-free funds and the building was already put to use.

Analysis: The factual finding that interest-free funds exceeded the investments attracted the presumption that the investments were made from such funds. The expenditure also related to an existing building already put to use in earlier years; consequently, there was no basis to capitalise the interest expenditure.

Conclusion: The disallowance of interest expenditure was not sustainable. This issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether disallowance computed under section 14A read with rule 8D could be added to book profit under section 115JB.

Analysis: Binding jurisdictional decisions established that an adjustment to book profit cannot be founded on the disallowance calculated under section 14A read with rule 8D. The concurrent findings of the appellate authorities deleting the corresponding book-profit adjustment were therefore upheld.

Conclusion: The section 14A disallowance computed under rule 8D could not be added to book profit under section 115JB. This issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: Neither proposed question gave rise to a substantial question of law.

Ratio Decidendi: Where interest-free funds sufficient to cover the investments are available, investments are presumed to be made from those funds; further, a disallowance quantified under section 14A read with rule 8D cannot by itself be used to increase book profit under section 115JB.

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