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When investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.

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Sec. 14A of Income Tax Act, 1961—Business Disallowance —No disallowance u/s. 14A towards any interest expenditure can be made Where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds.

Facts: Assessee is a public limited company engaged in manufacture, sale and distribution of beverage alcohol. During the course of scrutiny proceedings, AO made a disallowance under section 14A by applying Rule 8D. AO disallowed interest under section 14A by applying Rule 8D by applying clause (ii) and (iii) of Rule 8D, on the basis that interest and administrative costs were incurred towards investments made by the Company, which gives rise to exempt income.The CIT(Appeals) confirmed the order of the AO. Being aggrieved, assessee went on appeal before Tribunal.

Held, that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. In the light of said decisions, disallowance of interest expenses in the present case should be deleted. - UNITED SPIRITS LIMITED V/s JT. CIT - [2020] 26 ITCD Online 105 (ITAT-BANGALORE)