Disallowance under Section 14A cannot exceed the exempt income earned.

The assessee, engaged in developing and operating ports, SEZs and related infrastructure, filed its return for A.Y. 2008–09 declaring total income of ₹23,20,62,397.

Following scrutiny, the Assessing Officer passed an assessment order under Section 143(3), determining total income at ₹45,85,26,750.

The Commissioner of Income Tax (Appeals) granted partial relief, after which both the Revenue and the assessee approached the Income Tax Appellate Tribunal.

The Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s cross-objection.

The Revenue’s appeal under Section 260A concerned: (i) eligibility of interest earned on unutilised funds parked with banks for deduction under Section 80-IAB; and (ii) whether disallowance under Section 14A read with Rule 8D could exceed the exempt income.

The assessee’s cross-objection challenged the treatment of share-issue expenses of ₹58.14 crore against interest income of ₹19.58 crore.

Whether interest income earned from unutilised business funds parked with banks was eligible for deduction under Section 80-IAB of the Income-tax Act, 1961?

Whether disallowance under Section 14A read with Rule 8D could exceed the amount of exempt income earned by the assessee?

Whether the share-issue expenses aggregating to ₹58.14 crore could be set off against interest income of ₹19.58 crore?

Section 80-IAB permits deduction of profits and gains derived by an eligible SEZ developer from the eligible SEZ business; income earned from funds temporarily parked with banks may qualify where the funds were retained or invested for business purposes and the interest is properly regarded as business income.

The Court relied on Commissioner of Income Tax v. Nirma Ltd., (2014) 367 ITR 12 (Guj.), which held that interest income connected with business activities cannot be treated inconsistently—once included in business income, it cannot be excluded while computing the statutory deduction.

For Section 14A read with Rule 8D, the disallowance of expenditure incurred in relation to exempt income cannot exceed the exempt income actually earned; this principle was recognised in CIT v. Corrtech Energy Pvt. Ltd., 372 ITR 97 (Guj.), Joint Investments (P) Ltd. v. CIT, 372 ITR 694 (Delhi), and followed in CIT v. Vision Finstock Ltd., Tax Appeal No. 486 of 2017.

The Court also noted that the Revenue’s challenge in Vision Finstock had been dismissed by the Supreme Court on delay and merits.

The Court accepted the parties’ submission that both substantial questions were covered by existing precedent.

In relation to the interest income, the funds had been parked with banks for business-related reasons, including the insistence of financial institutions; consequently, the resulting interest could not automatically be characterised as income from other sources.

Applying the principle in Nirma Ltd., the Court treated the interest as business-linked income eligible for consideration under Section 80-IAB.

Regarding Section 14A, the Assessing Officer had computed disallowance of ₹1,02,82,049 against exempt income of only ₹55,604.

Applying Corrtech Energy, Joint Investments, and Vision Finstock, the Court held that the statutory disallowance could not exceed the exempt income and upheld the Tribunal’s restriction of the disallowance to ₹55,604.

Since the interest-income issue was decided in the assessee’s favour, the question raised in the cross-objection concerning adjustment of share-issue expenses was held not to survive.

The Revenue’s tax appeal was accordingly disposed of against it.

The assessee’s cross-objection was also disposed of as infructuous/not surviving, without the Court answering its substantive question.