No Rule 8D(2)(ii) interest disallowance arises where taxable interest income exceeds interest expenditure.

For Assessment Year 2009–10, the assessee earned exempt dividend and partnership income and incurred interest expenditure.

The Assessing Officer disallowed ₹23,77,67,259 under Section 14A read with Rule 8D(2)(ii).

The CIT(A) deleted the interest disallowance, finding that the borrowing from IDFC Ltd. was advanced to Adani Infrastructure Developers Pvt. Ltd. and that the interest received matched the interest paid.

The Tribunal upheld that decision.

The Revenue appealed to the High Court.

Whether the Tribunal was right in upholding the CIT(A)’s deletion of the ₹23,77,67,259 interest disallowance under Section 14A read with Rule 8D(2)(ii).

Section 14A of the Income-tax Act, 1961, read with Rule 8D(2)(ii) of the Income-tax Rules, 1962, provides for disallowance of expenditure attributable to exempt income; under the applicable Rule 8D formula, interest expenditure directly attributable to a particular income or receipt is excluded from the relevant computation.

In Principal Commissioner of Income Tax v. Nirma Credit & Capital (P.) Ltd., the Gujarat High Court held that, for calculating the interest component under Rule 8D(2)(ii), interest income must be set off against interest expenditure so that the calculation reflects the net interest expenditure.

In Principal Commissioner of Income-tax-2, Vadodara v. Shreno Ltd., the Court treated the question concerning mixed funds and interest attribution as one that may turn on the factual findings in the case.

The concurrent findings showed that the borrowed funds were advanced to another concern in a back-to-back transaction and that the interest received was equal to the interest paid; the borrowed funds were therefore not shown to have funded the exempt-income investments.

Applying Nirma Credit, the Court held that there was no excess interest expenditure after setting off the interest income, and thus no interest amount to disallow under Rule 8D(2)(ii).

The Revenue’s mixed-funds argument did not displace the concurrent factual findings or the applicable principle in Shreno Ltd.

The appeal was dismissed.