BharatTax Research·Published 19 September 2026
If interest-free funds exceed the investments they are said to have financed, a presumption arises that the investments came from those funds. The Supreme Court has approved the reasoning three times — and there are four situations where it has nothing to operate on.
The rule
Where investments have been made out of a mixed pool of borrowed and interest-free funds, and the interest-free funds are sufficient to cover the investments, a presumption arises that the investments came from the interest-free funds. The Assessing Officer cannot disallow interest by assuming the borrowed money was used instead.
CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) is the case practitioners cite for it, though it sits on a line of High Court authority reaching back to Woolcombers of India (1982) 134 ITR 219 (Cal), and running through Hotel Savera, Radico Khaitan and Britannia Industries.
Its practical importance is that money is fungible. Once borrowed and own funds are in one bank account, no tracing exercise can honestly say which rupee bought which share. The presumption resolves that impasse in the assessee’s favour, provided the arithmetic supports it.
It is relied on in 2,114 judgments on BharatTax and was applied as recently as 21 April 2026.
Is it still good law? Yes — the Supreme Court has approved it
This is the strongest answer of any case in this series. The mixed-fund approach has been approved by the Supreme Court three times:
| Decision | Effect |
|---|---|
| South Indian Bank Ltd. v. CIT (2021) 438 ITR 1 (SC) | No disallowance of interest where non-interest-bearing funds exceed the investment in tax-free securities. The decision to lead with. |
| Munjal Sales Corporation v. CIT (2008) 298 ITR 298 (SC) | Approved the mixed-fund approach. |
| East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 (SC) | The earliest of the three. |
In practice Reliance Utilities and South Indian Bank are now pleaded as a pair — the High Court decision for the reasoning, the Supreme Court decision for the authority.
How the Tribunal actually applies it
Where the arithmetic is clean, the interest disallowance goes. One Mumbai order in March 2026 put it in a sentence: for disallowance under section 14A, if interest-free funds exceed investments, no disallowance for interest is warranted. Other orders in the corpus record substantial surplus own funds against comparatively small investments and group loans — on figures of that shape the presumption is not seriously contestable.
The orders that succeed are the ones that put the numbers in front of the bench. Own funds — capital plus free reserves — against the investments, as at the relevant date, with paper-book page references. The presumption is arithmetic before it is law.
Before you plead it
- Do own funds exceed the investments, on the balance sheet, as at the relevant date?
- Are the figures in the paper book, with page references?
- Is any part of the borrowing directly traceable to a specific investment?
- Which assessment year is it? The role this presumption plays inside a s.14A computation changed on 2 June 2016 — see the companion article below.
When it will not help
Where own funds do not exceed investments. The presumption is arithmetic before it is law. If the numbers are the other way, so is the outcome.
Where the borrowing is traceable. The presumption exists because mixed funds cannot be traced. A term loan drawn to buy a specific asset can be, and the presumption has nothing to operate on.
Against the percentage limb of Rule 8D. This is the most common overreach, and it is dealt with separately in Section 14A and Rule 8D: what survives the own funds argument. Deleting an entire s.14A disallowance on funding grounds alone invites a correction on appeal.
Where the issue is not interest at all. Section 14A also disallows other expenditure attributable to exempt income, and s.36(1)(iii) questions about business purpose are separate from questions about source of funds.
Related authorities
The neighbouring s.14A authorities that practitioners meet in the same file are Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC), Godrej & Boyce (2010) 328 ITR 81 (Bom) and CIT v. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), the last of which applies the same own-funds reasoning to a bank.
Where the citation figures come from
Citation figures come from an analysis of 292,668 ITAT, High Court and Supreme Court judgments on BharatTax.net. Reliance Utilities is relied on in 2,114 of them. “Cited” counts judgments mentioning the authority and does not distinguish a case followed from one distinguished.