BharatTax Research·Published 19 September 2026
Winning the own funds point deletes the interest disallowance. It does not delete the disallowance. Benches are correcting first appellate orders that assume otherwise — and the rule those orders apply is not the one most practitioners learned.
The rule changed in 2016, and that is the whole point
Rule 8D was amended by the Income-tax (14th Amendment) Rules 2016, notified on 2 June 2016. Before that, the computation under Rule 8D(2) had three limbs: direct expenditure, an apportioned interest figure arrived at by formula, and half a per cent of the average value of investment.
The apportioned-interest limb was omitted. As amended, the disallowance is the aggregate of:
- expenditure directly relating to income which does not form part of total income; and
- one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income,
subject to a cap: the disallowance cannot exceed the total expenditure claimed by the assessee.
That matters for how the own funds presumption is pleaded. In the pre-amendment years it defeated a limb of the formula itself. From 2 June 2016 there is no interest limb in Rule 8D for it to defeat — the presumption still governs a direct interest disallowance, and questions under s.36(1)(iii), but the percentage limb was never about the source of funds and is untouched by it.
What the Tribunal is correcting
In three connected Mumbai appeals decided on 30 March 2026, the Tribunal held the first appellate authority’s reasoning “misplaced”: the CIT(A) had relied solely on the source of funds while ignoring that the amended Rule 8D(2) includes a one per cent disallowance on average investment value, which does not depend on the source of funds at all.
| What was argued | Result |
|---|---|
| Interest-free funds exceed investments | Interest component of the disallowance deleted — assessee succeeds |
| Therefore the entire s.14A disallowance should go | Rejected — the 1% component survives regardless of funding |
| Disallowance computed on all investments | Restricted to investments actually yielding exempt income — assessee succeeds |
The third row is the argument that does work against the percentage limb, and it should be run alongside the funding point rather than instead of it. The rule speaks of investment “income from which does not or shall not form part of total income”, and the Tribunal has directed that only such investments enter the computation.
How to plead it
- Take the funding point on the interest disallowance, on Reliance Utilities and South Indian Bank.
- Take the composition point separately on the percentage limb: strip out investments that did not and could not yield exempt income.
- Check the cap. The disallowance cannot exceed the expenditure actually claimed.
- Check which version of Rule 8D governs the year in issue. Before 2 June 2016 the formula has an interest limb; after, it does not.
When it will not help
Where the investments do yield exempt income. The composition argument is arithmetic about the portfolio, not a legal objection to the limb.
Where no satisfaction is recorded — a different and better argument. Section 14A(2) requires the Assessing Officer to record dissatisfaction with the assessee’s own computation before Rule 8D can be invoked at all. Where that is missing, the whole computation falls and none of the above is reached.
Against the section itself. Rule 8D is machinery. Section 14A is the charge, and disallowance of expenditure attributable to exempt income does not depend on Rule 8D being available.
Related authorities
Section 14A appears in 2,158 judgments in our corpus and Rule 8D in 499. The authorities to have alongside 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).
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. “Cited” counts judgments mentioning the authority and does not distinguish a case followed from one distinguished.