Proportionate interest can’t be disallowed u/s 14A if investments in shares have been made from interest free funds:

AO found that the assessee had made investment in the shares and securities of its group companies and it also had substantial interest bearing secured loans and unsecured loans. Assessee had also paid substantial interest and financial charges during the year under consideration. AO therefore took a view that interest bearing business funds had been diverted and utilized for the purpose of making the aforesaid investment and hence, he made disallowance of proportionate interest expenses u/s 14A. On appeal, CIT(A) observed that the said investments were made in earlier years and that too from interest free funds available with the assessee. Also, the assessee was having substantially high share capital and reserves as compared to such investments. Hence, it cannot be presumed that any part of interest bearing borrowed funds was utilized for the said investments. In light of the said facts, CIT(A) deleted the impugned disallowance and his order was further upheld by Hon’ble ITAT.

[DCIT vs. Nandan Exim Ltd - ITA Nos.601 & 225/Ahd/2011 and 2419/Ahd/2010]