Section 14A disallowance cannot be made mechanically under rule 8D for pre-rule years; commission deduction upheld on settled precedent.

Commission paid to a managing director was allowed to remain deductible because the issue had already been decided in the assessee's favour in earlier years and that settled view was followed. Section 14A disallowance could not be computed mechanically by applying rule 8D for years before its operation; the Assessing Officer was required to first examine the assessee's claim, record dissatisfaction with reasons, and then adopt a reasonable apportionment method. The commission disallowance therefore stood deleted, while the section 14A matter was remitted for fresh determination in accordance with the approved approach.

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Issues: (i) whether the deletion of disallowance of commission paid to the managing director was justified; (ii) whether the disallowance under section 14A could be made by applying rule 8D for the relevant assessment year.

Issue (i): whether the deletion of disallowance of commission paid to the managing director was justified.

Analysis: The commission issue had already been decided in favour of the assessee in earlier assessment years in the assessee's own case. The same view had been followed consistently, and the order deleting the disallowance was based on that settled position.

Conclusion: The deletion of the commission disallowance was upheld and the Revenue's ground failed.

Issue (ii): whether the disallowance under section 14A could be made by applying rule 8D for the relevant assessment year.

Analysis: Rule 8D and the corresponding sub-sections of section 14A were treated as prospective. For years prior to the operation of rule 8D, the Assessing Officer must first examine the correctness of the assessee's claim, record cogent reasons if dissatisfied, and then make a reasonable apportionment on an acceptable method rather than mechanically applying rule 8D.

Conclusion: The section 14A disallowance was set aside for fresh adjudication by the Assessing Officer in accordance with the approved guidelines.

Final Conclusion: The commission disallowance was sustained in favour of the assessee, while the section 14A issue was remitted for reconsideration, resulting in disposal of the connected appeals with partial relief to the assessee.

Ratio Decidendi: For assessment years preceding rule 8D, disallowance under section 14A cannot be computed mechanically under that rule and must instead follow a reasoned, objective determination based on a reasonable method of apportionment after the Assessing Officer records dissatisfaction with the assessee's claim.

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