Section 14A disallowance requires recorded dissatisfaction before rule 8D can be invoked for exempt dividend income.

Disallowance under section 14A read with rule 8D requires the Assessing Officer to examine the accounts and record dissatisfaction with the assessee's claim that no expenditure was incurred for exempt income. A presumptive disallowance without that statutory precondition is not sustainable. The note also reflects that, where shipping income is assessed under the tonnage tax scheme and the expenditure relating to taxable income is separable from exempt dividend income, the basis for invoking rule 8D is further weakened. On these facts, the disallowance was deleted in favour of the assessee.

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Issues: Whether disallowance under section 14A read with rule 8D was justified in the absence of any recorded dissatisfaction by the Assessing Officer as to the assessee's claim that no expenditure was incurred for earning exempt dividend income, particularly where the assessee's shipping income was assessed under the tonnage tax scheme.

Analysis: The jurisdiction to determine expenditure under section 14A and to apply rule 8D arises only after the Assessing Officer, having regard to the assessee's accounts, records dissatisfaction with the correctness of the claim that no expenditure was incurred in relation to exempt income. In this case, no such examination of the accounts or recording of dissatisfaction was made, and the Assessing Officer proceeded directly to make a presumptive disallowance. The assessee had also shown that its shipping business income was assessed under section 115VA and that the expenditure relatable to taxable income was separable from the exempt dividend income. On these facts, the statutory precondition for invoking rule 8D was not met.

Conclusion: The disallowance under section 14A read with rule 8D was not sustainable and was deleted in favour of the assessee.

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