Appeal outcome: AY 2008-09 allowed, AY 2007-08 dismissed.

The appeal for Assessment Year (AY) 2008-09 was allowed, restoring the Assessing Officer's original disallowance under Section 14A as per Rule 8D. Conversely, the appeal for AY 2007-08 was dismissed, upholding the Commissioner of Income Tax (Appeals)'s reduced disallowance based on a reasonable apportionment method.

---

---

Issues Involved:
1. Applicability of Section 14A of the Income-tax Act, 1961.
2. Requirement of recording satisfaction by the Assessing Officer (AO) under Section 14A.
3. Determination of expenditure under Rule 8D.
4. Quantum of disallowance under Section 14A for AY 2007-08 and AY 2008-09.

Detailed Analysis:

1. Applicability of Section 14A of the Income-tax Act, 1961:
The core issue revolves around the disallowance under Section 14A, which pertains to the expenditure incurred in relation to income not forming part of total income. The Tribunal emphasized that incurring some expenditure by the assessee for earning exempt income is essential for invoking Section 14A. Citing the cases of Maxopp Investment Ltd. vs. CIT and CIT vs. Hero Cycles Ltd., it was reiterated that if no expenditure is incurred in relation to exempt income, no disallowance can be made under Section 14A.

2. Requirement of Recording Satisfaction by the Assessing Officer (AO) under Section 14A:
The Tribunal held that the AO is mandated to record satisfaction that he is not satisfied with the correctness of the assessee's claim regarding the expenditure incurred for earning exempt income before invoking Section 14A. This requirement stems from sub-sections (2) and (3) of Section 14A. The Tribunal referenced the decision in Maxopp Investment Ltd. to support this view, emphasizing that the AO must explicitly state his dissatisfaction with the assessee's claim.

3. Determination of Expenditure under Rule 8D:
For AY 2008-09, the Tribunal discussed whether it is mandatory to compute disallowance under Rule 8D. It was concluded that, post the insertion of Rule 8D, the AO is bound to determine the expenditure as per this rule. The Tribunal cited the Supreme Court's decision in Bharat Hari Singhania vs. CWT, asserting that once a method is prescribed by the rules, it must be followed by the authorities. Consequently, the CIT(A) was not justified in reducing the disallowance to a figure different from that determined under Rule 8D.

4. Quantum of Disallowance under Section 14A for AY 2007-08 and AY 2008-09:
- AY 2008-09: The AO disallowed Rs. 19,96,242 under Section 14A, computed as per Rule 8D. The CIT(A) reduced this to Rs. 1,93,054, but the Tribunal reversed this decision, restoring the AO's disallowance, emphasizing that the computation must adhere to Rule 8D.
- AY 2007-08: Rule 8D was not applicable for this year. The AO disallowed Rs. 19,45,505, but the CIT(A) reduced it to Rs. 1,59,479, calculated at 0.05% of average investment. The Tribunal upheld the CIT(A)'s decision, noting that in the absence of Rule 8D, a reasonable method of apportionment is required. The Tribunal found the CIT(A)'s method reasonable, especially since the AO used a similar rate in a subsequent year.

Conclusion:
- The appeal for AY 2008-09 was allowed, restoring the AO's original disallowance as per Rule 8D.
- The appeal for AY 2007-08 was dismissed, upholding the CIT(A)'s reduced disallowance based on a reasonable apportionment method.

---