Section 14A disallowance cannot be mechanically enhanced by Rule 8D without a reasoned rejection of the taxpayer's computation.

A disallowance under Section 14A cannot be increased by mechanical application of Rule 8D unless the Assessing Officer's rejection of the assessee's own computation is reasonable on the facts. Here, exempt income arose incidentally from surplus funds during plant set-up, while borrowed funds were used for establishing the industrial project. On that factual basis, the larger disallowance was not sustainable and the rejection of the assessee's offered disallowance did not justify automatic recourse to Rule 8D. The note also states that no substantial question of law arose.

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Issues: Whether the disallowance offered by the assessee under Section 14A could be rejected and a larger disallowance computed by automatic application of Rule 8D, and whether any substantial question of law arose.

Analysis: The exempt income arose incidentally from deployment of surplus funds during the setting up of the plant, while the borrowed funds had been utilised for the business of establishing the industrial project. The rejection of the assessee's offered disallowance was held to require a standard of reasonableness. Automatic invocation of Rule 8D was not justified where the Assessing Officer's rejection of the assessee's basis did not satisfy that test.

Conclusion: The larger disallowance was not sustainable, and no substantial question of law arose.

Ratio Decidendi: A disallowance under Section 14A cannot be enhanced by mechanical application of Rule 8D unless the rejection of the assessee's offered disallowance is itself reasonable and justified on the facts.

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