Section 14A disallowance requires recorded dissatisfaction before Rule 8D applies; mechanical addition cannot stand.

Section 14A disallowance can be made only after the Assessing Officer examines the accounts and records objective dissatisfaction with the assessee's claim that no expenditure is relatable to exempt income. Rule 8D is only a computation mechanism and cannot be applied mechanically without that statutory precondition. Where the investments were stated to be in subsidiary companies for business purposes and no interest cost was shown for earning exempt income, a disallowance made without recorded reasons was unsustainable. The section 14A read with Rule 8D disallowance was therefore not justified and was deleted.

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Issues: Whether disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 was sustainable when the Assessing Officer did not record dissatisfaction with the assessee's claim and the investments were stated to be made in subsidiaries for business purposes.

Analysis: Disallowance under section 14A can be made only after the Assessing Officer examines the accounts and records objective dissatisfaction with the assessee's claim regarding expenditure relatable to income not forming part of total income. Rule 8D provides only the method of computation and becomes applicable only after such dissatisfaction is recorded. On the facts, the investments were in subsidiary companies, the assessee had no interest cost for earning exempt income, and the Assessing Officer made the disallowance mechanically without recording reasons for rejecting the assessee's explanation. The authorities relied on the principle that satisfaction under section 14A is a condition precedent for invoking Rule 8D.

Conclusion: The disallowance under section 14A read with Rule 8D was not justified and was rightly deleted.

Ratio Decidendi: Rule 8D can be invoked only after the Assessing Officer records dissatisfaction, on objective grounds, with the correctness of the assessee's claim under section 14A.

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