Section 14A disallowance requires recorded dissatisfaction before Rule 8D can be applied

Disallowance under section 14A read with Rule 8D cannot be sustained unless the Assessing Officer first records objective dissatisfaction with the assessee's claim that no expenditure was incurred to earn exempt income. The Tribunal held that recording of satisfaction under section 14A(2) is a mandatory precondition to invoking Rule 8D, and a mechanical disallowance without that finding is impermissible. On that basis, the disallowance was deleted and the issue was decided in favour of the assessee.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained in the absence of the Assessing Officer's recorded satisfaction that the assessee's claim of no expenditure incurred for earning exempt income was incorrect.

Analysis: The assessee had earned exempt income, but had claimed that no expenditure was incurred to earn it. The disallowance was made by applying Rule 8D without recording satisfaction under section 14A(2) as to why the assessee's explanation was incorrect. The Tribunal followed the settled position that recording of satisfaction is a mandatory condition before Rule 8D can be invoked and that, without such satisfaction, the disallowance cannot be mechanically made.

Conclusion: The disallowance under section 14A was unsustainable and was directed to be deleted; the issue was decided in favour of the assessee.

Ratio Decidendi: Rule 8D can be applied only after the Assessing Officer records objective dissatisfaction with the assessee's claim under section 14A(2); absent such satisfaction, a disallowance under section 14A cannot stand.

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