Section 14A disallowance fails where own funds exceed investments and no recorded dissatisfaction supports Rule 8D.

Disallowance under section 14A read with Rule 8D was held unsustainable because the assessee had substantial own funds, including share capital and reserves, far exceeding the investments yielding exempt dividend income, and no fresh investment was made during the year. The Assessing Officer also failed to record the requisite dissatisfaction with the assessee's claim on the basis of its accounts before applying Rule 8D, so the presumption arose that the investments came from interest-free funds. The ad hoc restriction made by the first appellate authority lacked proper foundation. The Revenue's appeal was rejected, the cross-objections succeeded, and the addition was deleted.

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Issues: (i) Whether disallowance under section 14A read with Rule 8D was justified when the assessee had substantial own funds and the Assessing Officer had not recorded the requisite dissatisfaction with the assessee's claim.

Issue (i): Whether disallowance under section 14A read with Rule 8D was justified when the assessee had substantial own funds and the Assessing Officer had not recorded the requisite dissatisfaction with the assessee's claim.

Analysis: The assessee had substantial reserve and surplus funds and share capital, far exceeding the investments that generated exempt dividend income. No fresh investment was made during the year, and the investments were from earlier years. The Assessing Officer did not demonstrate any defect in the assessee's computation or record a proper satisfaction, as required before invoking the Rule 8D formula. In such circumstances, the presumption arose that the investments were made out of interest-free funds. The restriction made by the first appellate authority to 10% of exempt income on an ad hoc basis was also unsupported by any proper foundation.

Conclusion: The disallowance under section 14A read with Rule 8D was not sustainable. The Revenue's appeal was rejected and the assessee's cross objections succeeded, with the addition deleted.

Final Conclusion: The decision turns on the mandatory requirement of recorded dissatisfaction before invoking section 14A read with Rule 8D, and on the availability of sufficient own funds to cover the investments yielding exempt income.

Ratio Decidendi: Section 14A read with Rule 8D can be applied only after the Assessing Officer records dissatisfaction, on the basis of the assessee's accounts, with the correctness of the assessee's claim, and where own funds exceed the investments, a presumption arises that the investments were made from interest-free funds.

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