Disallowance under section 14A and Rule 8D: AO must record non-satisfaction from accounts before applying Rule 8D.

Non-satisfaction with a claimed disallowance under section 14A must be determined by reference to the assessee's accounts; the Assessing Officer is required to examine those accounts and record objective non-satisfaction regarding any suo motu disallowance before invoking Rule 8D. Rule 8D is applicable only after such recorded non-satisfaction for apportionment of expenditure. Supreme Court precedent in Maxopp supports this requirement. On the facts the Tribunal reasonably concluded the AO did not record non-satisfaction as mandated, and no substantial question of law arose.

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Issues:
Challenge to Tribunal's order under section 260-A of the Income Tax Act, 1961 regarding disallowance under section 14A for assessment year 2008-09.

Analysis:
1. The Respondent, a recognized stock exchange, earned exempt dividend income but faced disallowance under section 14A of the Act. The Assessing Officer rejected the Respondent's claim and applied Rule 8D to compute a higher disallowance.

2. The Respondent's appeal to the CIT(A) was dismissed, leading to an appeal to the Tribunal. The Tribunal allowed the appeal, stating that the Assessing Officer did not express non-satisfaction with the disallowance claimed by the Respondent, hence Rule 8D was not applicable.

3. The Revenue appealed the Tribunal's decision, arguing that the Assessing Officer did express non-satisfaction with the Respondent's disallowance claim. The Revenue contended that Rule 8D should be invoked based on this non-satisfaction, not solely on the basis of the method used by the Respondent.

4. The High Court noted that the Assessing Officer must first record non-satisfaction with the disallowance claimed by the assessee before invoking Rule 8D. The Court emphasized the need for clear and objective satisfaction without immediate reference to Rule 8D.

5. Referring to the judgment in Godrej & Boyce Mfg. Co. Ltd. case, the Court reiterated that the Assessing Officer's satisfaction must be based on the accounts of the assessee. The application of Rule 8D arises only when the Assessing Officer is objectively unsatisfied with the disallowance claimed by the assessee.

6. Citing the Supreme Court's decision in Maxopp Investment Ltd. case, the Court affirmed that the Assessing Officer must record non-satisfaction with the assessee's disallowance claims before applying Rule 8D for expense apportionment.

7. Ultimately, the Court upheld the Tribunal's decision, stating that the Assessing Officer did not meet the requirements of section 14A(2) in expressing non-satisfaction with the disallowance claimed by the assessee. The Court found the Tribunal's view reasonable and declined to interfere.

8. Concluding that no substantial question of law arose from the issues presented, the Court dismissed the appeal, affirming the Tribunal's decision.

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