Reverse indexation barred for tenancy rights, while section 14A disallowance fails without recorded satisfaction and nexus.

Reverse indexation is not permissible for computing the cost of acquisition of tenancy rights where the statute permits indexation of a fair market value-based cost already determined under the applicable capital gains provisions; the claim was therefore rejected. In contrast, a disallowance under section 14A read with rule 8D cannot be sustained unless the Assessing Officer records proper satisfaction that the assessee's claim is incorrect and establishes a nexus between the expenditure and exempt income; in the absence of such satisfaction, the notional disallowance was deleted.

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Issues: (i) Whether the assessee could claim reverse indexation for determining the cost of acquisition of tenancy rights while computing long-term capital gains. (ii) Whether disallowance under section 14A read with rule 8D was justified in respect of exempt dividend income.

Issue (i): Whether the assessee could claim reverse indexation for determining the cost of acquisition of tenancy rights while computing long-term capital gains.

Analysis: The cost of acquisition for the transferred tenancy right had already been determined on the basis of fair market value as on 1 April 1981, supported by the assessee's own registered valuer's report. The statutory scheme under section 48 read with sections 49 and 55(2)(a) and 55(2)(b) permits indexation of the cost so determined, but it does not provide for adoption of a reverse indexation method. As the fair market value was available and had been accepted for indexation, there was no basis to replace it with a more beneficial but unsupported method.

Conclusion: The claim for reverse indexation was rejected and the issue was decided against the assessee.

Issue (ii): Whether disallowance under section 14A read with rule 8D was justified in respect of exempt dividend income.

Analysis: The assessee was engaged in professional practice and had claimed that the expenditure debited in the accounts was attributable to that profession, not to earning exempt income. The Assessing Officer made the disallowance without recording the requisite satisfaction under section 14A(2) as to why the assessee's claim was incorrect and without demonstrating a cogent nexus between the expenditure and the exempt income. In the absence of such satisfaction and supporting reasoning, a notional disallowance under rule 8D(2)(iii) could not be sustained.

Conclusion: The disallowance under section 14A read with rule 8D was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded only in part, with relief granted on the section 14A disallowance while the challenge to the computation of capital gains on tenancy rights failed.

Ratio Decidendi: Reverse indexation is not permissible where the statute provides indexation of a fair market value based cost of acquisition, and a disallowance under section 14A requires a recorded satisfaction that the assessee's claim is incorrect before rule 8D can be applied.

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