Recorded satisfaction is mandatory before Rule 8D disallowance under section 14A; related book profit adjustment also falls away.

Rule 8D computation under section 14A is permissible only where the Assessing Officer records dissatisfaction, having regard to the assessee's accounts, with the claim that no expenditure relates to exempt income. As no satisfaction under section 14A(2) had been recorded before invoking Rule 8D, the disallowance was held unsustainable. Once the primary disallowance failed, the corresponding addition of the same amount to book profit under section 115JB also did not survive. The result was in favour of the assessee.

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Issues: Whether the disallowance under section 14A read with Rule 8D was valid in the absence of recorded satisfaction by the Assessing Officer, and whether the consequential addition to book profit under section 115JB could survive.

Analysis: The disallowance under section 14A can be computed by applying Rule 8D only when the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the assessee's claim regarding expenditure relatable to exempt income. The recorded finding was that no such satisfaction under section 14A(2) had been entered before invoking Rule 8D. In view of this legal requirement, the Tribunal's deletion of the disallowance was upheld. Once the primary disallowance under section 14A was held unsustainable, the proposed addition of the same amount to book profit under section 115JB did not arise.

Conclusion: The disallowance under section 14A read with Rule 8D was not sustainable, and the consequential issue under section 115JB also failed. The appeal was thus in favour of the assessee.

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