Section 14A and Rule 8D disallowance set aside where mechanical application lacked a sustainable basis.

Disallowance under section 14A read with Rule 8D was held unsustainable where the Tribunal, on materially similar facts, followed an earlier decision in the assessee's own case and declined mechanical application of Rule 8D. The Court noted that the Assessing Officer had recorded satisfaction and made his own assessment, but rejected the challenge based on a supposed factual distinction. The controlling principle stated was that Rule 8D cannot be applied mechanically without a sustainable basis for disallowance, and the Tribunal was correct in relying on the earlier precedent. The issue was answered in favour of the assessee.

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Issues: Whether disallowance under section 14A read with Rule 8D was justified when the Assessing Officer had recorded satisfaction and the assessee had received dividend income from only one company.

Analysis: The Tribunal had followed the earlier decision in the assessee's own case and held that Rule 8D could not be applied mechanically. The Assessing Officer's order showed that he had made his own assessment, but the Court held that the solitary challenge based on a purported distinction in facts was untenable. The Tribunal's approach in relying on the earlier decision was found to be correct.

Conclusion: The disallowance under section 14A and Rule 8D was not sustainable, and the issue was answered in favour of the assessee.

Ratio Decidendi: Rule 8D cannot be applied mechanically where the disallowance under section 14A is not supported by a sustainable basis, and the Tribunal may follow an earlier decision in the assessee's own case on materially similar facts.

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