Objective satisfaction is mandatory before Rule 8D disallowance; section 234C interest follows returned income for recomputation.

A disallowance for exempt-income expenditure requires the Assessing Officer to examine the accounts and record objective satisfaction that the assessee's claim of no expenditure is incorrect before invoking Rule 8D; absent that statutory satisfaction, the disallowance is not sustainable. Interest for deferment of advance tax under section 234C is to be computed on returned income, not assessed income, so the levy must be recomputed accordingly.

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Issues: (i) Whether the disallowance under section 14A could be sustained without recording objective satisfaction having regard to the accounts before invoking Rule 8D; (ii) Whether interest under section 234C could be levied on assessed income instead of returned income.

Issue (i): Whether the disallowance under section 14A could be sustained without recording objective satisfaction having regard to the accounts before invoking Rule 8D.

Analysis: The assessee had earned exempt dividend income and had not made any suo motu disallowance. The Assessing Officer invoked Rule 8D mechanically and recorded only a general assertion that common administrative expenses must relate to exempt income. The statutory scheme under section 14A(2) and 14A(3) read with Rule 8D(1) requires the Assessing Officer to examine the accounts and record an objective satisfaction that the claim of no expenditure is incorrect before applying the prescribed computation mechanism. In the absence of such objective satisfaction, the disallowance cannot be sustained.

Conclusion: The disallowance under section 14A was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether interest under section 234C could be levied on assessed income instead of returned income.

Analysis: The levy of interest under section 234C was held to depend on the returned income and not on the assessed income. The Assessing Officer was therefore directed to recompute the interest accordingly.

Conclusion: Interest under section 234C was to be charged only on returned income, in favour of the assessee.

Final Conclusion: The appeals succeeded on the substantive challenge to the section 14A disallowance, and the consequential interest issue under section 234C was also decided for recomputation in accordance with the settled legal position.

Ratio Decidendi: A disallowance under section 14A cannot be made by applying Rule 8D unless the Assessing Officer first records an objective satisfaction, based on examination of the assessee's accounts, that the assessee's claim of no expenditure incurred for exempt income is incorrect.

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