AO cannot apply Rule 8D(3) for Section 14A disallowance without rejecting assessee's explanation with valid reasons

THE PR. COMMISSIONER OF INCOME TAX-5 Versus JAYPEE VENTRUES P. LTD

THE PR. COMMISSIONER OF INCOME TAX-5 Versus JAYPEE VENTRUES P. LTD - TMI The Delhi High Court, in an appeal concerning the disallowance under Section 14A of the Income Tax Act, 1961, upheld the concurrent findings of the CIT(A) and ITAT which had set aside the Assessing Officer's (AO) disallowance of Rs. 3,23,90,104/-. The AO had applied Rule 8D(3) of the Income Tax Rules to disallow expenses proportionate to exempt dividend income claimed by the assessee for AY 2008-09. The Court relied on its precedent in Maxopp Investment Ltd. v. CIT, (2012) 347 ITR 272 (Delhi), where it was held that the AO must not reject the assessee's explanation without reasons. This reasoning was subsequently followed in Godrej & Boyce v. CIT, 328 ITR 81 (Bom), and affirmed by the Supreme Court in CIT v. Godrej Boyce, 394 ITR 449. Given the concurrent findings of fact and binding legal precedents, the appeal was dismissed, confirming that mere invocation of Rule 8D(3) without rejecting the assessee's explanation with valid reasons does not justify disallowance under Section 14A.