Section 14A disallowance requires claimed exempt-income expenditure and recorded dissatisfaction before Rule 8D can apply.

Section 14A disallowance under Rule 8D applies only where the assessee has claimed expenditure with a nexus to exempt income, and the Assessing Officer first records dissatisfaction under section 14A(2). The text explains that exempt dividend income and long-term capital gains were earned, but no related expenditure was claimed as a deduction; business income was taxed under section 44AD and other expenditure was capitalised to work-in-progress rather than debited to revenue. On those facts, a mechanical invocation of Rule 8D without identifying specific claimed expenditure or recording the requisite dissatisfaction is not sustainable, and the disallowance should be deleted.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained where no expenditure relatable to exempt income was claimed as a deduction and the Assessing Officer failed to record the requisite dissatisfaction under section 14A(2).

Analysis: The assessee earned exempt dividend income and long-term capital gains, but the material on record showed that no expenditure attributable to such income had been claimed in computing taxable income. Business income from one proprietary concern was assessed under section 44AD, and the expenditure of the other concern was capitalised to work-in-progress, including interest and administrative es, rather than debited as revenue expenditure. Section 14A presupposes an actual claim of expenditure having nexus with exempt income, and Rule 8D can be applied only after the statutory condition in section 14A(2) is met. The assessment order did not identify any specific expenditure claimed for earning exempt income and the invocation of Rule 8D was mechanical.

Conclusion: The disallowance under section 14A read with Rule 8D was unsustainable and was directed to be deleted; the issue was decided in favour of the assessee.

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