Rule 8D disallowance under section 14A requires recorded dissatisfaction after account examination before the prescribed method is used.

Rule 8D can be applied only after the Assessing Officer examines the accounts and records a reasoned dissatisfaction with the assessee's claim on expenditure relating to exempt income. The article explains that a mere rejection for want of evidence, without identifying missing material, examining fund-flow or cash-flow statements, or linking specific borrowed funds or expenditure to exempt dividend income, does not satisfy the statutory precondition under section 14A(2). The appellate order also did not cure this defect. Accordingly, the disallowance under section 14A read with Rule 8D, to the extent it exceeded the assessee's voluntary disallowance, was treated as unsustainable and deleted.

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Issues: Whether the disallowance under section 14A read with Rule 8D could be sustained when the Assessing Officer had not, after examining the assessee's accounts, recorded the statutory dissatisfaction with the assessee's claim regarding expenditure incurred in relation to exempt income.

Analysis: Section 14A of the Income-tax Act, 1961 disallows expenditure incurred in relation to income not forming part of total income, and section 14A(2) permits recourse to the prescribed method only after the Assessing Officer examines the accounts and records reasons showing dissatisfaction with the correctness of the assessee's claim. The Assessing Officer rejected the assessee's claim essentially for want of evidence, without identifying the specific material not furnished, without examining the fund-flow and cash-flow statements, and without recording a reasoned finding linking borrowed funds or identified expenditure to the exempt dividend income. The appellate order also did not cure this defect by addressing whether the statutory precondition for invoking Rule 8D had in fact been met. The requirement of recorded satisfaction is mandatory before any disallowance can be computed by the prescribed method over and above the assessee's voluntary disallowance.

Conclusion: The disallowance under section 14A read with Rule 8D, to the extent it exceeded the assessee's voluntary disallowance, was unsustainable and was deleted; the issue was decided in favour of the assessee.

Ratio Decidendi: Rule 8D can be invoked only after the Assessing Officer, on examination of the accounts, records a reasoned dissatisfaction with the assessee's claim regarding expenditure incurred in relation to exempt income.

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