The Income Tax Appellate Tribunal (ITAT), Agra Bench, has reaffirmed the mandatory requirement for the Assessing Officer (AO) to record objective dissatisfaction before invoking Rule 8D for disallowance under Section 14A of the Income Tax Act. This ruling underscores the procedural safeguards against mechanical disallowances, particularly in cases involving exempt income such as dividends.
Background & Facts
The Dispute
The appeal was filed by the Revenue against the order of the Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, dated 30.12.2025, for the Assessment Year (AY) 2017-18. The assessee, M/s. Bajaj Resources Pvt. Ltd., had filed its return of income on 27.11.2017, declaring a total income of Rs 5,54,13,490 under the normal provisions of the Act and Rs 5,59,12,900 under Section 115JB of the Act. The assessee had claimed exemption under Section 10(34) of the Act for dividend income of Rs 76,32,40,625 but did not make any disallowance under Section 14A in its return.
Key Facts
- The assessee filed its return of income on 27.11.2017
- Dividend income of Rs 76,32,40,625 was claimed as exempt under Section 10(34)
- No disallowance under Section 14A was made in the return
- The AO disallowed Rs 4,72,29,284 under Rule 8D(2) during assessment
- The assessee did not appear before the ITAT despite issuance of notice
Procedural History
- 27.11.2017: Return of income filed by the assessee
- During assessment proceedings: AO noticed the claim of exempt dividend income and invoked Rule 8D(2) to disallow Rs 4,72,29,284
- 30.12.2025: Ld. CIT(A) deleted the disallowance, holding that the AO had mechanically applied Rule 8D without recording objective dissatisfaction under Section 14A(2) and without identifying expenditure relatable to the exempt income
- 27.04.2026: Appeal heard by ITAT Agra Bench
- 29.04.2026: ITAT pronounced its order
Relief Sought
The Revenue challenged the deletion of the disallowance under Section 14A read with Rule 8D(2) of the Income Tax Rules.
The Legal Issue
The central question was whether the AO is mandated to record objective dissatisfaction under Section 14A(2) before resorting to the computation mechanism provided in Rule 8D(2) of the Income Tax Rules, even when no interest disallowance is involved.
Arguments Presented
For the Revenue
The Revenue contended that the decision of the Hon'ble Supreme Court in South Indian Bank Ltd. was inapplicable to the instant case because the disallowance pertained only to indirect expenses and not to interest. Therefore, the availability of own funds was irrelevant, and the AO was not required to record objective dissatisfaction.
For the Assessee
The assessee did not appear before the ITAT, and no arguments were presented on its behalf.
The Court's Analysis
The ITAT examined the mandate of Section 14A(2) of the Act, which requires the AO to record objective dissatisfaction with the assessee's claim that no expenditure was incurred to earn exempt income. The Tribunal relied on the Supreme Court's decision in Maxopp Investments Ltd. v. CIT (reported in 402 ITR 640), which categorically held that recording of dissatisfaction with cogent reasons is mandatory before invoking Rule 8D(2).
"The Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640(SC) had categorically held that the recording of dissatisfaction with cogent reasons is mandatory on the part of the Learned AO before resorting to computation mechanism provided in Rule 8D(2) of the Rules."
The Tribunal distinguished the facts of the instant case from those in South Indian Bank Ltd., where the disallowance involved interest expenses. In the present case, since the disallowance was confined to indirect expenses, the Tribunal held that the AO's failure to record objective dissatisfaction rendered the disallowance unsustainable.
The Verdict
The ITAT dismissed Ground No. 2 raised by the Revenue and allowed Ground No. 1, thereby upholding the deletion of the disallowance of Rs 4,72,29,284 under Section 14A. The Tribunal concluded that the relief granted by the Ld. CIT(A) was in order, as the AO had not complied with the mandatory requirement of recording objective dissatisfaction under Section 14A(2).
What This Means For Similar Cases
Mandatory Recording of Objective Satisfaction Under Section 14A(2)
- The AO must record objective dissatisfaction with cogent reasons before invoking Rule 8D(2) for disallowance under Section 14A, irrespective of whether the disallowance pertains to interest or indirect expenses.
- Failure to comply with this procedural requirement will render the disallowance unsustainable, even if the assessee has not explicitly disputed the expenditure.
Distinction Between Interest and Indirect Expenses Disallowance
- The ruling clarifies that the availability of own funds is irrelevant when the disallowance pertains to indirect expenses (as opposed to interest expenses).
- Practitioners must argue that the AO cannot bypass the objective satisfaction requirement by merely distinguishing the nature of the expenditure.
Precedential Value of Maxopp Investments
- The decision reaffirms the binding nature of the Supreme Court's ruling in Maxopp Investments, which mandates strict compliance with Section 14A(2).
- Assessees can rely on this precedent to challenge mechanical disallowances under Rule 8D where the AO fails to record dissatisfaction.
