The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) ruled on 20 May that the Assessing Officer (AO) cannot apply Rule 8D automatically while making a disallowance under Section 14A of the Income Tax Act. The AO must first record dissatisfaction with the taxpayer’s own calculation of expenses related to exempt income.
What is Section 14A?
Section 14A says that expenses made for earning tax-free income cannot be claimed as a deduction against taxable income.
What is Rule 8D?
Rule 8D gives the method to calculate the amount of expense that should be disallowed under Section 14A.
What did ITAT say?
The AO cannot use Rule 8D directly. First, the AO must show why he is not satisfied with the taxpayer’s own calculation.
Simple meaning
If income is exempt from tax, related expense should not reduce your taxable income.
The Bench, comprising Judicial Member Sanjay Garg and Accountant Member Annapurna Gupta, allowed the appeal filed by Axis Bank and ordered the deletion of the disallowance made under Section 14A.
The Tribunal observed that the AO applied Rule 8D without meeting the mandatory requirement of first recording dissatisfaction with the bank’s calculation after examining its books of accounts.
Axis Bank had earned exempt income and had voluntarily disallowed a part of its administrative expenses under Section 14A using what it described as a scientific and reasonable method.
During the assessment, the AO rejected the bank’s calculation and applied Rule 8D. This resulted in an additional disallowance of more than ₹20 crore.
Axis Bank challenged the addition before the Tribunal. The bank argued that it had consistently followed a reasonable method to calculate expenses related to exempt income. It also referred to earlier decisions in its favour by the Tribunal, the Gujarat High Court, and the Supreme Court on the same issue.
The Tribunal noted that the bank had clearly explained its method of allocating expenses and had also shown that it had substantial interest-free funds of its own.
However, the AO did not point out any specific mistake in the bank’s calculation and simply assumed that Rule 8D should be applied.
Referring to its earlier decisions in Axis Bank’s own cases, the Tribunal said that Rule 8D can be applied only if the AO records dissatisfaction with the taxpayer’s calculation after examining the books of accounts.
The Tribunal found that this legal requirement was not fulfilled in the present case.
Since the facts were similar to previous years and the AO had not recorded any dissatisfaction, the Tribunal held that the application of Rule 8D was not valid in law.
Accordingly, the ITAT directed the deletion of the entire disallowance under Section 14A and allowed the appeal of Axis Bank on this issue.
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