The main legal point established in the judgment is the requirement for the assessing officer to record satisfaction before invoking the computation mode as specified in Rule 8D(2)(iii) and the principle of apportionment of expenses in Section 14a of the act.

JUDGMENT

T.S. Sivagnanam, J. - These appeals have been filed by the assessee under Section 260a of the Income Tax act, 1961, (the act, in brevity) challenging the orders passed by the Income Tax appellate Tribunal, Kolkata (Tribunal). There were four orders, which are subject matter of challenge before us in these two appeals. ITa/148/2018 is directed against the consolidated order dated 26.4.2018 passed by the Tribunal in ITa/1037/Kol/2012 and 773/KOL/2013 for the assessment years 2008-09 and 2009-10 respectively. The order impugned in ITaT/43/2021 is the order passed by the Tribunal in ITa/1195 and 1176/Kol/2019 for the assessment year 2011-12. The Tribunal in its order dated 21.10.2020, which is impugned in ITaT/43/2021 followed the order impugned in ITa/148/2018 and disposed of the appeal and, therefore, ITa/148/2018 is taken as the lead case which deals with the assessment years 2008-09 and 2009-10. ITa/148/2018 was admitted on 14.09.2018 on the following substantial questions of law.

a. Whether rule 8D of the Income Tax Rules 1962 can be invoked without examining the correctness of the assessee's claim of expenditure incurred in relation to exempt income and without recording reasons as to why, having regard to the assessee's accounts, such claim was not correct or acceptable?

b. Whether on the facts and in the circumstances of the instant case, the mechanical invocation and application of rule 8D of the Income Tax Rules, 1962 for computing the disallowance under Section 14a of the Income Tax act, 1961 was justified?

2. In ITaT/43/2021 the appellant has also raised identical substantial questions of law for consideration. Thus, we proceed to hear out and decide the aforesaid appeals by passing a common judgment and order.

3. We have heard Mr. Khaitan, learned senior counsel assisted by Ms. Nilanjana Banerjee (Paul) counsel for the appellant and Mr. Debasish Chowdhury, learned senior standing counsel and Mr. Madhu Jana, learned junior standing counsel for the respondent/revenue.

4. The issue involved in the instant case is whether rule 8D of the Income Tax Rules, 1962 could have been invoked by the assessing Officer without examining the correctness of the assessee's claim of expenditure in relation to exempt income and without recording reasons as to why such a claim was not correct or acceptable. The subsidiary question would be whether the assessing Officer can mechanically invoke and apply rule 8D of the Rules for computing the disallowance under Section 14a of the act. For the assessment years 2008-09 and 2009-10 the assessing Officer in paragraph 11 of the assessment order dated 31.12.2010 the assessing Officer has observed that the assessee has earned dividend income of Rs.3,58,81,107/-, which is exempt under Section 10(34) and they were called upon to explain why expenses related to dividend earned from shares held as investment be disallowed under Section 14a, as per formula provided in rule 8D of the Rules. The assessee had stated that they had voluntarily made a disallowance of Rs.10 lakhs. However, on going through the order of assessment dated 31.12.2010 we find that the assessing Officer has not noticed this fact and noted only the argument of the assessee that no expenditure has been incurred by them for earning the exempt dividend and interest income. The assessing Officer in a single line stated that the contention of the assessee is not acceptable and proceeded to apply rule 8D and disallowed the total amount of Rs.61,47,311/- for the assessment year 2008-09 and a sum of Rs.1,99,90,545/- for the assessment year 2009-10. aggrieved by the same, the assessee preferred appeal before the Commissioner of Income Tax (appeals) (CIT(a)). It was contended before CIT(a) that the assessing Officer erred in disallowing the amount mentioned above under Section 14a by automatically applying computation method prescribed in rule 8D without giving any reasons for non-acceptance of the claim of the appellant. Without prejudice