AO's recorded dissatisfaction justifies Rule 8D invocation for u/s 14A disallowance on exempt income expenditure.

ORDER

PER OM PRAKASH KANT, AM

These two appeals by the assessee are directed against two separate orders, both dated 20th August, 2025 passed by the Ld. Commissioner of Income Tax (Appeals) 47, Mumbai [in short, “the Ld. CIT(A)] for assessment years 2014-15 and 2015-16 respectively.

2. In both these appeals, identical issue in dispute of disallowance u/s 14A of the Act is involved and, therefore, both these appeals were heard together and disposed off by way of this consolidated order for the sake of convenience.

3. Now, we take up the appeal of the assessee for A.Y. 2014- 15. The sole ground raised by the assessee is reproduced as under:

“1. The Commissioner of Income Tax (Appeals)-47, Mumbai [hereinafter referred as CIT(A)] erred in confirming the action of the Deputy Commissioner of Income Tax Circle – 4(1)(1), Mumbai [hereinafter referred as AO] in making disallowance u/s 14A of the Income Tax Act, 1961 (Act) r.w. Rule 8D of the Income Tax Rules, 1962 (Rules) without recording his dissatisfaction having regard to its books of accounts.

The Appellant submits that it has made suo moto disallowance of Rs. 65,793/- u/s 14A r.w.r 8D of the Rules, hence, the disallowance in excess of Rs.65,793/- made by the AO shall be deleted.”

4. We have considered the rival submission of the parties and perused the material on record. In the case assessee was engaged in the business of share broking and dealing in shares, securities and derivative investments.

5. During the year assessee had earned exempt income of Rs.7,46,429/- and had voluntarily disallowed Rs.65,793/- u/s 14A of the Income Tax Act, 1961 (in short, “the Act”) comprising salary of an employee and administrative expenses. The Assessing Officer, however, found the disallowance inadequate, especially given the scale of investments and the resources involved in managing such investments. The Assessing Officer held that assessee’s claim of minimum expenditure towards earning exempt was not acceptable. Accordingly, he relied on the judicial precedents invoking Rule 8D of the Income Tax Rules and computed the disallowance u/s 14A at Rs.99,23,192/- and after reducing the suo motu disallowance made by the assessee, a net disallowance of Rs.98,57,399/- was made u/s 14A of the Act. The income under the MAT provisions was also accordingly recomputed by the Assessing Officer including disallowance u/s 14A of the Act. On further appeal, the Ld. CIT(A) restricted the disallowance to the extent of exempted income following various precedents. The relevant finding of Ld. CIT(A) is reproduced as under:

“10. The issue involved in these grounds relates to disallowance U/s 14A of the Act. During the relevant previous year, the appellant had claimed exempt income u/s 10(34) of the Act of Rs. 7,46,429/- and the appellant had suo motu offered disallowance u/s 14A of Rs. 65,793/-. The AO has worked out disallowance U/s 14A of the Act r.w.r. 8D at Rs. 99,23,192/-. Considering the disallowance already offered by the appellant, the net disallowance of Rs. 98,57,399/- was made to the returned income u/s 14A r.w.r. 8D of the Act. The appellant has contended that no further disallowance u/s 14A of the Act is required in the facts of its case. Further, as an alternate argument, the appellant has stated that disallowance cannot exceed the claim of exempt income claimed in the return of income for which it has relied on various judicial decisions. The appellant has also argued that the AO has not recorded satisfaction regarding the correctness of claim of the assessee in respect of expenditure related to earning of exempt income which is m