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AO cannot apply Rule 8D without showing how assessee’s method is incorrect
For AY 2008-09, the AO made a disallowance of Rs. 31 lakhs u/s 14A by applying Rule 8D without recording any satisfaction as to how the assessee’s calculation of s. 14A disallowance was incorrect. In appeal, the CIT (A) upheld the applicability of Rule 8D though he reduced the disallowance to Rs. 19 Lakhs. The department filed an appeal while the assessee filed a C.O. HELD by the Tribunal:
It is a pre-requisite that before invoking Rule 8D, the AO must record his satisfaction on how the assessee’s calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax-free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions (law laid down in assessee’s own case for AY 2007-08 reiterated)
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