The officer went straight to the Rule 8D formula without saying what was wrong with my own s.14A working. Is that a good ground?
It is the ground. Sub-rule (2) of Rule 8D is not reached at all until the Assessing Officer has first recorded the satisfaction mandated by s.14A(2) and Rule 8D(1), on the accounts. Where the officer never explained why the voluntary disallowance was unreasonable or unsatisfactory, the Rule 8D re-computation falls.
Decided by the High Court (Sanjiv Khanna J and V. Kameswar Rao J (oral judgment by Sanjiv Khanna J)) on 2014-11-25, reported as ITA 115/2014 and ITA 119/2014 (High Court of Delhi); cited in later judgments as [2015] 370 ITR 338 (Del). It bears on section 14A, section 14A(2), section Rule 8D, section 260A of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny, How Tax Law Is Read and Appeals matters.
This is the mandatory precondition, not a formality, and it is the single most successful line of attack on a s.14A addition. Two features make the decision unusually useful. The Court allowed the assessee to succeed on a ground different from the one the Tribunal had accepted — so the point can be taken even where the appellate authorities below went off on availability of own funds. And at para 19 the Court expressly warned the other way: once Rule 8D is validly invoked, the sufficiency-of-own-funds line drawn from Reliance Utilities, Tin Box, Suzlon and East India Pharmaceutical does not answer the prescribed formula, because sub-rule (2) prescribes the mode and method. So the own-funds argument belongs at the satisfaction stage, not the computation stage.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Two Revenue appeals under s.260A for AY 2008-09 and AY 2009-10. For AY 2008-09 the assessee returned taxable income of Rs 31,14,68,297 and exempt income of Rs 2,46,81,747 and voluntarily disallowed Rs 1,15,000 under s.14A; the Assessing Officer held the voluntary disallowance did not fulfil the requirements of s.14A read with Rule 8D, recomputed the disallowance at Rs 42,59,540 and added the balance. For AY 2009-10 the assessee returned income of Rs 8,98,19,429 and voluntarily disallowed Rs 2,76,194 against exempt dividend income of Rs 17,43,782; the officer computed Rs 5,36,393 under Rule 8D and added the difference. The Commissioner (Appeals) deleted the additions on the footing that the investments had come out of surplus own funds, the assessee having share capital of Rs 60,00,000 and reserves and surplus of Rs 53.19 crores as on 31 March 2008. The Tribunal dismissed the Revenue's appeals on 27 September 2013, relying on CIT v. Tin Box Co. and CIT v. Reliance Utilities and Power Ltd.
The Revenue's appeals were dismissed with no order as to costs. The conditions in s.14A(2) read with Rule 8D(1) were not satisfied and the Assessing Officer erred in invoking sub-rule (2) without elucidating and explaining why the voluntary disallowance was unreasonable and unsatisfactory; no such satisfaction was recorded before the re-computation, so the assessee succeeded (para 20).
The Court read s.14A(2) and Rule 8D(1) together: the computation or disallowance made by the assessee, or the claim that no expenditure was incurred, must be examined with reference to the accounts, and only when that explanation or claim is found unsatisfactory does computation under sub-rule (2) arise (paras 12 and 13). It drew on the passage in Godrej and Boyce Mfg. Co. Ltd. v. DCIT (2010) 328 ITR 81 (Bom) that Parliament has provided an adequate safeguard by making the invocation of the power conditional on the objective satisfaction of the Assessing Officer as to the correctness of the claim having regard to the accounts, that the officer must give the assessee a reasonable opportunity to show cause and must record reasons if he is not satisfied, and that these safeguards, implicit in fairness and fair procedure under article 14, must be observed (para 17). It found that the clear findings that the assessee had sufficient funds, coupled with the officer's failure to hold and record his satisfaction, clinched the issue, the voluntary deductions never having been rejected as unsatisfactory on examination of accounts (para 18). At para 19 the Court added the caveat that once the disallowance is computed under Rule 8D, the Tin Box and Reliance Utilities line of cases could not be applied to rewrite the prescribed formula, and that the Commissioner (Appeals) and Tribunal's interpretation of clause (ii) of sub-rule (2) was not sustainable — but at para 20 held that it need not reach sub-rule (2) at all.
We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules.
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Handle my notice → Ask a CA on WhatsAppIt is the ground. Sub-rule (2) of Rule 8D is not reached at all until the Assessing Officer has first recorded the satisfaction mandated by s.14A(2) and Rule 8D(1), on the accounts. Where the officer never explained why the voluntary disallowance was unreasonable or unsatisfactory, the Rule 8D re-computation falls. This was decided by the High Court (Sanjiv Khanna J and V. Kameswar Rao J (oral judgment by Sanjiv Khanna J)) and bears on section 14A, section 14A(2), section Rule 8D, section 260A of the Income Tax Act 1961. It is reported as ITA 115/2014 and ITA 119/2014 (High Court of Delhi); cited in later judgments as [2015] 370 ITR 338 (Del). This is the mandatory precondition, not a formality, and it is the single most successful line of attack on a s.14A addition. Two features make the decision unusually useful. The Court allowed the assessee to succeed on a ground different from the one the Tribunal had accepted — so the point can be taken even where the appellate authorities below went off on availability of own funds. And at para 19 the Court expressly warned the other way: once Rule 8D is validly invoked, the sufficiency-of-own-funds line drawn from Reliance Utilities, Tin Box, Suzlon and East India Pharmaceutical does not answer the prescribed formula, because sub-rule (2) prescribes the mode and method. So the own-funds argument belongs at the satisfaction stage, not the computation stage. If it applies to you, the first step is this: Extract the exact words in the assessment order that are said to be the satisfaction, and test them: do they refer to the accounts, and do they say why your figure is wrong? A recital that the claim is 'not commensurate' is not an examination of the accounts.
Two Revenue appeals under s.260A for AY 2008-09 and AY 2009-10. For AY 2008-09 the assessee returned taxable income of Rs 31,14,68,297 and exempt income of Rs 2,46,81,747 and voluntarily disallowed Rs 1,15,000 under s.14A; the Assessing Officer held the voluntary disallowance did not fulfil the requirements of s.14A read with Rule 8D, recomputed the disallowance at Rs 42,59,540 and added the balance. For AY 2009-10 the assessee returned income of Rs 8,98,19,429 and voluntarily disallowed Rs 2,76,194 against exempt dividend income of Rs 17,43,782; the officer computed Rs 5,36,393 under Rule 8D and added the difference. The Commissioner (Appeals) deleted the additions on the footing that the investments had come out of surplus own funds, the assessee having share capital of Rs 60,00,000 and reserves and surplus of Rs 53.19 crores as on 31 March 2008. The Tribunal dismissed the Revenue's appeals on 27 September 2013, relying on CIT v. Tin Box Co. and CIT v. Reliance Utilities and Power Ltd. The matter was decided on 2014-11-25 by the High Court (Sanjiv Khanna J and V. Kameswar Rao J (oral judgment by Sanjiv Khanna J)). On those facts the High Court held as follows. The Revenue's appeals were dismissed with no order as to costs. The conditions in s.14A(2) read with Rule 8D(1) were not satisfied and the Assessing Officer erred in invoking sub-rule (2) without elucidating and explaining why the voluntary disallowance was unreasonable and unsatisfactory; no such satisfaction was recorded before the re-computation, so the assessee succeeded (para 20).
The Court read s.14A(2) and Rule 8D(1) together: the computation or disallowance made by the assessee, or the claim that no expenditure was incurred, must be examined with reference to the accounts, and only when that explanation or claim is found unsatisfactory does computation under sub-rule (2) arise (paras 12 and 13). It drew on the passage in Godrej and Boyce Mfg. Co. Ltd. v. DCIT (2010) 328 ITR 81 (Bom) that Parliament has provided an adequate safeguard by making the invocation of the power conditional on the objective satisfaction of the Assessing Officer as to the correctness of the claim having regard to the accounts, that the officer must give the assessee a reasonable opportunity to show cause and must record reasons if he is not satisfied, and that these safeguards, implicit in fairness and fair procedure under article 14, must be observed (para 17). It found that the clear findings that the assessee had sufficient funds, coupled with the officer's failure to hold and record his satisfaction, clinched the issue, the voluntary deductions never having been rejected as unsatisfactory on examination of accounts (para 18). At para 19 the Court added the caveat that once the disallowance is computed under Rule 8D, the Tin Box and Reliance Utilities line of cases could not be applied to rewrite the prescribed formula, and that the Commissioner (Appeals) and Tribunal's interpretation of clause (ii) of sub-rule (2) was not sustainable — but at para 20 held that it need not reach sub-rule (2) at all. In the words reproduced by the source cited on this page: "We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules." The decision followed or applied Godrej and Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax (2010) 328 ITR 81 (Bom) — relied upon; Maxopp Investment Ltd. v. Commissioner of Income Tax [2012] 347 ITR 272 (Del) — relied upon; CIT v. Tin Box Co. [2003] 260 ITR 637 (Del) and CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) — held not applicable to the computation under Rule 8D(2).
It was decided by the High Court on 2014-11-25 and is reported as ITA 115/2014 and ITA 119/2014 (High Court of Delhi); cited in later judgments as [2015] 370 ITR 338 (Del). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 14A, section 14A(2), section Rule 8D, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeals were dismissed with no order as to costs. The conditions in s.14A(2) read with Rule 8D(1) were not satisfied and the Assessing Officer erred in invoking sub-rule (2) without elucidating and explaining why the voluntary disallowance was unreasonable and unsatisfactory; no such satisfaction was recorded before the re-computation, so the assessee succeeded (para 20). It arises in Deductions & Disallowances, Assessment & Scrutiny, How Tax Law Is Read and Appeals matters, on section 14A, section 14A(2), section Rule 8D, section 260A of the Income Tax Act 1961, and was decided by Sanjiv Khanna J and V. Kameswar Rao J (oral judgment by Sanjiv Khanna J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Take the satisfaction point as the primary ground and the quantum points in the alternative — the first disposes of the whole addition. Deploy the own-funds and no-interest-bearing-borrowing material as the reason the officer could not honestly have been dissatisfied, rather than as a way of rewriting the formula. If the officer's satisfaction is recorded only in the appellate order or in a remand report, say so — the statute requires it of the Assessing Officer, before invoking sub-rule (2).
Still good law. Followed by the Delhi High Court in Joint Investments Pvt Ltd v. CIT (ITA 117/2015, 25 February 2015), which reproduces paras 12 and 13, and treated as authority by the Delhi High Court in PCIT v. IL & FS Energy Development Company Ltd (ITA 520/2017, 16 August 2017) — both judgments were read in full for this pass. The Finance Act 2022 Explanation does not touch the satisfaction requirement, which is in s.14A(2) and Rule 8D(1) and was not amended. No Supreme Court decision doubting it was located, and a systematic later-treatment search was not completed. Read para 19 with care: it describes the pre-2 June 2016 interest formula in clause (ii) of Rule 8D(2), which has since been substituted out of the Rule. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The first ?type=print pass on this document returned a condensed rendering in which whole paragraphs had been rewritten into single sentences, and its version of the s.14A text did not match the statute. It was refetched with an instruction to reproduce paras 17 to 20 exactly, which returned the original wording; para 13 was separately re-confirmed through /docfragment/ and matches word for word the reproduction of the same paragraph inside Joint Investments Pvt Ltd v CIT. Facts and figures below are taken from the second pass and from the reproduction in Joint Investments. The Rule 8D dealt with is the version in force before 2 June 2016; the analysis of clause (ii) of sub-rule (2) at para 19 describes an interest formula that no longer exists. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeals were dismissed with no order as to costs. The conditions in s.14A(2) read with Rule 8D(1) were not satisfied and the Assessing Officer erred in invoking sub-rule (2) without elucidating and explaining why the voluntary disallowance was unreasonable and unsatisfactory; no such satisfaction was recorded before the re-computation, so the assessee succeeded (para 20).
TaxSphere, “CIT v Taikisha Engineering India Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-taikisha-engineering-satisfaction-mandatory-before-rule-8d/ (validity last checked 2026-09-08)
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The Assessing Officer has applied Rule 8D to an assessment year before 2008-09. Can he?
My whole exempt dividend income has been wiped out by the s.14A disallowance. Is that permissible?
The department says the Finance Act 2022 Explanation to s.14A is clarificatory and applies to my old years. Is it?
The Assessing Officer has computed a s.14A disallowance under Rule 8D. Which version of Rule 8D applies to my year, and is the disallowance capped?
