ITAT Ahmedabad Deletes ₹20 Crore+ 14A Disallowance Against Axis Bank, Bars Mechanical Use of Rule 8D

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) on 20 May held that disallowance under Section 14A of the Income Tax Act cannot be made by mechanically invoking Rule 8D unless the Assessing Officer first records dissatisfaction with the taxpayer's own computation of expenditure relatable to exempt income.

Judicial Member Sanjay Garg and Accountant Member Annapurna Gupta allowed the appeal filed by Axis Bank Limited and directed deletion of the disallowance made under Section 14A. The Bench held:

“Therefore, it is abundantly clear that the AO had proceeded to apply Rule 8D for computing the expenses disallowable under section 14A of the Act without fulfilling the mandatory pre-requisite of first recording dissatisfaction with the assessee's computation of the same, having regard to its books of accounts.”

Axis Bank Limited had earned exempt income and made a suo motu disallowance of a portion of administrative expenditure under Section 14A based on a stated scientific methodology. During assessment proceedings, the Assessing Officer rejected the computation and applied Rule 8D, resulting in an additional disallowance exceeding Rs.20 crore.

The bank challenged the addition before the Tribunal, arguing that it had consistently followed a reasonable and scientific method to identify expenditure attributable to exempt income. It also relied on earlier favourable rulings on identical issues in its own case by the Tribunal, the Gujarat High Court, and the Supreme Court.

The Tribunal noted that the taxpayer had explained its basis of allocation and demonstrated availability of substantial interest-free own funds. However, the Assessing Officer did not identify any specific defect in the computation and proceeded on the assumption that Rule 8D applied automatically.

Referring to its earlier decision in the taxpayer's own case, the Bench reiterated that Rule 8D could be invoked only after the Assessing Officer, having regard to the books of account, records dissatisfaction with the correctness of the taxpayer's computation. It found that this statutory condition was not met in the present year.

Finding the facts identical to earlier assessment years and noting the absence of recorded dissatisfaction, the Tribunal held that invocation of Rule 8D was unsustainable in law. Accordingly, the ITAT directed deletion of the entire disallowance under Section 14A and allowed the appeal on this issue.

Appearance for the Assessee: Shri Tushar Hemani, Senior Advocate, Shri Kushal Fofaria, Authorised Representative (AR)

Appearance for the Revenue: Shri Sher Singh, CIT-DR (Commissioner of Income Tax Departmental Representative)