The Mumbai bench of the income-tax appellate tribunal (ITAT) has ruled in favour of actor Aishwarya Rai Bachchan, deleting a Rs4.11 crore disallowance made by the assessing officer (AO) under Section 14A of the Income Tax Act, 1961, read with Rule 8D. The tribunal held that the disallowance was made without proper reasoning or satisfaction, and without segregating the investments from which exempt income was actually earned.
The two-member bench, comprising judicial member Pawan Singh and accountant member Renu Jauhri, upheld the order of the commissioner of income-tax (appeals) (CIT(A)) dated 16 June 2025 which had granted full relief to Ms Rai Bachchan.
"(the) AO simply rejected the computation submitted by Ms Rai Bachchan and proceeded to compute the disallowance under Section 14A (read with respect to) 8D at Rs4.60 crore without segregating the investments from which exempt income was derived. Moreover, it is seen that the total expenses debited to the profit and loss (P&L) account are only Rs2.48 crore and thus the computation of disallowance of Rs4.60 crore is devoid of any logic and clearly unreasonable. Thus it is clear that the AO has not considered the entire factual matrix of the case nor gone through the relevant accounts and the disallowance has been made without proper appreciation of facts in the light of the settled legal position," the ITAT says.
The case pertained to assessment year (AY)22–23. Ms Rai Bachchan had filed her income tax returns (ITR) declaring total income of Rs39.33 crore. During scrutiny, the AO proposed a disallowance under Section 14A in respect of expenses allegedly related to earning exempt income.
Although the taxpayer had already made a suo-moto disallowance of Rs49.08 lakh, despite asserting that no expenditure was incurred for earning such income, the AO went on to compute an additional disallowance of Rs4.11 crore, bringing the assessed income to Rs43.44 crore.
The AO based this computation on the average value of total investments of about Rs460.6 crore without limiting the calculation to investments generating exempt income. This was despite the taxpayer’s submission that only a small portion of investments had yielded tax-free income of Rs2.14 crore during the year.
In its detailed order dated 31 October 2025, the ITAT observed that the AO’s computation was 'devoid of logic and clearly unreasonable', as the total expenses debited to the P&L account were only Rs2.48 crore — far less than the Rs4.60 crore disallowance computed by the department.
The tribunal emphasised that under Section 14A read with Rule 8D, the AO must record satisfaction explaining why the taxpayer’s own disallowance is not acceptable. Citing the Supreme Court’s ruling in Maxopp Investments Ltd vs CIT [(2018) 402 ITR 640 (SC)], the bench held that mere rejection of the taxpayer’s computation without such reasoning is not permissible.
“The AO simply rejected the computation submitted by the assessee and proceeded to compute the disallowance without segregating the investments from which exempt income was derived,” the bench noted. “The disallowance made by the AO over and above the suo-moto disallowance made by the assessee is without any basis and deserves to be deleted.”
The bench also referred to the special bench ruling in Vireet Investments Pvt Ltd vs ACIT [165 ITD 27], which requires that only those investments that actually yield exempt income should be considered for the purposes of disallowance under Section 14A.
In this case, Ms Rai Bachchan had voluntarily offered Rs49.08 lakh as disallowance, including transaction-related costs such as securities transaction tax and other indirect expenses, even though she contended that no direct expenditure was incurred to earn exempt income. The tribunal found this approach reasonable and consistent with judicial precedents.
Accordingly, it dismissed the appeal filed by the revenue and confirmed the relief granted by the CIT(A).
The order concluded that the AO had failed to consider the factual matrix and the settled legal position, resulting in an excessive and arbitrary addition.
“It is clear that the AO has not considered the relevant accounts and has made the disallowance without proper appreciation of facts,” the tribunal stated.
“Accordingly, the disallowance made by the AO over and above the suo-moto disallowance made by the assessee is without any basis and deserves to be deleted.”
With this ruling, the ITAT reaffirmed that tax authorities must strictly adhere to the principles of reasoned satisfaction under Section 14A before making any disallowance.
