On October 22, 2022, actor and taxpayer Aishwarya Rai Bachchan filed her income tax return for the assessment year 2022–23, declaring an income of Rs 39.33 crore. As of March 31, 2021, she held investments worth Rs 449 crore in assets generating tax-free income.
Her return was later picked up for detailed scrutiny by the Income Tax Department. After reviewing her case, the assessing officer (AO) disallowed expenses related to exempt income under Section 14A of the Income-tax Act, read with Rule 8D. Bachchan argued that she had already made a voluntary (suo motu) disallowance of Rs 49 lakh, even though she had not incurred any expenses to earn that exempt income.
What Section 14A Says
Section 14A was introduced to prevent taxpayers from claiming deductions for expenses linked to tax-free income. The idea is simple: costs related to earning tax-exempt income cannot be used to reduce taxable income.
How the Tax Officer Calculated the Disallowance
The AO rejected her explanation and applied Rule 8D to compute the disallowance as 1% of the average investment value.
Her investments stood at Rs 472 crore in March 2020 and Rs 449 crore in March 2021, averaging Rs 460 crore during the year.
The AO calculated 1% of this—Rs 4.60 crore—as disallowed expenditure.
Out of this, Bachchan had already disallowed Rs 49 lakh on her own. The remaining Rs 4.11 crore was added by the tax department, increasing her taxable income to Rs 43.44 crore in the assessment order dated March 16, 2024.
The Appeals and the Verdict
Bachchan appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who ruled in her favour. The Income Tax Department then challenged the decision before the Income Tax Appellate Tribunal (ITAT) in Mumbai. On October 31, 2025, ITAT Mumbai upheld the CIT(A)’s decision and dismissed the department’s appeal.
According to Chartered Accountant Dr. Suresh Surana, in the case ACIT vs Aishwarya Rai Bachchan (ITA No. 5403/MUM/2025), the AO failed to record proper satisfaction before applying Rule 8D. Surana explained that the assessee had already provided a detailed calculation of Rs 49.08 lakh, including both direct and indirect costs like transaction tax, securities transaction tax (STT), and portfolio management fees.
The AO, however, disallowed Rs 4.60 crore without identifying any specific errors in her computation and without recording the required dissatisfaction under Section 14A(2).
ITAT noted several inconsistencies:
- Her total reported expenditure was only Rs 2.48 crore, yet the AO claimed Rs 4.6 crore as disallowance—an illogical outcome.
- The AO failed to limit the disallowance to investments that actually generated exempt income, contrary to the Vireet Investment Pvt. Ltd. v. ACIT (165 ITD 27) ruling.
ITAT concluded that the CIT(A) was correct in deleting the excess disallowance and that Bachchan’s self-calculated Rs 49 lakh was reasonable.
Key Points from the Tribunal’s Decision
The ITAT stated that:
- The AO must record clear reasons showing why the taxpayer’s own computation is incorrect before invoking Rule 8D.
- Disallowance cannot exceed total expenses booked.
- Only investments that actually yield exempt income can be considered under Rule 8D.
Citing the Supreme Court’s Maxopp Investments Ltd. v. CIT (2018) 402 ITR 640, the Tribunal reaffirmed that absence of a properly recorded satisfaction makes a Rule 8D disallowance invalid. It found that the AO had ignored factual details and made an unreasonable calculation.
As a result, the ITAT upheld CIT(A)’s order, deleted the additional Rs 4.11 crore disallowance, and dismissed the tax department’s appeal.
How Section 14A Disallowance Works
Section 14A(1) prohibits deductions for expenses related to tax-free income. If the AO is not satisfied with the taxpayer’s computation, they must explicitly record their dissatisfaction before applying Rule 8D.
Rule 8D sets a formula to determine the disallowance:
- Direct expenses related to exempt income.
- Plus 1% of the average value of investments that generated exempt income during the year.
Importantly, the total disallowance cannot exceed the total expenses shown in the profit and loss account. Rule 8D is not automatic—it can only be applied after the AO reviews the taxpayer’s records and documents clear reasons for disagreement.
