The Aishwarya Rai Bachchan ₹4 Crore Tax Case – Expert Analysis

In 2025, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, delivered a significant judgment in favor of Ms. Aishwarya Rai Bachchan, setting aside an additional disallowance of approximately ₹4 crore made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income-tax Rules, 1962.

While celebrity tax cases often attract attention for their personalities, this ruling is notable because it reinforces fundamental principles of tax law particularly that Section 14A cannot be applied mechanically and that the Assessing Officer must follow due process before making any disallowance.

This article provides a comprehensive explanation of the facts, law, and reasoning behind the decision, written in clear language but with professional depth.

Background of the Case

For the Assessment Year (AY) 2022–23, Ms. Aishwarya Rai Bachchan filed her return of income on 22 October 2022, declaring:

• Total income: ₹39.33 crore
• Investments in tax-free income-generating assets: ₹449.44 crore
• Exempt income: ₹2.14 crore, primarily from dividends and tax-free interest.

Her case was selected for comprehensive scrutiny by the Income Tax Department to verify whether any expenditure had been claimed against tax-free incomean area governed by Section 14A of the Income-tax Act.

Understanding Section 14A: The Foundation of the Dispute

Section 14A of the Income-tax Act, 1961 was introduced by the Finance Act, 2001 to ensure that taxpayers do not claim deductions on expenses related to earning income that is exempt from tax.

The logic is straightforward: if certain income is exempt, any expenditure incurred to earn that income should also not reduce taxable profits.

For example, if an individual earns ₹10 lakh of tax-free interest on government bonds and pays ₹1 lakh in portfolio management fees, that ₹1 lakh cannot be deducted from taxable income.

What Rule 8D Provides

While Section 14A lays down the principle, Rule 8D provides the method of computation.
Rule 8D(2)(iii) specifies that 1% of the average value of investments that have actually yielded exempt income during the year shall be disallowed as expenditure presumed to relate to that income.

However, Rule 8D is not meant to be used automatically.
Section 14A(2) clearly states that the AO may apply this rule only after recording an objective dissatisfaction with the correctness of the taxpayer’s own computation.

This recording of dissatisfaction is a jurisdictional preconditionwithout it, any disallowance made under Rule 8D becomes invalid.

The Assessing Officer’s Computation

In her return, Ms. Bachchan had voluntarily disallowed ₹49,08,657 (suo motu) under Section 14A, acknowledging a small portion of indirect and direct expenses such as portfolio management charges and securities transaction tax (STT).

The Assessing Officer, however, was not satisfied and decided to apply Rule 8D(2)(iii) directly.
His working was as follows:

Thus, the AO added ₹4.11 crore to her income, completing the assessment under Section 143(3) at a total income of ₹43.44 crore.

The First Appeal: CIT(A)’s Decision

The assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that:

1. She had already made a reasonable voluntary disallowance.
2. The AO had not recorded any satisfaction explaining why her computation was unsatisfactory.
3. The disallowance exceeded the total expenditure debited to the Profit & Loss account, which was ₹2.48 crore.

The CIT(A) accepted her contentions.
After examining the records, the Commissioner held that the AO had mechanically invoked Rule 8D without complying with the statutory condition of recording dissatisfaction.
Consequently, the CIT(A) deleted the additional disallowance of ₹4.11 crore and sustained only the ₹49 lakh voluntarily offered by the assessee.

The Department’s Appeal Before ITAT Mumbai

The Income Tax Department appealed against the CIT(A)’s order before the ITAT, Mumbai Bench, leading to the case ITA No. 5403/MUM/2025.

After hearing both sides and perusing the documents, the Tribunal upheld the order of the CIT(A) and ruled in favour of Aishwarya Rai Bachchan on 31 October 2025.

Tribunal’s Detailed Reasoning

1. Absence of Recorded Satisfaction

The Tribunal emphasized that under Section 14A(2), the AO must first examine the taxpayer’s accounts and record dissatisfaction regarding the correctness of the claim before applying Rule 8D.
In this case, the AO had merely applied the formula without stating why the assessee’s calculation was inadequate.
This omission rendered the disallowance invalid.

2. Reasonableness of Voluntary Disallowance

The Tribunal noted that Ms. Bachchan had proactively made a detailed disallowance covering direct and indirect expensesportfolio management fees, STT, and a small proportion of other overheads.
This demonstrated both prudence and good faith.

3. Mathematical Inconsistency

Her total expenses as per the Profit & Loss account were ₹2.48 crore, yet the AO computed disallowance at ₹4.60 crore.
A disallowance cannot logically exceed the total expenses incurred.
The Tribunal found this approach untenable.

4. Incorrect Application of Rule 8D

The AO had applied 1% on the entire investment base of ₹460 crore, instead of restricting it to investments that actually produced exempt income.
This contradicted the decision of the Special Bench in Vireet Investment Pvt. Ltd. v. ACIT (165 ITD 27), which limits the computation to income-yielding investments only.

5. Reliance on Precedents

The Tribunal cited the Supreme Court judgment in Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640, which laid down that Rule 8D cannot be applied without recorded satisfaction and that the AO must act on objective reasoning rather than assumptions.

The Final Ruling

The Tribunal concluded:

• The assessee’s suo motu disallowance of ₹49,08,657 was fair and reasonable.
• The AO’s additional disallowance of ₹4.11 crore was unsustainable in law.
• The order of the CIT(A) deleting the addition was upheld.

Accordingly, the appeal of the Income Tax Department was dismissed.

Print