Why did the Income Tax Department send Aishwarya Rai Bachchan a tax notice, what was the assessing officer’s rationale?

Well known actor Aishwarya Rai Bachchan has recently won a case against the Income Tax Department – a Rs 4 crore case relating to disallowance of income. On October 22, 2022, Aishwarya Rai Bachchan, declared a total income of Rs 39 crore (39,33,02,240) for the Assessment Year 2022-23. Her investments in tax-free income generating assets stood at Rs 449 crore, according to an ET report.Following her ITR processing, she received a tax notice as her case was selected for comprehensive scrutiny by the Income Tax Department for detailed verification. In response to the tax notice, Aishwarya provided the requisite clarifications. However, the tax assessing officer (AO) rejected certain expenses related to exempt income under Section 14A read with Rule 8D. She argued that she had voluntarily made a disallowance of Rs 49 lakh (suo-moto), despite not incurring any expenses for earning the exempt income. Why did the Income Tax Department send Aishwarya Rai Bachchan a tax notice, what was the assessing officer’s rationale, and why did the Income Tax Appellate Tribunal (ITAT) Mumbai rule in her favour? We take a look:

Aishwarya Rai Bachchan tax case: What was the matter about?

Section 14A of the Income-tax Act, 1961 was established to prevent taxpayers from claiming deductions on expenses related to tax-exempt income. This provision ensures that expenses linked to tax-free income cannot be claimed against taxable income, thus maintaining tax base integrity and equality between exempt and taxable income streams.

The Disallowance, calculated at 1% of above, made by the tax officer= Rs 4,60,63,388. Source: ETMrs. Bachchan contested the tax department’s order by filing an appeal with the CIT(A), who subsequently ruled in her favour after a thorough investigation.The Income Tax Department, not accepting the CIT(A)’s decision, subsequently approached ITAT Mumbai. Finally, ITAT Mumbai ruled in Aishwarya Rai Bachchan’s favour on October 31, 2025.

What is Section 14A relating to disallowance of income?

Section 14A(1) clearly states that expenditure related to income not forming part of total income under the IT Act cannot be claimed as deductions. When the Assessing Officer reviews accounts and finds the taxpayer’s claim unsatisfactory, including claims of zero expenditure, they must document their concerns before determining disallowance as per Rule 8D of the Income-tax Rules, 1962. This process applies universally, even when taxpayers assert no expenditure against exempt income.Upon documenting valid concerns about a taxpayer’s calculations, the AO employs a formula-based methodology under Rule 8D for quantifying disallowance, the ET report says. This includes:

“The aggregate disallowance, however, cannot exceed the total expenditure debited to the profit and loss account for the relevant year. It is pertinent to note that Rule 8D is not intended to apply automatically. The AO must first examine the taxpayer’s accounts and computation of disallowance, form an objective opinion supported by reasons that such computation is incorrect or inadequate, and record this satisfaction in the assessment order. Only then may the AO proceed to apply the Rule 8D formula. Absence of such recorded satisfaction renders the disallowance invalid,” Chartered Accountant (Dr.) Suresh Surana told ET.

Why did ITAT Mumbai rule in Aishwarya Rai Bachchan’s favour?

Surana explains that in the referenced tax appeal (ITA No.5403/MUM/2025) involving ACIT and Aishwarya Rai Bachchan, the appellant submitted her income-tax return for Assessment Year 2022-23. She declared a total income of Rs. 39.33 crore, which comprised investments generating exempt income of Rs. 2.14 crore, primarily from dividends and tax-free interest sources.The appellant voluntarily implemented a disallowance of Rs. 49.08 lakh under Section 14A in conjunction with Rule 8D, whilst maintaining her position that she had not incurred any direct expenses for generating the exempt income.However, the AO deemed the assessee’s submission inadequate. The AO implemented Section 14A r/w Rule 8D(2)(iii) without identifying specific discrepancies in her calculations and determined a disallowance of Rs 4.60 crore (1% of average investment), resulting in a total income of Rs 43.44 crore. The CIT(A) later reversed the AO’s additional disallowance beyond the voluntary amount, noting the AO’s failure to document proper satisfaction as mandated under Section 14A(2). The Tax Tribunal evaluated the Assessing Officer’s ruling and made several key observations:

Surana says: “The ITAT Mumbai concluded that the CIT(A) rightly deleted the additional disallowance and Aishwarya Rai Bachchan’s suo-motu disallowance was found reasonable in the circumstances.”