M/S. RANE HOLDINGS LTD.,CHENNAI vs. ITO, CORPORATE WARD-5(3), CHENNAI

PDF · subscribers
ITA 2404/CHNY/2026Status: DisposedITAT Chennai06 November 2026AY 2017-1811 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the AO failed to record the requisite satisfaction before invoking Rule 8D of the Rules. The assessee had made a suo motu disallowance and provided a detailed working for expenditure attributable to exempt income. The AO was required to examine this working and, if not satisfied, record cogent reasons for rejecting it before invoking Rule 8D. The mere observation that the suo motu disallowance was inadequate did not satisfy the statutory requirement under section 14A(2). The Tribunal noted that on identical facts, it had decided the issue in favour of the assessee for AY 2015-16, following the Supreme Court's decision in Maxopp Investments Ltd. and the Delhi High Court's decision in PCIT vs. Vedanta Ltd., which mandated the recording of satisfaction by the AO. Consequently, the consequential disallowance made under section 14A could not be sustained. The Tribunal set aside the FAA's order and directed the AO to delete the disallowance of Rs. 1,42,75,142/-.

What were the facts?

The assessee, Rane Holdings Ltd., engaged in manufacturing transport equipment, filed its return for Assessment Year 2017-18 declaring a total income of Rs. 42,53,09,110/-. The assessee reported exempt income under sections 10(34) and 10(35) of the Income Tax Act, 1961, amounting to Rs. 16,90,98,027/- and Rs. 82,47,467/- respectively. A suo motu disallowance of Rs. 13,87,952/- was made under section 14A. The Assessing Officer (AO) found this disallowance inadequate and invoked Rule 8D of the Income-tax Rules, 1962, proposing a disallowance of Rs. 1,56,63,094/-. After adjusting the suo motu disallowance, the AO made a further disallowance of Rs. 1,42,75,142/-. The Commissioner of Income Tax (Appeals) - National Faceless Appeal Centre (NFAC), Delhi, confirmed this disallowance.

What were the issues?

1. Whether the First Appellate Authority (FAA) was justified in confirming the disallowance of Rs. 1,42,75,142/- made by the AO by invoking the provisions of section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. Assessee's Contentions: - The assessee adopted a scientific basis for computing expenditure attributable to exempt income and made a suo motu disallowance of Rs. 13,87,952/-, which included direct and indirect expenses. - The AO failed to properly examine or appreciate the assessee's working before invoking Rule 8D. - The FAA erred in assuming the assessee only disallowed direct expenses. - The AO did not record the necessary satisfaction for invoking Rule 8D, as required by section 14A(2). - Reliance was placed on the decision in the assessee's own case for AY 2015-16 (ITA No. 650/CHNY/2026), and the Supreme Court decision in Maxopp Investments Ltd. vs. CIT (2018) 402 ITR 640, and Delhi High Court decision in PCIT vs. Vedanta Ltd. [2019] 102 taxmann.com 95. Revenue's Contentions: - The Ld. DR supported the orders of the AO and the FAA.

Which sections of the Income-tax Act were involved?

Section 14A,Section 10(34),Section 10(35),Section 143(2),Section 250

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI

Before: SHRI GEORGE GEORGE K & SHRI GAGAN GOYAL

Hearing: 05.11.2026Pronounced: 06.11.2026

आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 16.02.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18.

ITA No.2404/CHNY/2026 - 2 - Rane Holdings Ltd 2. The solitary issue that is raised is whether the First Appellate Authority (FAA) is justified in confirming the disallowance of Rs.1,42,75,142/- made by the AO by invoking the provisions of section 14A of the Act.

3.

Brief facts of the case are as follows: The assessee is a company engaged in the business of manufacturing of transport equipment. For the assessment year 2017-18 the assessee filed its return of income on 18.11.2017 declaring a total income of Rs.42,53,09,110/-. The assessment was selected for scrutiny and notice u/s.143(2) of the Act was issued on 28.09.2018. During the course of assessment proceedings, the AO noticed that the assessee had declared exempt income u/s.10(34) and 10(35) of the Act amounting to Rs.16,90,98,027/- and Rs.82,47,467/-, respectively. It was further noticed that the assessee had made a suo motu disallowance of Rs.13,87,952/- u/s.14A of the Act. The AO was of the view that the disallowance made by the assessee was inadequate and, accordingly, issued a show-cause notice proposing to invoke the provisions of Rule 8D of the Income-tax Rules, 1962 (hereinafter called the ‘Rules’). In response to the show-cause notice, the assessee submitted that the investments were mainly in subsidiaries, joint ventures and associate companies and that the

ITA No.2404/CHNY/2026 - 3 - Rane Holdings Ltd major investments were made pursuant to restructuring of group companies. It was further submitted that the dividends received from such investments were directly credited to the bank account and no expenditure was incurred for earning such dividend income. The submissions of the assessee, however, were not accepted by the AO. Accordingly, the AO computed the disallowance u/s.14A r.w. Rule 8D of the Rules at Rs.1,56,63,094/-. After reducing the suo motu disallowance of Rs.13,87,952/- already made by the assessee, the AO made a further disallowance of Rs.1,42,75,142/- u/s.14A of the Act. The relevant findings of the AO read as follows:- “On perusal of the submissions, It is seen from the return of income, the assessee has shown exempt income u/s 10(34) and 10(35) amount of Rs. 16,90,98,027/- and Rs. 82,47,467/-respectively. The assessee has identified the expenses and arrived at an amount of Rs. 13,87,952/- which has been disallowed under section 14A. Hence, the assessee has been show caused as to why the provisions of rule 8D of the Rules should not be invoked. Assessee filed a letter dated 23/12/2019 stating that the investments of the assessee comprises of investments in subsidiaries, joint ventures and associates. Also stated that the major investments held by the assessee is pursuant to restructuring amount their group companies wherein dividend from these investments are received through bank credit directly and no expenses were incurred. The reply has been considered and is not acceptable for the reasons mentioned below:

The Assessee has also claimed various administrative and other expenses in its Profit and Loss Account. Therefore the assessee could not have earned Exempt Income from the said investments without incurring any expenditure. Thus having regard to the accounts of the assessee of the said previous year, I am not agreed with the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income. Therefore the amount of expenditure in

ITA No.2404/CHNY/2026 - 4 - Rane Holdings Ltd relation to such income is determined hereunder, in accordance with the provisions of Rule 8D (2).

As per Rule 8D(2) of the Income Tax Rules 1962, the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts namely:

(i) the amount of expenditure Rs. NIL directly relating to income which does not form part of total income.

(ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall for part of the total income. a. Annual average of Rs.1,38,36,83,502/- monthly average of Non- current investments (1% of Rs.1,38,36,83,502/-) Rs.1,38,36,83,502/- b. Annual average of monthly average of Rs.18,26,25,947/- Mutual funds (1% of Rs.18,26,25,947/-) Rs. 18,26,259/- Disallowance u/s 14A Rs.1,56,63,094/-

As the assessee has already disallowed Rs.13,87,952/- in the computation of total income, the balance amount of Rs.1,42,75,142/- is to be disallowed and brought to tax. Disallowance u/s.14A : Rs.1,42,75,142/-“

ITA No.2404/CHNY/2026 - 5 - Rane Holdings Ltd 4. Aggrieved, assessee filed appeal before the FAA. The FAA, after considering the submissions of the assessee and the assessment order, held that the AO had recorded cogent reasons and had objectively arrived at a satisfaction regarding the inadequacy of the suo-motu disallowance made by the assessee. Accordingly, the FAA held that the conditions for invoking Rule 8D were satisfied and that the application of the said Rule was warranted. The FAA, therefore, confirmed the disallowance made by the AO u/s.14A of the Act.

5.

Aggrieved by the confirmation of disallowance made u/s.14A of the Act, the assessee has filed the present appeal before the Tribunal. The Ld. AR submitted that the assessee had adopted a scientific basis for identifying and computing the direct and indirect expenditure attributable to earning exempt income and had accordingly made a suo motu disallowance of Rs.13,87,952/- u/s.14A of the Act. The detailed working of such disallowance, including the administrative and other expenses attributable to the investments, was also furnished before the AO. However, the AO, without properly examining or appreciating the said working, proceeded to invoke Rule 8D of the Income-tax Rules and made a further disallowance of Rs.1,42,75,142/-. The Ld. AR further

ITA No.2404/CHNY/2026 - 6 - Rane Holdings Ltd submitted that the Ld.CIT(A) had failed to appreciate that the disallowance of Rs.13,87,952/- was not merely towards direct expenses but also included the administrative and other indirect expenses attributable to the investments. The CIT(A)-NFAC erroneously proceeded on the premise that the assessee had disallowed only direct expenses and failed to consider the detailed computation furnished by the assessee. It was further contended that the AO had recorded an incorrect satisfaction that the assessee had not made any disallowance, without considering the suo motu disallowance already made and the detailed basis adopted by the assessee. Therefore, the statutory requirement for invoking Rule 8D was not satisfied. The Ld. AR accordingly submitted that the additional disallowance made by the AO and confirmed by the CIT(A)-NFAC is unsustainable and needs to be deleted.

6.

The Ld.DR supported the orders of the AO and the FAA.

7.

We have heard rival submissions and perused the material on record. The assessee, in its return of income, had made a suo motu disallowance of Rs.13,87,952/- u/s.14A of the Act. The detailed working of the expenditure incurred in relation to the exempt income is placed at pages 2 to 14 of the paper-book filed by the

ITA No.2404/CHNY/2026 - 7 - Rane Holdings Ltd assessee. On perusal of the same, we find that the assessee has furnished a detailed basis for determining the expenditure attributable to earning the exempt income and same reads as follows:- “As the Investments are long-term investments, there are no day-to-day transactions for the same and there is no separate department to oversee the Investment portfolio. The dividend from these Investments are received through bank credit directly and hence no expenses are incurred for earning the dividend Income. However, the company has identified the expenses on a scientific basis by considering the prorated salary of the identified staff based on the estimated man hours spent for the investments and other administrative expenses and arrived at an amount which has been disallowed under section 14A In the computation of total Income. These expenditures are categorized as Salary and administrative Expenses

A. Salary: Prorated salary of the relevant personnel considered for the number of hours spent by them on the days on which there were purchase of shares,

B. Administrative Expense:

Direct Expenses: Telephone and conveyance expenses has been identified and considered

Indirect Expenses: 2% of all the relevant Indirect expenses has been disallowed which includes sitting fee to directors for board meetings, travelling, postage etc.”

8.

We find that the assessee had specifically explained before the lower authorities that the investments were not made out of borrowed funds and that the increase in investments during the year was from internal accruals, which is evident from the increase in reserves and surplus as reflected in Note 4 to the Balance Sheet.

ITA No.2404/CHNY/2026 - 8 - Rane Holdings Ltd It was further explained that the dividend income was directly credited to the bank account and no separate expenditure was incurred for earning such income. The assessee had also explained that the major investments were made pursuant to the restructuring of group companies during the earlier years, including the scheme of arrangement in the previous year 2007-08 and the amalgamation of Rane Investment Limited in the previous year 2009-10. These investments were long-term strategic investments and continued to remain invested for several years. According to the assessee, no specific expenditure was incurred either for making or maintaining such investments or for earning the dividend income therefrom.

9.

In our considered view, once the assessee had made a suo motu disallowance u/s.14A of the Act and furnished a detailed working of the expenditure incurred in relation to the exempt income, the AO was required to examine the same and, if not satisfied, record cogent reasons for rejecting the working furnished by the assessee before invoking Rule 8D of the Rules. The provisions of Rule 8D could be invoked only after the AO, having regard to the accounts of the assessee, recorded his dissatisfaction with the correctness of the claim made by the assessee. However,

ITA No.2404/CHNY/2026 - 9 - Rane Holdings Ltd in the present case, we find that the AO has not recorded any specific satisfaction or assigned any cogent reason for rejecting the detailed working furnished by the assessee. The mere observation that the suo motu disallowance made by the assessee was inadequate would not, by itself, satisfy the statutory requirement contemplated u/s.14A(2) of the Act.

10.

We further note that on identical facts, the Tribunal, in the assessee's own case for the assessment year 2015-16 in ITA No.650/CHNY/2026, had decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as under:- 9. Coming to administrative expenses disallowed under Rule 8D(2)(iii), first of all we noted from the assessment order that the AO has not recorded any subjective satisfaction and the so called satisfaction recorded by the AO is on totally wrong presumption that the assessee has not attributed any expenditure to exempt income, whereas the assessee has disallowed a sum of Rs.11,85,570/- towards exempt income. Once the AO has not recorded satisfaction as envisaged under Rule 8D(2) of the Rules, the issue is in favour of the assessee in view of the decision of Hon’ble Supreme Court in the case of Maxopp Investments Ltd., vs. CIT (2018) 402 ITR 640. The Hon’ble Supreme Court held as under:-

“Having regard to the language of section 14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned the expenditure but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect.”

ITA No.2404/CHNY/2026 - 10 - Rane Holdings Ltd 10. In view of the above decision we are of the view that this issue is squarely covered in favour of the assessee as the AO failed to record satisfaction for making disallowance under Rule 8D(2) of the Rules. Hence, we delete the disallowance and allow this issue of assessee’s appeal.

11.

We also find support from the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Vedanta Ltd., reported in [2019] 102 taxmann.com 95 (Delhi) wherein it was held that Rule 8D cannot be invoked and applied unless the AO records his dissatisfaction regarding the correctness of claim made by the assessee in relation to expenditure incurred to earn exempt income. The relevant finding reads as under:- “8. It is apparent that the Assessing Officer without examining, commenting and rejecting the disallowance made by the respondent- assessee had applied Rule 8D as compulsory and universally applicable rule where the assessee has earned exempt income. However, Rule 8D cannot be invoked and applied unless the Assessing Officer records his dissatisfaction regarding correctness of the claim made by the assessee in relation to expenditure incurred to earn exempt income. This is the mandate and pre-condition imposed by sub-section (2) to Section 14A of the Act. Rule 8D is in the nature of best judgment determination i.e. determination in default and on rejection of the explanation of the assessee in relation to expenditure incurred to earn exempt income. Rule 8D is not applicable by default but only if and when the Assessing Officer records his satisfaction and rejects the explanation of the assessee regarding the disallowance of expenditure. In the present case the assessment order proceeds on a wrong assumption that Rule 8D would applies to all cases and is mandatory. Finding of the Tribunal affirming the order of the Commissioner of Income Tax (Appeals) is in accordance with the law.” 12. In view of the above facts and circumstances, we are of the considered opinion that the AO has failed to record the requisite

ITA No.2404/CHNY/2026 - 11 - Rane Holdings Ltd satisfaction before invoking Rule 8D of the Rules. Therefore, the consequential disallowance made u/s.14A of the Act cannot be sustained. Accordingly, we set aside the order of the FAA on this issue and direct the AO to delete the disallowance of Rs.1,42,75,142/- made u/s.14A of the Act. Thus, the ground raised by the assessee is allowed.

12.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 6th November,2026 at Chennai.

Sd/- Sd/- (जॉज� जॉज� के) (गगन गोयल) (GAGAN GOYAL) (GEORGE GEORGE K) लेखा सद�य/ACCOUNTANT MEMBER उपा�य� /VICE PRESIDENT चे�नई/Chennai, �दनांक/Dated, the 6th November, 2026 RSR, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त /CIT, Chennai 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF. By Order Digitally signed by REKHA REKHA SENTHIL RAJ SENTHIL RAJ Date: 2026.11.10 13:11:11 +05'30'

More judgments on Section 14A

All 15,875 judgments and leading authorities on Section 14A →

Recent GST High Court judgments

Search GST case law →