RANE HOLDINGS LTD,CHENNAI vs. DCIT CORPORATE CIRCLE-5(1), CHENNAI

The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of the AO in disallowing expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D(2)(ii) & (iii) of the Income Tax Rules, 1962 (hereinafter the ‘Rules’). For this, assessee has raised various grounds, which need not be reproduced.

Brief facts are that the assessee is the holding company of ‘Rane’ group of companies and is engaged in the business of providing services to its group companies in the areas of management, information technology, business development and infrastructure. The AO while framing assessment u/s.143(3) of the Act noticed that the assessee has made investment in equity instruments from where the assessee has earned exempt income in the shape of dividend, etc., and accordingly, he required the assessee to explain as to why disallowance u/s.14A of the Act read with Rule 8D(2)(ii) regarding interest expenses and under Rule 8D(2)(iii) regarding administrative expenses, be not disallowed. The assessee before the AO explained that the interest expenses

3 be not disallowed under Rule 8D(2)(ii) for the reason that the assessee company has sufficient funds as Reserves and Surplus and Share Capital which is more than investment made in equities giving raise to exempt income. The assessee claimed before the AO that it had suo-motu disallowed a sum of Rs.11,85,570/- in regard to earning of exempt income but AO was not convinced and he noted no expenditure has been incurred in relation to income which does not form part of total income. Therefore the AO applied the formula envisaged under Rule 8D(2)(ii) and disallowed interest expenses of Rs.2,92,350/-, as administrative expenses under Rule 8D(2)(iii) at Rs.1,07,70,000/- taking 0.5% of average value of investment. The AO made total addition u/s.14A r.w.Rule 8D(2) at Rs.1,10,62,350/-. Aggrieved the assessee preferred appeal before CIT(A).

The CIT(A) simply confirmed the action of the AO and also directed the AO to verify the claim of assessee as to whether it had already disallowed some amount on this count. He further directed if the assessee has already disallowed some amount then the AO to modify the impugned disallowance. Aggrieved, the assessee came in second appeal before the Tribunal.

On the other hand, the ld. Senior DR argued that the AO has recorded satisfaction and there is no prescribed method or formula or proforma for recording of satisfaction whereas the AO has categorically stated that he is not satisfied. As regards to 7 disallowance of interest expenses under Rule 8D(2)(ii), he could not make any argument, he left the decision on the Bench.

In reply, the ld.counsel for the assessee stated that the AO is not aware about the fact that assessee has suo-motu disallowed expenses of Rs.11,85,570/- qua exempt income, then, how he can be satisfied about incurring of expenditure which are relatable to exempt income.

We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee has earned dividend income and claimed the same as exempt out of investments made in equity instruments. Admitted facts are that the assessee has more interest free funds available with it in the shape of Share Capital and Reserves and Surplus, which are to the tune of Rs.283.06 crores as against the investments of Rs.234 crores. We noted from the assessment order that the AO has recorded the finding that the assessee has not incurred any expenditure in relation to income which does not form part of total income and this finding is totally absurd whereas the assessee has incurred expenditure of Rs.11,85,570/-. As regards interest expenses, once the AO is unable to prove the nexus of expenditure

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 9 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.”

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.

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