RUCHI GLOBAL LTD,MUMBAI vs. DCIT CEN CIR 40, MUMBAI

Instant appeal by the assessee is directed against the order dated 22nd August 2013, passed by the learned Commissioner (Appeals)–38, Mumbai, for the assessment year 2010–11.

2 Ruchi Global Limited 3. Brief facts are, the assessee a company filed its return of income on 29th September 2010, declaring total income of ` 2,77,18,720. During the assessment proceedings, the Assessing Officer noticing that the assessee had earned exempt income by way of dividend called upon the assessee to explain why provisions of section 14A r/w rule 8D should not be applied to disallow expenditure incurred for earning the exempt income. In response to the query raised by the Assessing Officer, though, the assessee submitted, it had earned exempt income by way of dividend amounting to ` 6,99,346 from the investment in shares and mutual funds. However, since the entire investment was made out from own surplus funds and not out of borrowed funds no interest expenditure should be disallowed. As far as indirect / administrative expenditure is concerned, assessee submitted that the assessee has already disallowed an amount of ` 9,024, which is reasonable and no further disallowance should be made. The Assessing Officer after considering the submissions of the assessee, however, was not convinced with the same. He, therefore, proceeded to compute disallowance of expenditure u/rule 8D and worked out the total disallowance at ` 17,80,353, comprising of ` 12,50,574 towards interest expenditure and an amount of ` 5,29,779 being 0.5% of the average investment towards administrative expenditure. Being aggrieved of such disallowance, assessee preferred appeal before the 3 Ruchi Global Limited learned Commissioner (Appeals). The learned Commissioner (Appeals) also confirmed the disallowance.

i) CIT v/s Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.); & ii) CIT v/s HDFC Bank Ltd. [2014] 366 ITR 505 (Bom.).

4 Ruchi Global Limited how the expenditure is related to exempt income. He further submitted, investment made in sister concern being a strategic investment no disallowance can be made under section 14A.

5 Ruchi Global Limited free surplus funds. In the present case, the Assessing Officer has not established a direct nexus between the borrowal made by the assessee and the investment in shares. Unless, a direct one to one relationship is established between the borrowed funds and the investment made in exempt income yielding assets no disallowance under section 14A can be made. As this aspect has not been examined by the Departmental Authorities, we are inclined to restore the issue back to the file of the Assessing Officer for necessary verification. If on verification, it is found that the assessee has sufficient interest free surplus fund available with it during the relevant previous year, which can take care of the investment in shares, no disallowance of the interest expenditure under section 14A r/w rule 8D can be made in terms of the ratio laid down by the Hon'ble Jurisdictional High Court in the case referred to above. As far as the disallowance of indirect / administrative expenditure under rule 8D(2)(iii) is concerned, it is noticed, the assessee itself has disallowed the amount of ` 9,024 under section 14A. However, the basis for such disallowance has not been provided in the course of hearing before us. It has been submitted by the learned Authorised Representative that the assessee has not incurred any administrative or indirect expenditure in relation to exempt income, hence, no disallowance should be made. However, we are unable to accept the contention of the assessee on mere face value. The assessee through supporting evidence has to establish that 6 Ruchi Global Limited it has not made any administrative expenditure for earning exempt income. More so, when the assessee itself has made disallowance under section 14A. As held by the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT, [2010], 328 ITR 081 (Bom.). After coming into effect of rule 8D from the assessment year 2008–09, disallowance under section 14A has to be made in terms of rule 8D. A reference to section14A(3) also makes it clear that even in a case where assessee claims that no expenditure has been incurred by him in relation to exempt income, disallowance in terms of rule 8D(2)(iii) has to be made, of–course, only after the Assessing Officer records his satisfaction that the disallowance made by the assessee is not correct with reference to the books of account maintained by the assessee. Since these factual verifications are very much essential before making disallowance under rule 8D(2)(iii), we restore the matter back to the file of the Assessing Officer to decide afresh after due opportunity of being heard to the assessee.