ORIENTAL AROMATICS LIMITED MUMBAI ,MUMBAI vs. DCIT-CC-1(2)(2), MUMBAI , MUMBAI

O R D E R

PER PAVAN KUMAR GADALE, JM:

Disallowance u/s. 14A r.w. Rule 8D of Rs. 23,55,195/-

1. 1. The learned Commissioner of Income Tax (Appeals) -2, Mumbai ["CIT(A)"] erred in fact and in law in confirming the action of the learned Deputy Commissioner of Income Tax- Circle 1(2)(2), Mumbai ("the AO") in computing the disallowance u/s. 14A of the Income Tax Act, 1961 ("the Act") read with rule 8D of the Oriental Aromatics Ltd., Mumbai Income Tax Rules, 1962 ("the Rules") and thereby making disallowance amounting to Rs. 23,55,195/-.

2. The learned CJT(A) erred in fact and in law confirming the action of learned AO in invoking provisions of section 14A of the Act read with rule 8D despite the fact that the Appellant was having surplus interest free funds to make investment.

3. The learned CIT(A) erred in fact and in law confirming the action of learned AO in invoking provisions of section 14A of the Act read with rule 8D, without recording any satisfaction as to the correctness of the claim of the Appellant having regard to the accounts of the Appellant.

4. The learned CIT(A) erred in fact and in law confirming the action of the learned AO in making disallowance u/s 14A of the Act on the basis of assumptions and presumptions.

5. Without prejudice to above, the learned CIT(A) erred in fact and in law in confirming the action of the id. AO in considering all investments i.e. including investment yielding taxable income, for the computation of disallowance u/s 14A r.w.r. 8D and thereby making an erroneous computation of the disallowance amounting to Rs. 23,55,195.

6. The learned CIT(A) erred in fact and in law confirming the action of Ld. AO in levying interest u/s. 234B of the Act.

7. The learned AO erred in fact and in law in initiating penalty proceeding u/s 271(1)(c) of the Income Tax Act, 1961.

8. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal

. Oriental Aromatics Ltd., Mumbai

2. The Brief facts of the case are that the assessee company is engaged in the manufacturing and sale of perfumery compound, fragrance and flavors. The assessee filed the return of income on 28.11.2015 for the A.Y 2015-16 with a total income of Rs.8,79,82,770/- and the return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act are issued. In compliance, the Ld. AR of the assessee appeared from time to time and furnished the details and the case was discussed. The A.O on perusal of the Audited financial statements found that the assessee has earned dividend income during the year and has claimed exempted. The assessee was called to submit the details in respect of the expenses related to the dividend income. Whereas, the assessee has filed a letter on 14.11.2017 explaining that the assessee company has not incurred any expenditure on earning exempted dividend income and the investments are made in subsidiary company not with an intention to earn dividend income. Whereas, the A.O find that the explanations filed by the assessee are not satisfactory and dealt on the provisions of Sec. 14A r.w.r 8D and observed that the assessee has received substantial dividend income but has not disallowed any expenses u/s 14A r.w.r 8D which is mandatory. Oriental Aromatics Ltd., Mumbai Therefore, considering the provisions of Sec.14A and Rule 8D and the judicial decisions, the A.O. has calculated the disallowance u/s 14A r.w. 8D(2)(iii) of IT Rules and made disallowance of Rs.23,55,195/- and assessed the total income of Rs.9,03,37,965/- and passed order u/s 143(3) dated 28.12.2017.

3. Aggrieved by the order of the A.O., the assessee has filed an appeal with the CIT(A),whereas the appellate authority considered the grounds of appeal, provisions of law and additional grounds of appeal raised.whereas the contentions of the assessee that it has substantial surplus own funds and therefore no disallowance under Section 14A r.w.r 8D(2)(iii) is applicable. But, the CIT(A) has dismissed the ground of appeal on disallowance u/s 14A and has granted relief in other grounds of appeal and partly allowed the assessee appeal. Aggrieved by the order of the CIT(A),the assessee has filed an appeal before the Hon’ble Tribunal.

4.At the time of hearing, the Ld. AR of the assessee submitted that the assessee has substantial own funds and out of the said funds, the investments are made in subsidiary of the assessee company and the dividend income earned was claimed exempted. Further the borrowed funds are not utilized for the purpose of Oriental Aromatics Ltd., Mumbai investments. Since the own/surplus funds are more than the investments in subsidiary company, therefore the disallowance u/s 14A r.w.Rule 8D2(iii) is not warranted and prayed for allowing the assessee appeal.

6.We heard the rival submissions and perused the material available on record. The sole crux of the disputed issue being disallowance u/s 14A r.w.r 8D2(iii) as the assessee company has received substantial dividend income but no disallowance of expenses incurred for earning the exempted income. The Ld.AR submitted that the investments made in subsidiary company are out of surplus/own funds and hence disallowance is not required. The Ld.AR has been emphasizing on the availability of the own funds but on perusal of the assessment order, we could not find any observations of the A.O. that the assessee company has filed details in respect of the own funds except mentioning that the investments made in subsidiary company are made not with an intention to earn dividend income but business strategy. The Ld.DR has rightly pointed out that there are Oriental Aromatics Ltd., Mumbai no specific observations of the A.O on the disputed issue. We considering the overall facts and circumstances and the information dealt are of the opinion that the A.O. has to verify and examine whether assessee company has surplus funds and the investments are made out of the own funds. Accordingly, we provide one more opportunity to the assessee to substantiate its case before the assessing authority and restore the disputed issue for limited purpose to the file of the Assessing officer to examine the facts. The assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the details and we allow the grounds of appeal of the assessee for statistical purposes.