M/S KHODAY INDIA LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1), BANGALORE

The captioned appeals have been filed by the assessee in respect of assessment years 2013-14 in question against the respective orders passed by the CIT(A)-4, Bengaluru arising from the order passed by the AO u/s 143(3) and 154 of the IT Act, 1961 (‘The Act’) both dated 30-08-2017.

The solitary issue involved in both the appeals relates to disallowance made u/s 14A of the Act. & 2489(B)/2017 2 3. Briefly stated, the assessee filed return of income for the assessment year 2013-14 in question which was subjected to scrutiny assessment and the assessment order was framed u/s 143(3) of the Act by an order dated 20-01-2016. While framing the assessment u/s 143(3), the AO carried out a disallowance of Rs.49,50,262/- u/s 14A of the Act. The assessee preferred an appeal against the aforesaid disallowance before the CIT(A). During the pendency of appeal, the AO passed another order u/s 154 of the Act on 28-06-2017 whereby the disallowance u/s 14A of the Act was revised and enhanced from Rs.49,50,262/- to Rs.2,17,23,007/-. The CIT(A) upheld the enhanced disallowance of Rs.2,17,23,007/-in the first appeal. In this backdrop, the captioned appeals are presented before the Tribunal ie. one against the original disallowance and the other against the revised/ enhanced disallowance.

We have heard rival submissions on the issue. As pointed out on behalf of the assessee, the assessee has claimed exempt income during the year to the extent of Rs.28,000/- As against the aforesaid exempt income, assessee has suo motu disallowed amount of Rs. 13,527/- under sec.14A of the Act. The disallowance under S. 14A cannot exceed the exempt income. Therefore, no disallowance is permissible in excess of Rs.28,000/- in view of the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Corrtech Energy P. Ltd. 372 ITR 97 (Guj.). In another judgment in the case of CIT vs. Vision Finstock Ltd. Tax Appeal No. 486 of 2017 dated 31.07.2017 the Hon’ble Gujarat High Court has once again expressed the similar view and held that disallowance of expenditure in terms of Section 14A r.w. Rule 8D cannot exceed the exempt income itself. It is noticed that SLP(Civil) [Diary No. 13152/2018] filed by the Revenue against the judgment of the Hon’ble Gujarat High Court in Vision Finstock Ltd. (supra) has been dismissed on merits by the Hon’ble Supreme Court vide order dated 07.05.2018. The reference is also made to the decision of Hon’ble Supreme Court of India in CIT vs. Chettinad Logistics (P.) Ltd. & 2489(B)/2017 3 (2018) 95 taxmann.com 250 (SC). Thus, in the light of judicial precedents noted above, no additional disallowance is called for under sec.14A of the Act in excess of exempt income. The disallowance is thus required to be restricted to the extent of exempt income.

In the result, both the appeals of the assessee are partly allowed.