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Income Tax Appellate Tribunal, BANGALORE BENCHES “ C ” BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARIShri L. Bharath, C.A. Shri Pradeep Kumar, CIT (D.R)
O R D E R PER SHRI CHANDRA POOJARI, A.M. : This appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-3, Bangalore dt.24.11.2017 for the Assessment Year 2013-14.
The assessee has raised the following grounds of appeal :
The facts of the case are that the assessee company is engaged in manufacturing and trading of apparels and garments and filed Return of Income on 30.09.2013 declaring an income of Rs.5,01,22,730 and the case was selected for scrutiny and notice issued under Section 143(2) of the Act. During the year, the assessee had received dividend income from investments in shares amounting to Rs.32 lakhs. The assessee had free reserves and investments ofRs.76.62 Crores and Rs.76.63 Crores respectively during the F.Y. 2012-13. The Assessing Officer disallowed Rs.6,09,16,460 without considering the computation of assessee and not given an opportunity of hearing to the assessee. The assessee had considered interest expenditure of Rs.2,01,69,247 (on unsecured loans) which were not directly attributable to the exempt income. The assessee borrowed a sum of Rs.12,56,28,527 in relation to funds for specific purposes and could not be used for the purpose of investments. These loans were taken by the assessee towards working capital and cash credit which were utilized for day to day activities and accordingly used for earning taxable income. Aggrieved by the order of Assessing Officer, the assessee filed an appeal before the CIT (Appeals). The CIT (Appeals) partly allowed the assessee's appeal giving relief on account of pick up charges, credit card charges and forward premium for foreign currency. Aggrieved by the order of CIT (Appeals), the assessee is in appeal before the Tribunal.
Before us, the learned Authorised Representative pressed only Ground No.3(c) and submitted that the quantum of disallowance under Section 14A of the Act should not exceed the amount of exempted income. In support of this proposition, he relied on the judgement of Hon'ble Delhi High Court in the case of Joint Investment Pvt. Ltd. Vs. CIT 372 ITR 694 (Delhi) and in paras 7 to 9 held as under :
“ 7. During the course of hearing, counsel for the petitioner had relied upon a decision of this Court in Commissioner of Income Tax VI v. Taikisha Engineering India Ltd., (ITA 115/2014, decided on 25.11.2014). The court had, in that judgment, highlighted the necessity in view of the peculiar wording of Section 14A (2) that computation or disallowance of the assessee, or claim that no expenditure was incurred for earning exempt income should be examined with reference to the accounts and only if the assessee’s explanation is unsatisfactory, can the AO proceed further.
The Court in Taikisha Engineering (supra) pertinently observed: - “Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made.
We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules.”
In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” 4.1 Further, Mumbai Bench of ITAT in similar situation held in the case of Future Corporate Resources Ltd. in Dt.26.07.2017 at Para 8 as follows :
8. Coming to the second argument of the assessee, the assessee argued that it had earned meager dividend income of Rs.24,138 as against which, the AO 10 ITA 4658/Mum/2015 disallowed a sum of Rs.3,36,28,000 which is more than the exempt income. The assessee further argued that disallowance u/s 14A cannot exceed amount of exempt income. The assessee relied upon case laws in support of its arguments. We find that the Hon’ble Delhi High Court in the case of Joint Investments P Ltd vs CIT (2015) 372 ITR 694 (Del( held that the window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. We further notice that the Hon’ble Delhi High Court in the case of CIT vs Holcim India Pvt Ltd (2014) 272 CTR 282 (Del) has held that there can be no disallowance u/s 14A in the absence of exempt income. The rationale behind these judgments is that the amount of disallowance cannot exceed exempt income. In this case, on perusal of the facts, we find that the assessee has earned exempt income of Rs.24,138, whereas the AO disallowed an amount of Rs Rs.3,36,28,000. Therefore, considering the facts and circumstances of the case and also following the ratios of the case laws discussed above, we are of the view that disallowance u/s 14A cannot exceed the exempt income. Hence, we direct the AO to restrict disallowance u/s 14A to the extent of exempt income earned by the assessee.
In view of the above decisions, we are of the opinion that the disallowance under Section 14A r.w. Rule 8D(2)(ii) of IT Rules should be restricted to exempted income earned by the assessee not beyond that. Accordingly, the Assessing Officer is directed to recomputed the disallowance under Section 14A r.w. Rule 8D(2)(ii) of the IT Rules.
Other grounds raised
by the assessee are dismissed as not pressed.
6. In the result, appeal of the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page.