M/S INDUS-LEAGUE CLOTHING LIMITED,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1)(1), BANGALORE

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 :

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 :

Other grounds raised