DCIT CIR 6(3)(1), MUMBAI vs. INDIA FASHIONS LTD, MUMBAI

M/s. India Fashions Ltd. Assessment Year :2011-12 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 1 crore made by the AO on account disclosure during the survey proceedings as the assessee had offered additional income of Rs. 1 crore from merchant trading from China to USA and income from wind turbine at Tamilnadu in his statement recorded on oath u/s. 133A and retraction of the assessee from the sworn in statement was an afterthought.' 2. On the facts and the circumstances of the case, and in law, the Ld. CIT(A) erred in restricting the disallowance made u/s. 14A at Rs. 5,64,729/- comprising of interest expenses of Rs.4,69,401/- under Rule 8D(2)(ii) and administrative expenses of Rs. 95,328/- under Rule 8D(2)(iii), without appreciating the fact that Rule 8D has a prescribed a formula for calculation of disallowance u/s 14A and the same is binding in nature and the investments were made from the common pool of fund and the assessee had not provided any evidence to prove that the interest free advances were not made out of borrowed funds." 2.1 The assessment for impugned AY was framed by Ld. Deputy Commissioner of Income Tax, Circle 6(3)(1), Mumbai [AO] u/s 143(3) read with Section 144C on 29/03/2015 wherein the income of the assessee was determined at Rs.5.64 Lacs under normal provisions as against loss of Rs.371.81 Lacs e-filed by the assessee on 29/11/2011. The book profits u/s115JB were computed at Rs.122.23 Lacs as against Rs.116.58 Lacs computed by the assessee. The assessee being resident corporate entity was stated to be engaged as manufacturer, trader and exporters of readymade garments during impugned AY. 2.2 During assessment proceedings, it transpired that the assessee earned exempt dividend income of Rs.3,225/- which called for disallowance u/s 14A. Applying the provisions of Rule 8D, Ld. AO worked out aggregate disallowance of Rs.5.64 Lacs against the same which comprised-off of interest disallowance u/r 8D(2)(ii) for Rs.4.69 Lacs and expense disallowance u/r 8D(2)(iii) for Rs.0.95 Lacs. 2.3 The second addition of Rs.1 Crore stem from the fact that the assessee was subjected to survey action u/s 133A on 26/11/2010 wherein in response to question no.4 put to the director of the assessee, M/s. India Fashions Ltd. Assessment Year :2011-12 the assessee offered additional income of Rs.1 Crore to account for income from merchant trading from China to USA and income from wind turbine project at Tamil Nadu. On the basis of the same, Ld. AO proceeded to add the same to the income of the assessee since the same was not reflected separately in the return of income filed by the assessee. 2.4 The assessee defended its stand vide rely dated 18/03/2015 by submitting that the same was purely adhoc disclosure and the income & expenses relating to merchant trading activities as well as turbine project was properly recorded in the books of accounts and therefore, further addition / disclosure, on that account, was not required. The attention was drawn to the fact that the disclosure made during survey proceedings was subsequently retracted by the director on 30/01/2011. However, treating the explanation merely an afterthought story created by the assessee, the amount of Rs.1 Crore was added to the income of the assessee.

Aggrieved, the assessee agitated the same with success before ld. first appellate authority vide impugned order dated 08/09/2017 wherein interest disallowance u/r 8D(2)(ii) was deleted by observing that own funds were far in excess of the investments made by the assessee. To arrive the said conclusion, strength was drawn from the judgments of Hon’ble Bombay High Court rendered in CIT Vs Reliance Utilities & Power Ltd. [313 ITR 340] & also in CIT Vs. HDFC Bank Ltd. [ITA No. 330 of 2012. The expense disallowance u/r 8D(2)(iii) was restricted to Rs.3,325, being exempt income earned by the assessee. Aggrieved by M/s. India Fashions Ltd. Assessment Year :2011-12 the aforesaid relief provided by first appellate authority, the revenue is in further appeal before us.

Upon hearing rival submissions, the factual matrix that assessee’s own funds were far in excess of investments made by the assessee remain unrebutted. Nothing has been placed on record to controvert the findings in impugned order. So far as expense disallowance is concerned, we find that the disallowance has been restricted to the extent of exempt income earned by the assessee which is in line with the settled legal positions. Therefore, finding no infirmity in the impugned order, we dismiss this ground of revenue’s appeal. 5.1 So far as the addition of Rs.1 Crore is concerned, the assessee agitated the same before first appellate authority vide replies dated 22/08/2016 & 31/07/2017 wherein the assessee, inter-alia, contended that the sale and purchase transactions from merchant trading activity were duly reflected in the books of accounts and the concerned receipts as well as payments were through banking channels. Regarding wind-turbine project, it was submitted that the assessee generated and sold energy aggregating to Rs.11.98 Lacs to Tamil Nadu State Electricity Board which was also reflected in the books of accounts under the head Sale of energy and therefore, no further addition, in that respect was warranted. In support the above submissions, attention was drawn to the fact that the complete details of income from merchant trading as well as income from wind turbine project was filed along with documentary evidences as well as financial statements during assessment proceedings before Ld. AO.