M/S ALPANA COTTAGE INDUSTRIES,NEW DELHI vs. ITO, NEW DELHI

The only issue raised in this appeal is against the confirmation of disallowance of Rs.5,14,907/- u/s 14A of the Income-tax Act, 1961 (hereinafter also called `the Act’).

Briefly stated the facts of the case are that the assessee earned exempt dividend income of Rs.5.66 lakh. No disallowance was made u/s 14A of the Act. The Assessing Officer called upon the assessee to furnish details about investment and mutual funds yielding exempt income and the proposed disallowance on account of interest amounting 2 Alpana Cottage Industries to Rs.16,87,195/- u/s 14A of the Act read with Rule 8D(2)(ii). In the absence of any reply submitted on behalf of the assessee, the AO made disallowance amounting to Rs.16.87 lakh. In the appeal before the ld. CIT(A), the assessee contended that no adequate opportunity was granted by the Assessing Officer and further, there were certain calculation mistakes in the assessment order on this issue. After considering the remand report from the AO, the ld. CIT(A) restricted disallowance u/s 14A of the Act to Rs.5,14,907/-, against which the assessee has come up in appeal before the Tribunal.

I have considered the rival submissions and perused the relevant material on record. In so far as the contention of the ld. AR about not recording of any satisfaction by the AO before making disallowance u/s 14A is concerned, it is found that the assessee did not furnish any detail in this regard before the AO as called for. How, without any explanation having been tendered by the assessee, the AO could have concluded that the assessee’s version of no expenditure against the exempt income was wrong and he was satisfied with it.

It is observed that the AO made disallowance only on account of expenditure by way of interest under Rule 8D(2)(ii) to the tune of Rs.16.87 lakh, which got restricted in the first appeal to Rs.5,14,907/-. There is no disallowance u/s 14A of the Act on the other clauses of Rule 8D(2). Referring to page 27 of the paper book, being, the assessee’s 3 Alpana Cottage Industries balance sheet, the ld. AR contended that share capital of the firm as on 31.03.2011 stood at Rs.1.26 crore as against the investment in mutual funds fetching exempt income only to the tune of Rs.91.61 lakh. On this score, it was argued that the capital of the partners was utilized for making investments in the mutual funds and hence no disallowance should be made.

I am not convinced with the contention advanced on behalf of the assessee. It can be seen from the Partners’ capital accounts that an interest of Rs.11,23,897/- was paid to them on the respective capital balances. As such, it cannot be contended that the share capital of Rs.1.26 crore was interest free funds available at the disposal of the assessee, out of which investments were made in mutual funds amounting to Rs.91.61 lakh. The ld. AR contended that there were non- interest bearing Unsecured loans amounting to Rs.41.34 lakh and hence disallowance should be restricted accordingly. I am equally not impressed with this contention as well, for the reason that the investment in the mutual funds has not been shown to have been made out of these unsecured loans and there can’t be any such presumption. In view of the foregoing discussion, I am satisfied that the ld. CIT(A) was fully justified in restricting the disallowance to this extent, which does not require any further interference.