MAFATLAL FABRICS P. LTD,MUMBAI vs. ASST CIT 1(2), MUMBAI

The assessee has raised the following grounds:-

Re: Disallowance u/s.14A of the Act: A. In relation to Interest Expenditure: 1.1 The Learned Commissioner of Income Tax (Appeals) erred in confirming the action of the AO as under: (a) Considering interest expenditure incurred during the year in quantifying disallowance. Without prejudice and in alternate (b) Not netting off interest income against interest expenditure for the year relevant in quantifying disallowance of interest. Without prejudice and in alternate (c) Not excluding interest expenditure of Rs.2,98,765/- referable to Trading Activities. B. In relation to disallowance under Sub-Rule 2(iii): Disallowing Rs.2,84,370/- quantified at 0.5% of average value of investments.

The brief facts of the case are that the assessee filed its return of income on 26.09.2009 declaring total income to the tune of Rs.1,19,81,519/-. The case was selected for scrutiny through CASS. Notices u/s.143(2) and 142(1) of the Income Tax Act, 1961 ( in short “the Act”) were issued and duly served upon the assessee. The return was processed u/s.143(1) of the Act on 22.03.2011. Notice u/s.143(2) of the Act was issued on 28.08.2010 and duly served upon the assessee. Further, notice u/s.142(1) of the Act dated 05.07.2011 alongwith questionnaire was issued and served upon the assessee on 11.07.2011. The assessee was engaged in the business of trading and exports of fabrics. Goods were sold under the brand name of ‘Mafatlal Fabrics’. The goods were purchased either order specific or customer based as per their experience. Generally goods purchased for the corporate customer and institutional customers were made order specific. During the year under consideration, the assessee company declares turnover amounting to Rs.98,32,81,405/-. Under the year of assessment the assessee earned the dividend income to the tune of Rs.22,55,809/- which was claimed u/s.10(34) of the Act. The assessee disallowed a sum of Rs.4,04,913/- u/s.14A of the Act. Since the assessee did not furnish the proper working, therefore, the notice was given and the disallowance was worked out to the tune of Rs.6,19,047/-. Since the assessee was not satisfied, therefore, filed an appeal before the CIT(A) who confirmed the order of the Assessing Officer, therefore assessee has filed the present appeal before us.

Under this issue the assessee has challenged the expenditure assessed to earn the exempt income u/s.14A r.w. Rule 8D of the Act to the tune of Rs.6,19,047/-. The learned representative of the assessee has argued that the appellant was having 12.5 crore interest free fund whereas the investment was only to the tune of Rs.92,93,700/- which was less than the available non interest free funds. Therefore, in the said circumstances no disallowance is required u/s.14A r.w.Rule 8D of the Act in view of the law settled in Hon’ble Bombay High Court in case titled as HDFC Bank Vs. DCIT 366 ITR 505 (Bombay) and in case titled as CIT Vs. Reliance Utilities 313 ITR 340. However, on the other hand the learned departmental representative has strongly relied upon the order passed by the CIT(A) in question. By giving the careful thoughts to the arguments advanced by Ld representative of the parties and by going through the relevant record carefully specifically balance sheet filed by the assessee lies at page 12 to 22 of the paper book, it came to the notice that the assessee was having paid up capital, free reserve and surplus to the tune of Rs.11.73 crores and was having interest free unsecured loan to the tune of Rs.0.82 crores, total to the tune of Rs.12.55 crores. The investment was only to the tune of Rs.4,83,05,168/-. On appraisal of the above mentioned law wherein it is specifically held that where the interest free funds were available more than the investment then presumption would arrive that the investment was made out of interest free funds generated or available with the assessee. Accordingly, if own fund is sufficient to meet out the investment then in the said circumstances no disallowance of interest could be made in view of the provision u/s.14A of the Act. The assessee did not provide detail of the expenditure incurred to earn the exempt income. In view of the said