IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I , MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NOS. 1791 & 1792/MUM/2015 : (A.Ys : 2010-11 & 2011-12) M/s. K. Uttamlal (Exports ) Pvt. Ltd. Vs. DCIT, Circle-6(2), C/o. Karnavat & Co. Mumbai (Respondent) 2A Kitab Mahal, 1st floor, 192, Dr. D.N. Road, Mumbai - 1 PAN : AAACK9486B (Appellant) Assessee by : Shri Sunil Hiravat Revenue by : Shri Deepak Ripote Date of Hearing : 21/07/2016 Date of Pronouncement : 30/09/2016 ORDER PER G.S. PANNU, AM : captioned appeals have been preferred by assessee for Assessment Years 2010-11 & 2011-12 and since they involve certain common issues, they have been clubbed and heard together and consolidated order is being passed for sake of convenience and brevity. Appeal for Assessment Year 2010-11 is taken as lead case to appreciate controversy. ITA NO. 1791/Mum/2015 (Assessment Year 2010-11) 2. This appeal by assessee is directed against order of CIT(A)-12, Mumbai dated 29.01.2015, pertaining to Assessment 2 M/s. K. Uttamlal (Exports) Pvt. Ltd. ITA Nos. 1791 & 1972/Mum/2015 Year 2010-11, which in turn has arisen from order dated 18.02.2013 passed by Assessing Officer, Mumbai under section 143(3) of Income Tax Act, 1961 (in short Act ). 3. In this appeal, assessee has raised following Grounds of appeal : 1. On facts and in law, learned CIT(A) had erred in confirming disallowance of Rs.5,35,143/- out of interest u/s 14A. Under facts and circumstances of matter, he ought to have directed Assessing Officer to delete said sum of Rs.5,35,143/-. 2. On facts and in law, learned CIT(A) had erred in confirming disallowance of Rs.5,83,063/- out of expenses instead of Rs.12,000/- as claimed by appellant. Under facts and circumstances of matter, he ought to have directed Assessing Officer to restrict disallowance to Rs.12,000/- out of expenses. 3. On facts and in law, learned CIT(A) had erred in confirming addition of Rs.29,353/- being purchases from M/s. Mahalaxmi Corporation by treating same as bogus purchases as claimed by Assessing Officer. Under facts and circumstances of matter, he ought not to have confirmed said addition of Rs.29,353/-. 4. appellant before us is company incorporated under provisions of Companies Act, 1956 and is, inter-alia, engaged in business of export of goods and merchandise as well as trading and investment in shares and securities. In course of assessment proceedings, Assessing Officer noticed that assessee had received dividend income of Rs.2,18,959/-, which was claimed as exempt. Assessing Officer invoked provisions of Sec. 14A of Act and 3 M/s. K. Uttamlal (Exports) Pvt. Ltd. ITA Nos. 1791 & 1972/Mum/2015 disallowed expenditure of Rs.11,19,650/- in relation to exempt income by applying formula contained in Rule 8D(2) of Income Tax Rules, 1962 (in short Rules ). Assessing Officer disallowed Rs.5,35,143/- out of interest expenditure under Rule 8D(2)(ii) of Rules and Rs.5,83,063/- out of overheads in terms of Rule 8D(2)(iii) of Rules. said disallowances have since been affirmed by CIT(A) and accordingly, assessee is in appeal before us on said issues by way of Grounds of appeal no. 1 & 2 stated above. 5. Insofar as disallowance of interest expenditure of Rs.5,35,143/- is concerned, plea of assessee is that exempt income has been earned by way of dividend and that amount invested in investments is out of interest-free funds. learned representative for assessee pointed out that so far as investments are concerned, it is evident from Schedule-V of Balance-sheet that there is no change from that in last year, and further that amount of share capital and Reserves & Surplus are more than adequate to cover value of such investments and, therefore, following ratio of judgment of Hon'ble Bombay High Court in case of Reliance Utilities & Power Ltd., 313 ITR 340, presumption is that such investments are out of interest-free funds. Reliance has also been placed on judgment of Hon'ble Bombay High Court in case of HDFC Bank Ltd., 366 ITR 505 for proposition that in aforesaid situation disallowance u/s 14A of Act is not merited. At time of hearing, learned representative also pointed out that under similar situation, interest disallowed u/s 14A of Act in Assessment Year 2009-10 by Assessing Officer was deleted by 4 M/s. K. Uttamlal (Exports) Pvt. Ltd. ITA Nos. 1791 & 1972/Mum/2015 CIT(A) and Revenue has not preferred any appeal against such order. Therefore, on basis of consistency also, plea of assessee is that interest disallowance deserves to be deleted. 6. ld. DR has not controverted factual matrix brought out by learned representative for assessee, but has merely relied upon action of Assessing Officer. 7. We have carefully considered rival submissions. In Paper Book filed before us, assessee has placed copy of computation of total income as also Annual statement of accounts for previous year relevant to assessment year under consideration. In statement of total income it is revealed that assessee has earned exempt dividend income of Rs.2,18,959/- as well as share of profit from partnership firms of Rs.20,41,220/- which is exempt u/s 10(2A) of Act. In context of reliance placed by assessee on judgment of Hon'ble Bombay High Court in case of HDFC Bank Ltd. (supra), we have perused Annual financial statements. In particular, figures of share capital plus Reserves & Surplus have been examined by us in context of investments made, which has yielded such exempt incomes. It is quite clear that amount of share capital plus Reserves & Surplus is more than adequate to cover such investments. Therefore, in our view, case of assessee is fully covered by ratio of judgment of Hon'ble Bombay High Court in case of HDFC Bank Ltd. (supra) and disallowance of interest u/s 14A of Act is untenable, which is hereby directed to be deleted. Thus, on this aspect, assessee succeeds. 5 M/s. K. Uttamlal (Exports) Pvt. Ltd. ITA Nos. 1791 & 1972/Mum/2015 8. Insofar as disallowance of Rs.5,83,063/- out of overhead expenses is concerned, same has been worked out by Assessing Officer by applying Rule 8D(2)(iii) of Rules. On this aspect, learned representative pointed out that assessee had made suo motu disallowance of Rs.12,000/- based on working placed at pg. 24 of Paper Book. In terms of said statement, assessee has taken into consideration proportion of annual cost to assessee for its staff for work involved relating to exempt incomes. part of administrative expenses has also been attributed to it. Be that as it may, we find that basis of working adopted by assessee has not been adversely commented by Assessing Officer in assessment order before proceeding to compute disallowance by invoking Rule 8D(2)(iii) of Rules. This approach of Assessing Officer is contrary to provisions of Sec. 14A(2) of Act, which requires Assessing Officer to record his satisfaction on incorrectness of claim made by assessee having regard to accounts of assessee, and only thereafter he can resort to compute disallowance by invoking Rule 8D of Rules. Such approach is conspicuous by its absence in present case and, therefore, on this count itself we find no reason to uphold disallowance of Rs.5,83,063/- computed by Assessing Officer. As consequence, we direct Assessing Officer to retain disallowance of Rs.12,000/- computed by assessee and delete balance. Thus, on this aspect also, assessee succeeds. 9. last Ground raised by assessee is with regard to disallowance of Rs.29,353/- made by Assessing Officer out of 6 M/s. K. Uttamlal (Exports) Pvt. Ltd. ITA Nos. 1791 & 1972/Mum/2015 purchases. relevant discussion in assessment order reveals that assessee was found to have effected purchases of Rs.29,353/- from M/s. Mahalaxmi Corporation representing labels for products exported by assessee. Assessing Officer has referred to statement of said supplier made to Sales Tax Department wherein it is admitted that no such transactions were entered by said concern with assessee. As consequence, Assessing Officer held said purchases to be bogus and added sum of Rs.29,353/- to returned income. CIT(A) has also affirmed stand of Assessing Officer, against which assessee is in further appeal before us. 10. Before us, learned representative for assessee pointed out that assessee is exporter of various goods and merchandise which, inter-alia, includes export of Papads. In this context, it was explained that assessee had purchased Papads from M/s. Shree Mahila Gruhudyog and exported same and impugned purchases consisted of labels affixed on such packets of Papads. learned representative pointed out that assessee was having huge turnover of approximately Rs. 67 crores and that impugned purchases of Rs.29,353/- was too meagre amount for it to undertake any fraudulent purchases so as to deflate profits. In any case, it was pointed out that these are minor purchases which have been carried out in course of business and do not call for any disallowance. 7 M/s. K. Uttamlal (Exports) Pvt. Ltd. ITA Nos. 1791 & 1972/Mum/2015 11. On other hand, ld. DR referred to reasoning of Assessing Officer, which we have already adverted to in earlier paras and is not repeated for sake of brevity. 12. We have carefully considered rival submissions. In our considered opinion, Assessing Officer has mechanically made addition without establishing on concrete basis that assessee had effected bogus purchases. In fact, alleged statement of supplier, made to Sales Tax Department, which is referred to by Assessing Officer has not been confronted to assessee at any stage. Furthermore, we find that there is no doubt that assessee had effected purchase of Lijjat Papads for export and impugned purchases were merely labels affixed on packets of Papad so exported. Under entirety of circumstances, in our view, impugned action of Assessing Officer is unsustainable and addition of Rs.29,353/- is directed to be deleted. 13. In result, appeal of assessee is partly allowed. 14. only issue involved in appeal of assessee for Assessment Year 2011-12 relates to bogus purchases of Rs.75,000/-. Since issue as well as facts and circumstances are pari materia to those considered by us in assessees appeal for Assessment Year 2010-11 in earlier paragraphs, our decision in appeal for Assessment Year 2010-11 shall mutatis mutandis apply for Assessment Year 2011-12 also. 8 M/s. K. Uttamlal (Exports) Pvt. Ltd. ITA Nos. 1791 & 1972/Mum/2015 15. Resultantly, appeal of assessee for Assessment Year 2010-11 is partly allowed and for Assessment Year 2011-12 is allowed. Order pronounced in open court on 30th September, 2016. Sd/- Sd/- (AMARJIT SINGH) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Date : 30th September, 2016 *SSL* Copy to : 1) Appellant 2) Respondent 3) CIT(A) concerned 4) CIT concerned 5) D.R, I Bench, Mumbai 6) Guard file By Order Dy./Asstt. Registrar I.T.A.T, Mumbai M/s. K. Uttamlal (Exports) Pvt. Ltd. v. DCIT, Circle-6(2), Mumbai