IT APPEAL NO. 3349 (MUM.) OF 2016
[ASSESSMENT YEAR 2010-11]

C.N. PRASAD, JUDICIAL MEMBER 
AND RAMIT KOCHAR, ACCOUNTANT MEMBER

Harsh P. Shah for the Appellant.
B.S. Bist, DR for the Respondent.

ORDER

Ramit Kochar, Accountant Member - This appeal, filed by the assessee, being ITA No. 3349/Mum/2016, is directed against the appellate order dated 29th January, 2016 passed by learned Commissioner of Income Tax (Appeals)- 45, Mumbai (hereinafter called "the CIT(A)"), for assessment year 2010-11, the appellate proceedings before the learned CIT(A) arising from assessment order dated 20th March, 2013 passed by learned Assessing Officer (Hereinafter called " the AO") u/s 143(3) of the Income-tax Act,1961 (Hereinafter called "the Act").

2. The grounds of appeal raised by the assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:—

3. Brief facts of the case are that the assessee is a partnership firm in the business of labour job work of heat treatment on ferrous metal items of various sizes. During the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of 1961 Act, the A.O. observed that there was a difference between the figures of income of labour charges as per figures as appearing in AIR information vide 26AS and income as reported in the assesee's books of accounts, wherein income of Rs. 231,849/- was not offered by the assessee for taxation and hence the income was under-reported by the assessee. The chart showing the afore-stated difference in income is as under:—

Since , the assessee could not reconcile difference amount of Rs. 2,31,849/- in the income between income as reflected in AIR information data base vide 26AS and income as reflected in its books of accounts, the A.O. added the same to the income of the assessee, vide assessment order dated 20-03-2013 passed by the AO u/s 143(3) of 1961 Act.

4. The A.O. further observed that the assessee invested an amount of Rs. 3,53,838/- in shares and earned dividend income of Rs. 15,001/- , which was claimed as exempt. An amount of Rs. 32,09,641/- was also claimed as interest expenses in P&L A/c . The AO observed that as per the computation of income filed for assessment year 2010-11, no disallowance of expenditure incurred in relation to the earning of exempt income as contemplated u/s 14A of 1961 Act was offered for taxation by the assessee. The A.O. accordingly calculated following disallowance of expenditure incurred in relation to the earning of exempt income as contemplated u/s 14A of 1961 Act read with Rule 8D of the Income-tax Rules, 1962:—

Thus, A.O. worked out disallowance of expenditure to the tune of Rs. 24,410/- incurred in relation to earning of income which does not form part of total income as mandated u/s 14A of 1961 Act read with Rule 8D(2)(ii) and 8D(2)(iii) of Income-tax Rules, 1962, vide assessment order dated 20-03-2013 passed by the AO u/s 143(3) of 1961 Act.

5. Aggrieved by the additions made to income by the A.O. vide assessment order dated 20-03-2013 passed by the AO u/s 143(3) of 1961 Act, the assessee carried the matter further by filing first appeal before ld. CIT(A).

6. The assessee submitted before learned CIT(A) that there were large number of transactions exceeding 900 and it was a big exercise to reconcile all transactions as appearing in AIR information with transactions as appearing in books of accounts. The assessee submitted reconciliation charts and finally submitted before learned CIT(A) that balance remaining transactions of Rs. 2,28,424/- could not be reconciled. The assessee relied on the decision of the tribunal in the case of A.F. Ferguson & Co. v. Jt. CIT [IT Appeal No. 5037/Mum/2012 and ITA No. 437/Mum/2013, dated 17-10-2014] as well as decision of the Bangalore Bench of the tribunal in the case of Dy. CIT v. Shree Selva Kumar [IT Appeal No. 868/Bang/2009, dated 22-10-2010] and another decision in the case of Mrs. Arati Raman v. Dy. CIT [IT Appeal No. 245/Bang/12, dated 05-10-2012]. Reliance was also placed by the assessee to the decision in the case of S. Ganesh v. ACIT [IT Appeal No. 527/Mum/2010, dated 08- 12-2010], wherein the assessee contended that additions made to the income of the assessee by A.O. solely based on the AIR information are not sustainable and should be deleted.

The ld. CIT(A) after considering submissions of the assessee observed that the assessee is in the business of labour job work of heat treatment on ferrous metal items of various sizes. The learned CIT(A) observed that the assessee had shown sales figure of Rs. 11,286,518/- while as per AIR information it was Rs.11,514,942/-. The ld. CIT(A) observed that the amount shown by the assessee in its P&L account was less than that received as per AIR information. The ld. CIT(A) held that since the assessee was not able to reconcile the difference between income as shown in AIR data base with income as recorded in books of accounts, addition of difference in receipt between AIR and the P&L A/c amounting to Rs. 2,31,849/- was confirmed by learned CIT(A), vide appellate order dated 29-01-2016 passed by learned CIT(A).

With respect to the disallowance of Rs. 24,410/- made u/s 14A of 1961 Act read with Rule 8D of 1962 Rules, the assessee relied upon decision of Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 and also decision of Mumbai-tribunal in the case of Reliance Industries Ltd. v. Addl. CIT [2012] 28 taxmann.com 189/[2013] 55 SOT 8 (URO), which contentions was rejected by the ld. CIT(A) who confirmed the additions made by the A.O. to the tune of Rs. 24,410/- towards disallowance of expenditure incurred in relation to earning of income which does not form part of total income as contemplated u/s 14A of 1961 Act read with Rule 8D(2)(ii) and 8D(2)(iii) of 1962 Rules, by holding that the assessee must have incurred some expenses to earn exempt income, vide appellate order dated 29-01-2016 passed by learned CIT(A).

7. Aggrieved by the appellate order dated 29-01-2016 passed by ld. CIT(A), the assessee filed second appeal before the tribunal.

8. With respect to the first issue, the ld. Counsel for the assessee submitted that the reconciliation statement reconciling the difference between income as reported in AIR information with income as reported in books of accounts, was duly submitted before the Revenue. The difference of Rs. 2,28,424/- could not be reconciled because of magnitude of transactions. The assessee contended that since it is small difference, additions made should be deleted. The ld. Counsel also relied on decision of the tribunal in the case of A.F. Ferguson & Co. (supra) and contended that additions be deleted. It was submitted that information as appearing in AIR information data base is not sufficient to fasten liability to tax on the assessee. It was further submitted that the AO has not issued any notices u/s 133(6) of 1961 Act to these parties wherein there is difference between income as reported in AIR information data base and income as reported in books of accounts.

9. The ld. D.R. submitted that the assessee has not reconciled the difference in the income reported in AIR information and income reported in the P&L account, which led to the addition to the income to the tune of Rs.2,28,424/- as finally sustained by learned CIT(A). The onus is on the assessee to reconcile the difference between income as reported in AIR data base with income as reflected in books of accounts, which has not been discharged by the assessee in the instant case. The assessee merely relied on the decisions of the tribunal in the case of A F Ferguson & Co. (supra) which is not applicable in the instant case as the income reported in books of accounts of the assessee is lower than the income as reported in AIR information data base which has led to under-assessment of income to tax in the instant case, while in the case law relied upon by the assessee, it was just the reverse as income offered for taxation as reported in books of accounts was much higher than income as appearing in AIR information data base. Further in the case law relied upon by the assessee, the tax-payer in the said case had submitted that full and complete details of parties were not available in AIR data base.

10. We have considered rival contentions and also perused the material available on record including case laws cited by the assessee. We have observed that the assessee is a partnership firm in the business of labour job work of heat treatment on ferrous metal items of various sizes. It was observed by the learned CIT(A) that sales figure shown by the assessee in its books of accounts was Rs. 1,12,86,518/- which was less than the figures of sale of Rs. 1,15,14,942/- reported in AIR information data base. Thus, there was a difference between the income as reported in AIR data base information figure and income as reflected in assessee's books of account, which was less by Rs. 2,28,424/- as reflected in assessee's books of accounts which led to under-reporting of income offered to tax as was contended by authorities below leading to additions being made in the hands of the assessee. We find that the assessee has produced the copies of ledger account as well AIR data base information as reflected in 26AS, wherein there is difference between the income reported between books of accounts and 26AS, to the tune of Rs.2,28,424/- leading to under-reporting in the income offered for taxation. The decision of A F Ferguson & Co. (supra) relied upon by the assessee is distinguishable as the income reported in that case in books of accounts which was offered for taxation was higher than income as reported in AIR information data base, wherein there was no under-reporting to income offered for taxation by the said tax-payer. Further, in the said case, the tax-payer had contended that full and complete details of parties as were appearing in AIR information data base is not available, while in the instant appeal before us, the income reported in books of accounts which was offered for taxation to Revenue was lower than income as is appearing in 26AS. Further, the assessee in the instant appeal is not contending that full and complete details of the parties who are appearing in AIR information reflected in 26AS are not available which could handicap assessee from reconciling the difference. The assessee has also admitted that it dealt with all the parties as are appearing in 26AS. The Revenue has vide its AIR information data base as reflected in 26AS has confronted assessee that his income as is reflected in its books of accounts is under-reported to Revenue and the assessee was asked to reconcile the difference as the income as reported in AIR information vide 26AS is higher than income as reported in books of accounts. Thus, AIR information as reflected in 26AS incriminates assessee which is a credible incriminating information to shift the onus back to the assessee and is now for the assessee to reconcile the difference between the figures as are appearing in its books of accounts and in AIR information reflected in 26AS is on assessee. The assessee has not in the instant case contended that it has no dealings with the parties as are appearing in AIR information data base as reflected in 26AS as the assessee has admitted dealing with all these parties rather only contention is the magnitude of transactions exceeding 900 in numbers handicapping assessee to reconcile the difference which is not a satisfactory explanation offered by the assessee to discharge its onus. Until the assessee comes out with satisfactory and plausible explanation, this onus will not stood discharged. The assessee in the instant case has stated that there are large number of transactions exceeding 900 and hence it is not possible to reconcile the difference of Rs. 2,28,424/- is not a satisfactory explanation to discharge onus cast on the assessee. In our considered view keeping in view facts and circumstances of the case as well magnitude of transactions, we are of the considered view that one more opportunity need to be granted to the assessee to reconcile the difference in the income as reflected in AIR information data base vide 26AS and income as reflected in books of accounts wherein the assessee can also resort to calling account statements from the said parties wherein the amounts were not reconciled, to reconcile the difference wherever the said difference exceeded Rs.10,000/-. We are inclined to accept difference of Rs. 10,000/- and less between the income as reported in books of accounts and income as reported in form no 26AS keeping in view smallness of difference and difficulties faced in reconciling the same. Thus, this issue needs to be set aside and restored back to the file of the A.O. for de-novo determination of the issue on merits. The assessee is directed to produce all details and cogent evidences relevant to the matter before the A.O. in its defense. The AO shall grant opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. We order accordingly.

11. With respect to the second issue, the ld. Counsel submitted that the grounds raised by the assessee is restricted to disallowance of expenditure towards interest of Rs. 22,687/- incurred in relation to earning of exempt income as was disallowed by the AO u/s 14A of 1961 Act read with Rule 8D(2)(ii) of 1962 Rules, which disallowance was confirmed by ld. CIT(A). It was submitted that the investment in shares was made by the assessee out of its own funds which were interest-free funds available to the assessee. The ld. Counsel invited our attention to the assessment order dated 20-03-2013 passed by the AO u/s 143(3) of 1961 Act, page no. 2, wherein the A.O. has reflected the interest free capital of the assessee of Rs. 32,68,881/-. It was submitted that investments in shares held by the assessee are only to the tune of Rs. 3,53,838/- as at year end, while average investment held by the assessee during the previous year relevant to impugned assessment year was only Rs. 3,44,588/- in shares which were capable of yielding tax-free income. It was submitted that disallowance of Rs. 22,687/- u/r 8D(2)(ii) of 1962 Rules r.w.s. 14A of 1961 Act is not sustainable in law as assessee's own fund of Rs. 32,68,881/- are much higher than investment of Rs. 3,53,838/- held by the assessee in shares which are capable of yielding exempt income and presumption shall apply that the assessee has invested his own funds in making investments in shares from where the exempt income was earned. The assessee relied on decision's of Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) and CIT v. HDFC Bank Ltd. [2014] 366 ITR 505/49 taxmann.com 335/226 Taxman 132 (Mag.) to contend that no disallowance of interest expenses of Rs. 22,687/- u/r 8D(2)(ii) of 1962 Rules r.w.s 14A of 1961 could be sustained.

12. The ld. D.R. relied on the order of the authorities below.

13. We have considered rival contentions and also perused the material available on record including case laws cited before us. We have observed that the assessee is a partnership firm in the business of labour job work of heat treatment on ferrous metal items of various sizes. The assessee has made investment in shares to the tune of of Rs. 3,53,838/- as at year end which were capable of yielding exempt income and earned dividend income of Rs. 15,001/- which was claimed as exempt from tax. The assessee's own capital which are interest free funds available with the assessee are undisputedly to the tune of Rs. 3,268,881/-, which are reflected in the assessment order dated 20-03-2013 /page 2 passed by the AO u/s 143(3) of 1961 Act. The revenue could not controvert the said financial details of assessee's own capital which was interest-free and investment in shares which are capable of yielding exempt income. The A.O. disallowed an amount of Rs. 22,687/- towards interest expenses for earning dividend income of Rs.15,001/- claimed as an exempt from tax by invoking Section 14A of 1961 Act r.w.r. 8D(2)(ii) of 1962 Rules. The figure of investments in shares which are capable of yielding exempt income was undisputedly adopted by the AO as Rs. 3,35,337 as at beginning of year and Rs. 3,53,838/- as at year end while computing disallowance u/r 8D(2)(ii) of 1962 Rules r.w.s. 14A of 1961 Act. There is no averment/finding on record brought by authorities below that interest bearing funds were specifically invested in assets being shares capable of yielding exempt income and in the absence thereof, the presumption shall apply that the assessee has used its own interest free capital which undisputedly was of Rs. 32,68,881/- and the same was utilized for making investments of Rs. 3,53,838/- in shares which were capable of yielding exempt income. The assessee had rightly relied on the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) and in the case of HDFC Bank Ltd. (supra). In our considered view, the additions to the tune of Rs. 22,687/- made by the AO w.r.t. interest expenses incurred in relation to earning of exempt income u/s 14A of 1961 Act r.w.r. 8D(2)(ii) of 1962 Rules cannot be sustained in view of presumption as contemplated under the aforesaid judgments of jurisdictional High Court which is binding on us and hence addition of Rs.22,687/- made by invoking Section 14A of 1961 Act r.w.r. 8D(2)(ii) of 1962 Rule is hereby ordered to be deleted. We order accordingly.

14. In the result, appeal filed by the assessee in ITA No. 3349/Mum/2016 for assessment year 2010-11 is allowed in the manner as indicated above.