LIFESTYLE INTERNATIONAL PRIVATE LIMITED,BENGALURU V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1), BENGALURU

ITA 1932/BANG/2024

AI Insights

The case involves M/s. Lifestyle International Pvt. Ltd., which appealed against the assessment order passed by the DCIT, Circle 6(1)(1), Bengaluru. The primary contention was regarding the computation of total income and disallowances made under section 14A of the Income Tax Act. The Tribunal examined various grounds including the incorrect computation of total income, disallowance of capital expenditure, and incorrect levy of interest under sections 234A and 234B. The Tribunal found discrepancies in the computation of total income and the application of disallowances under section 14A, leading to a partial allowance of the appeal.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 847201 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2026
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Bangalore
• Assessment Year: 2020-2021
• Appeal Filed On: 04-10-2024
• Laws Referred To: Income Tax Act, Income Tax Rules 1962
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: T. SURYANARAYAN; SENIOR
• Keywords: Capital expenditure; Earning of tax free income; Rule 8D
• Section: 234B; 37; 14A; 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No.1932/Bang/2024 Assessment Year: 2020-21 M/s. Lifestyle International Pvt. Ltd., 77 Town Centre, Building No.3 West Wing, Off HAL Airport Main Road, Off HAL Airport Road, Yamlur P.O, Bangalore – 566 037. PAN: AAACL 2937 J Vs. DCIT, Circle – 4(1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri. T. Suryanarayan, Senior Advocate and Smt. Tanmayee Rajkumar, Advocate Revenue by : Dr. Divya K. J, CIT(DR)(ITAT), Bangalore. Date of hearing : 22.01.2026 Date of Pronouncement : 26.03.2026 O R D E R Per Prashant Maharishi, Vice President: 1. Captioned appeal is filed by M/s. Lifestyle International Pvt. Ltd., [ Assessee / Appellant] against the assessment order passed by the DCIT, Circle – 4(1)(1), Bengaluru [the Learned AO], dated 07.08.2024, wherein the total income of the assessee was assessed at Rs.789,39,22,299/-. 2. The assessee has raised the following grounds of appeal: Printed from counselvise.com ITA No.1932/Bang/2024 Page 2 of 11 Printed from counselvise.com ITA No.1932/Bang/2024 Page 3 of 11 3. Briefly stated the facts of the case shows that assessee is a company who filed return of income on 13.02.2021 at a total income of Rs.617,17,17,240/-. The return was processed under section 143(1) of the Act, on 18.03.2022, at a total income of Rs.638,90,920/-. The return of income was picked up for scrutiny by issuing notice under section 143(2) of the Act on 29.06.2021. 4. During the relevant Assessment Year, the assessee and M/s. Splash Fashions India Pvt. Ltd. entered into a demerger agreement through the National Company Law Tribunal, which was subsequently reviewed under Chapter X-A by the GAAR panel. The GAAR panel issued its directions on 29.07.2024, resulting in an addition of Rs.147,13,11,368/-. This particular issue is not contested before us. 5. The learned AR further found that assessee has earned a dividend of Rs.3,30,54,304/- which is exempt income against which the assessee has disallowed only Rs.4,76,270/- under section 14A of the Act despite the fact that assessee has made huge investment of Rs.238 Crores in mutual funds. The learned AO after questioning Printed from counselvise.com ITA No.1932/Bang/2024 Page 4 of 11 the assessee disallowed Rs.89,45,011/- under section 14A of the Act comprising of 1% of average of the investment in terms of provisions of Rule 8D of the Income Tax Rules, 1962 (the Rules). The learned AO thus passed the Assessment Order on 07.08.2024. 6. While computing the income of the assessee the learned AO started computation from income as computed under section 143(1)(a) of the Act at Rs.638 Corres and further while preparing the computation sheet, the learned AO has computed the total income of Rs.944,20,65,429/- against the computation of total income made by him in the Assessment Order of Rs.789,39,22,999/-. 7. The learned Sr. Advocate Shri. T. Suryanarayan and Smt. Tanmayee Rajkumar, Advocate, on behalf of the assessee and Dr. Divya K. J, CIT(DR) were heard. The learned AR also filed a petition under Rule 29 r.w.r. 18(4) of the Rule submitting the working of disallowance made by the assessee under section 14A of the Act, statement of mutual funds and copies of Form No.16 of the employees’ working in the treasury department of the assessee. 8. Ground No.1 was stated to be general in nature and therefore he same is dismissed. 9. The 2nd ground of appeal is with respect to the disallowance of capital expenditure under section 37(1) of the Act amounting to Rs.20,83,11,604/- in the intimation passed u/s 143(1) 9a) of The Act dated 18/3/2022. The learned AR submitted that as per intimation in Annexure of ‘other information’ as per clause No.7(A), the assessee in ROI stated that it has debited expenditure of capital nature to the extent of disallowable under section 37 of Printed from counselvise.com ITA No.1932/Bang/2024 Page 5 of 11 the Act of Rs.7,93,32,815/-. However, the CPC has taken the same figure at Rs.28,76,44,419/-. Thus, the addition of Rs.20,83,11,604/- was made in the intimation. Against this intimation, the assessee filed appeal wherein the above adjustment was deleted. The learned counsel placed before us the order of the National faceless appeal Centre Delhi dated 11 August 2023 wherein as per ground No. 2 decided as per paragraph No. 4.2 deleting the adjustment of ₹ 208,311,604/– was shown to us. However, the learned AO, at the time of computation of the income, took income as computed under section 143(1)(a) of the Act at Rs.638,90,920/-. 10. We find that as the above adjustment has been deleted by the CIT(A), now the AO should start computation by reducing the above sum. In view of the above findings, ground No.2 of the appeal is allowed. 11. Ground No.3 of the appeal is against the disallowance under section 14A of the Act. The facts clearly shows that assessee has earned exempt income of Rs.3,30,54,304/-. However, the disallowance was computed under section 14A of the Act of only Rs.4,76,270/-. The disallowance working is provided as per clause No.21H of the tax audit report. The assessee has stated that during the year, assessee has shifted its investment plan from dividend plan to growth plan. Thus, the income was exempt only till September 2919, and after the same period, the income was taxable. Thus, according to the assessee, the dividend income which is exempt is only for that period and therefore the disallowance should also be restricted to 6 months. Assessee has substantiated total cost of manpower showing the name of the Printed from counselvise.com ITA No.1932/Bang/2024 Page 6 of 11 employees, number of hours, CTC of those employees comes to the above amount of Rs.4,76,270/-. 12. The learned AO asked the assessee to file a justification of working of calculation. The assessee submitted that other than above stated facts, no other assets earned any exempt income. The assessee also submitted that there is a suo moto disallowance made by the assessee. As the learned AO asked the monthly opening and closing balances, the assessee submitted the same. 13. The learned AO presumed that as the assessee himself has given average monthly opening and closing balance and it had earned exempt income till September, he disagreed with the working of suo moto disallowance of Rs.4,76,270/-. The AO further held that assessee did not produce any ledger of expenses incurred towards earning exempt income, details of employees dedicated to work on managing investment portfolio and details of salary given to such employees, he proceeded to calculate the disallowance @ 1% of the monthly average of the investment. 14. Vide paragraph No.3.7 of the Order, he also stated that it cannot be denied that there would be certain administrative expenses like salary etc., which are incurred which would be part of expenses attributable to earning the exempt income. 15. Accordingly, he computed 1% of average investment yielding tax exempt income at Rs.89,45,011/-, made a disallowance of the same. 16. The learned AR referred to the submission made before the learned assessing officer on 25 August 2023 placed at page No. 1 of the paper book and 26 September 2023 placed at page No. 10 of the paper book. The learned authorised representative submitted Printed from counselvise.com ITA No.1932/Bang/2024 Page 7 of 11 that assessee has disallowed a sum of 4,76,270/– giving a detailed breakup of such sum. The learned assessing officer without examining about the correctness of the claim of the assessee has proceeded to compute the disallowance computed 1% of the average annual investment yielding tax exempt income. He submitted that according to the provisions of section 14 A (2) of the act the learned assessing officer should have recorded the satisfaction about the correctness of the claim of the assessee of the SUO Moto disallowance. The observation made by the learned assessing officer are not referenced with books of accounts. He submitted that in absence of such satisfaction, the disallowance made by the learned assessing officer is not valid. 17. The learned departmental representative vehemently supported the action of the learned assessing officer and submitted that the disallowance made by the assessee was not acceptable because there are many such expenditure which might have been incurred by the assessee. She referred to the assessment order passed by the learned AO. 18. We have carefully considered the rival contention and perused the orders of the learned lower authorities. Undoubtedly the assessee has earned exempt income of ₹ 33,054,304/– being the dividend income earned from the mutual fund. The assessee has disallowed ₹ 476,270/– under section 14 A for earning exempt income while filing the return of income. The learned assessing officer thereafter on 10 August 2023 asked the assessee to furnish the justification and working of calculation under section 14 A along with detailed total investments including monthly opening and closing balances. The assessee submitted its reply on 25th of Printed from counselvise.com ITA No.1932/Bang/2024 Page 8 of 11 August 2023 wherein it was submitted that assessee has shifted its investment from dividend plan to growth plan and therefore exempt income was earned only till September 2019. Assessee also referred to the SUO Motu disallowance made under section 14 A of the act of ₹ 476,270. Assessee also submitted the monthly opening and monthly closing balances of investment computing the annual average of monthly averages at ₹ 894,501,131. Admittedly the assessee did not produce calculation or justification of ₹ 4,076,274 disallowance under section 14 A of the act. However, the learned assessing officer without finding out anything with reference to the books of account proceeded to work out the disallowance based on 1% of opening and closing balances of the investment who is income is or shall be exempt computing it at ₹ 8,945,011. Undoubtedly, the provisions of section 14 A (2) of the act authorises the assessing officer to compute the disallowance in accordance with the provisions of the rules prescribed (rule 8D of income tax rules 1962), however, but before exercising this authority exercising this authority, the learned assessing officer has also a responsibility to examine the correctness of the claim of the assessee with reference to the books of accounts of the assessee. Here the claim of the assessee is that it has only incurred expenses of ₹ 476,270 in relation to exempt income. On reading the assessment order we do not find any expenses pointed out by the assessee debited in the books of accounts which is claimed by the assessee as deduction. Though the learned assessing officer while paragraph No. 3.7 and 3.8 of the order has mentioned that the investment activities undertaken by the assessee, looking at its volume, it can be safely presumed Printed from counselvise.com ITA No.1932/Bang/2024 Page 9 of 11 that the assessee would be maintaining a dedicated workforce to manage its investment portfolio and advise it. However, that may be a presumption, but such presumption cannot replace the finding of the fact recorded by the learned assessing officer on examination of the books of account holding that the claim of the assessee is incorrect. 19. Several judicial precedents of the honourable High Courts including the honourable Supreme Court has held that that after recording of the satisfaction by the learned AO about the correctness of the claim of the assessee on examination of the books of accounts opened the door of invoking the rules prescribed for disallowance under section 14 A of the act. Further If the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure which is incurred and in terms of Section 14A, then alone he can fall-back on the said sub- rules and apply Rule 8D. In the order of the Assessing Officer and particularly his conclusion that the assessee disputes the quantum of disallowance and once Section 14A is attracted, the disallowance is to be made as per Rule 8D only which has been prescribed by the Legislature. The Assessing Officer did not specifically record that he is not satisfied with the correctness of the claim of the assessee in respect of the expenditure in relation to the income which does not form part of the total income under the Act. However, he felt obliged and going by the presence of Rule 8D that once Section 14A is attracted, the disallowance is to be made as per Rule 8D only which has been prescribed by the Printed from counselvise.com ITA No.1932/Bang/2024 Page 10 of 11 Legislature. The Assessing Officer has not adverted to the plain language of sub-section (2) of Section 14A. 20. As the mandatory satisfaction is missing in this case, the disallowance made by the learned assessing officer of ₹ 8,945,011/– is directed to be deleted however the Suo motto disallowance made of ₹ 476,270 is also directed to be retained. Accordingly ground No. 3 of the appeal is allowed. 21. Ground No. 4 of the appeal is against the error in the computation sheet. According to the assessment order the total income is computed by the AO of ₹ 7,893,922,299/– however while computing the taxable income in computation sheet it is taken at ₹ 9,442065,429. This is an apparent error which should not have happened. 22. After hearing the parties, we direct the learned assessing officer to take the correct amount of the computation after giving effect to our direction in ground No. 2 of this appeal and then compute the total income correctly. 23. Ground No. 5 is against the chargeability of interest under section 234A of the act. The learned authorised representative submitted that that assessee has filed its return of income on 13 February 2020 one where the due date of filing of the return was 15 February 2020 one and therefore there should not have been any interest under section 234A of the income tax act. Despite this fact, in the computation sheet the learned assessing officer has charged interest of ₹ 301,799,225. It was also shown to us that in intimation passed under section 143 (1) of the act dated 18 March 2022 there was no interest charged under section 234A of the act however the computation sheet shows the above interest. We Printed from counselvise.com ITA No.1932/Bang/2024 Page 11 of 11 direct the learned assessing officer to delete the above interest under section 234A of the act charged in the computation sheet at serial No. 37 of ₹ 30,17,99,225/–. Ground No. 5 of the appeal is allowed. 24. Ground No. 6 is against incorrect levy of interest under section 234B of the act which is consequential in nature and therefore same is dismissed. 25. According to ground No. 7 the assessee has challenged the ad hoc computation of interest of ₹ 4,530,411 by the learned assessing officer. We direct the learned assessing officer to recompute the interest in accordance with the law. Ground No. 7 is allowed. 26. In the result the appeal filed by the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (KESHAV DUBEY) (PRASHANT MAHARISHI) Judicial Member Vice President Bangalore, Dated: 26.03.2026. /NS/* Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order Assistant Registrar, ITAT, Bangalore. Printed from counselvise.com "