Income Tax Appellate Tribunal - Chandigarh
Swaraj Engines Ltd., Mohali vs Acit, Mohali on 1 June, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.1258/Chd/2016
(Assessment Year : 2012-13)
Swaraj Engines Limited, Vs. The A.C.I.T.,
Mohali. Circle -1, Mohali.
PAN: AACS2990N
&
ITA No.1259/Chd/2016
(Assessment Year : 2013-14)
Swaraj Engines Limited, Vs. The D.C.I.T.,
Mohali. Circle (6)1, Mohali.
PAN: AACS2990N
(Appellant) (Respondent)
Appellant by : Shri A.K. Jindal
& Ms.Rattan Kaur
Respondent by : Shri S.K. Mittal, DR
Date of hearing : 14.03.2017
Date of Pronouncement : 01.06.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
These two appeals filed by the same assessee are directed against the separate orders passed by the learned Commissioner of Income Tax (Appeals)-2, Chandigarh dated 2.9.2016 and 21.10.2016 relating to assessment years 2012-13 and 2013-14 respectively.
2. Since the issue involved in both appeals is common, they were heard together and are being disposed 2 off by this common order. For the sake of convenience we shall be dealing with the appeal of the assessee in ITA No.1258/2016.
ITA No.1258/Chd/2016 (A.Y. 2012-13):
3. The assessee in the present appeal has raised the following grounds:
1. That the order passed by the Learned CIT (A) is bad in law being based on conjectures and surmises and without appreciating material on record.
2. That the learned CIT (A) has erred in law and on facts of the case by confirming the disallowance of Rs. 27,20,584/-
made by Ld. AO u/s 14A by applying Rule 8D of Income Tax Rules 1962.
3. That the learned CIT (A) has erred in law and on facts of the case by making the provisions of Section 14A read with Rule 8D applicable to the Appellant Company in a mechanical manner.
4. That the Learned CIT(A) has erred in law and on facts of the case by ignoring the disallowance made by the Appellant Company himself in respect of earning the exempted income u/s 14A of Income Tax Act, 1961.
5. That the appellant craves to leave, add or modify any ground of appeal before the disposal of Appeal."
4. The only issue in the present appeal pertains to disallowance of expenses made by invoking the provisions of section 14A of the Income Tax Act, 1961 (in short 'the Act').
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5. Bri ef facts rel evant to the i ssue are that the assessee had earned di vi dend of Rs.3,08,09,411/- du ri ng the year. The Asse ssi ng Offi cer qu esti oned the ass essee that si nce di vi dend i ncome was e xe mpt from ta x, therefore, e xpenses i ncurred to earn the same is requi red to be di sal l o wed as per secti on 14A of the I ncome Ta x Act,1961 r. w.r. 8D of the I ncome Ta x Ru l es, 1962. The assessee submi tted, that the ta x audi tors, after taki ng i nto account rel evant facts, consi dered an amount of Rs.8,79,416/- as e xpendi ture to wards earni ng of e x empt di vi dend i n come and the same had been di sal l o wed whi l e computi ng the ta xabl e i ncome. The As sessi ng Offi cer f ound that onl y the sal ar y part and some admi ni strati ve e xpenses had been consi dered by the assessee for maki ng di sal l o wance u/s 14A of the Act. He, therefore, re jected the contenti on of the assessee and computed the di sal l o wance by appl yi ng Rul e 8D, as under:
1) Under Rul e 8D( 2) ( i i ) = Rs.1.27 l acs
2) Under Rul e 8D( 2) ( i i i ) = Rs.34.73 l acs
Total di sal l o wanc e = Rs.36 l acs
6. Thereafter, after reduci ng the disal l o wance made by the assessee i tsel f i n i ts retu rn of i ncome am ounti ng to Rs.8,79,416/-, the Assessing Offi cer made a net di sal l o wance of Rs.27,20,584/- u/s 14A of the Act and added back the same to the i ncome of the assessee.
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7. The matter was carri ed i n appeal before the Ld. CI T( Appeal s) where the assessee vehementl y contested the di sal l o wance made, argui ng that no di sal l o wance of ei ther i nterest e xpendi ture or admi ni strati ve e xpenses was cal l ed for by appl yi ng rul e 8D( i i ) & 8D ( i i i ) respecti vel y, si nce the enti re i nvestments had been made i n debt based mutual funds whi ch di d not requi re any e xpendi ture to b e incurred as the same ar e made through el ectroni c mode and the di vi dend was automati cal l y credi ted. The ass essee al so argued that i t had on i ts o wn di sal l o wed 100% salary of i ts Accounts Offi cer, 10% of i ts Co mpany Secretar y and some e xpenses out of a dmi ni strati ve e xpenses thus maki ng a tota l di sal l o wance of Rs.8,79,416/-. The assessee al s o submi tted that the Assessi ng Offi cer had not brought on record any other e xpendi tur e whi ch has bee n i ncurred by th e assessee to earn e xempt i ncome and had appl i ed Rul e 8D in a mechani cal manner. Rel i ance was pl aced on the decisi on of juri sdi cti onal Hi gh Court i n the case of CI T V s. Deepak Mi ttal ( 2014) 361 I TR 131. The as sessee al so submitted that i t had ampl e reserves and surpl us and al l i nvestments were made from i ts o wn funds and, therefore, al so no di sal l o wance u/s 14A of the Act was warranted. Reli ance was pl aced on the deci si on of the juri sdi cti onal High Court i n the case of CI T Vs. Abhi shek Industri es Ltd. 380 I TR 652. The CI T( Appeal s ) re jected both the contenti ons of the assessee stati ng that the Assessi ng Offi cer had categori cal l y 5 gi ven hi s sati sf acti on that the di sal l o wance made by the assessee on i ts o wn was not correct. The CI T( Appeals) poi nted out that the Assessi ng Offi cer had obs erved that whi l e the assessee had di sal l o wed sal ar y of one empl o yee onl y, Profi t & Lo ss Account sho w ed e xpenses of R s.1916.88 l acs as 'Empl o yees Benefi t Expenses' and Rs.7.60 l acs on bank and other fi nanci al charges. The CI T( Appeal s) further poi nted out that the Assessi ng Of fi cer had al so re corded hi s sati sfacti on by o bservi ng that the assessee had no t fi l ed any evi dence i n support of i ts cl ai m. The CI T( Appeal s) hel d that these fi ndi ngs of the Assessi ng Of fi cer amounted t o objecti ve sati sfacti on about the i ncorrectness of the cl ai m of assessee of the e xpendi ture i ncurred. He therefore re jected the assessee's contenti on that the sai d di sal l o wance had been made i n the absence of sati sfacti on of the Assessi ng Offi cer regardi ng the i ncorrectness of the cl ai m of the assessee. The CI T( Appeal s) al so hel d that the assessee had i ncurred i nterest e xpenses from common pool of mi xed funds for earni ng e xempt i ncome and that t he e xpendi ture i ncurred on i nfrastructure, man po wer an d management was al so i nvol ved i n deci si on maki ng for i nvestment purpose whi ch had earned di vi dend i ncome. The CI T( Appeal s) hel d that where common funds had been uti l i zed for earni ng non ta xabl e and ta xabl e i ncome, the computati onal provisi ons provi ded under Rul e 8D were at tracted for the purpose of cal cul ati ng the e xpendi ture i ncurred for earni ng the e xempt i ncome. The CI T( Appeal s) rel i ed upon the deci si on of I . T.A. T. i n the case of Ani l Kumar Si nghani a Vs. ACI T ( 2014) 6 51 Ta xmann.co m 98 in thi s regard and further on the deci si on of the H on'bl e Punjab & Har yana Hi gh Court i n the case of Avon C yc l e Ltd. Thus the appeal of the as sessee was di smi ssed and the di sal l o wance made u/s 14A amounting to Rs.27,20,584/- was uphel d by the CI T( Appeal s) .
8. Aggri eved by the same, the assess ee has no w come up i n appeal before us. Duri ng the course of hearing before us, the Ld. counsel for assessee argued that there was absence of sati sfacti on of the Assessi ng Offi cer regardi ng i ncorrectness of cl ai m of the assessee of quantum of e xpendi ture di sal l o wabl e u/s 1 4A of the Act. The Ld. counsel for assessee rel i ed upon the deci sion of the juri sdi cti onal Hi gh Court i n the c ase of CI T vs Dee pak Mi ttal ( 2013) 361 I TR 131 and CI T vs Abhi shek I ndustri es Lt d. ( 2016) 380 I TR 6 52. The Ld. co unsel for the as sessee al so argued that no di sal l o wance of i nterest i n any case coul d have been made under Rul e 8D( 2) ( i i ) si nce the ass essee had enough o wn sur pl us funds whi c h were i nterest f ree for the purpose of making the sai d i nvestments. The Ld. counsel for assessee dre w o ur attenti on to t he annual accou nts of the assessee for the i mpugned assessment year pl aced at Paper Book pages 9 to 19 and poi nted out that whi l e i n vestments duri ng the i mpugned year i ncreased by Rs.2333.1 l acs, from Rs.5778.54 l acs i n the precedi ng year to Rs.8111. 64 l acs i n the i mpugned year, the o wn interest free funds of the assessee amounted to Rs.18627.80 l acs bei ng the share capi tal , reserves and surpl us of the assessee, and the profi ts 7 earned duri ng the year by th e assessee amo unted to Rs.7727.5 l acs. Thus the Ld Cou nsel poi nted out that there were suffi ci ent o wn i nterest free funds wi th the assessee to fi nance the i nvestments made duri ng the year. The Ld. counsel for asse ssee further sub mi tted that as a matter of fact no i nterest e xpendi ture h ad been i ncurr ed by the assessee duri ng t he i mpugned yea r and thus no di s al l o wance u/s 14A r. w.r.8D( 2) ( i i ) on account of i nterest e xpendi ture was warranted i n thi s case. Th e Ld. counsel for assessee dre w our attent i on to the Profi t & Loss Accou nt for the i mpugned year a nd poi nted out t hat the total fi n ance cost debi ted to the P rofi t & Loss Acc ount amounted t o Rs.7.60 l acs whi ch consisted of i nterest on over draft Rs.0.21 l acs, bank charges Rs.3.26 l acs and other i nterest cost of Rs.4.13 l acs as di scl osed i n schedul e 2.20 of the Bal ance Sheet. The Ld. counsel for assessee further pl aced a detai l e d break up of other i nterest cost as fol l o ws:
i) Late deposi t of e xci se dut y Rs.0.50 l acs
ii) I nterest on supplementar y bi l l s of vendors due to revi si on i n rates wi th retrospecti ve effect. Rs.1.23 Lacs
iii) I nterest u/s 234C on i ncome ta x Rs.2.40 l acs Total : Rs.4.13 l acs
9. Thus the Ld. cou nsel for assessee poi nted out that i n fact no e xpendi ture on account of i nterest on borro wed funds had been i ncurred by the assessee. The Ld. counsel for assessee al so stated that i denti cal i ssue had been deci ded i n assessee's case by the I TAT Chandi gar h Bench i n 8 I TA Nos.154 & 155/Chd/2015 rel ati ng to assessment years 2010-11 and 2011-12 wherei n the matter had been set asi de to the fi l e of the Assessi ng Offi cer to redeci de the i ssue in the l i ght of the deci si on of the Hon'bl e Punjab & Har yana Hi gh Court i n the case of Abhi shek I ndustri es Ltd. ( supra) and CI T Vs. Kapsons Associ ates in I TA No.354 of 2013 dated 4.8.2015. Copy of the order was pl aced before us.
10. The Ld. DR, on the other hand, argued that the Assessi ng Offi cer had record ed sati sfacti on vi s-à-vi s correctness of the cl ai m of the assessee that onl y e xpenses amounti ng to Rs.8,79,416/- had been i ncurred i n rel ati on to the e xempt i nco me earned i n the form of di vi den d. The Ld . DR dre w our attenti on to page 4 of the assessment order para 3.1 i n thi s regard and stat ed that the sati sfacti on of the Assessi ng Offi cer was recorded i n the sai d para.
11. We have heard the contenti ons of both the parti es, perused the orders of authori ti es bel o w and gone through the documents referred to before us. The i ssue before us pertai ns to di sal l o wance made u/s 14A of the Act. The undi sputed facts are that the as sessee had earn ed e xempt i ncome in th e form of di vi dend amou nti ng to Rs.3,08,09,411/- duri ng the rel evant year out of investments made amounti ng to Rs.8111 l acs. The fact that i nvestments made by the assessee sho wed an i ncrease of Rs. 2333.1 l acs as compared to the precedi ng year , that the o w n funds of the assessee ,i n the form of s hare capi tal an d reserves amounted to Rs. 18627.80 l acs and the profi ts earned by the 9 assessee duri ng the year amount ed to Rs. 7727. 5 l acs are al so not di sputed. Al so not di sputed i s the fact that the total i nterest e xpendi ture i ncurred by the assessee duri ng the year amounted to Rs Rs.7.60 l acs whi ch consi sted of i nterest on over draft Rs.0.21 l acs, bank charges Rs.3.26 l acs and other i nterest cost of Rs.4.13 l acs as di scl osed i n schedul e 2.20 of the Bal ance Sheet. The bre ak up of the other i nterest i s al so not di sputed. I t i s al so a fact on record that the assessee had suo moto made a di sal l o wance of Rs.8,79,416/- u/s 14A of the Act whi ch consi sted of enti re sa l ar y of i ts Accounts Offi cer and 10% sal ar y of i ts Company Secretar y and 46% of the aforementi oned sal ari es on account of admi ni strati ve e xpenses as fol l o ws:
Disallowance u/s 14A Amt.( In Rs. ) En tire S al ar y o f Mr. Vinod 3, 77, 249/- Sh ar ma ( Accoun ts Of f icer ) 10% S al ar y of 2, 23, 856/- Mr. M. S. Gre wal l ( Co mp an y Secre tar y) Sub Total 6,01,105/- Add: 46. 30% ( % age of Ad min is tr ative e x penses to 2,78,311/- the s al ar y) f or Adm. Ex p. Gross Total 8,79,416/-
12. The fi rst argume nt whi ch was raised before us and whi ch needs to be addressed i s regardi ng the sati sfacti on of the Assessi ng Offi cer vi s-à-vi s the correctness of the cl ai m of the assessee th at the e xpenses i ncurred for e arni ng the e xempt i ncome amounted to Rs.8,79,416/-. On e xami ni ng the assessment order and on rea di ng para 3.1 of the same, whi ch was poi nted out to us by the Ld. DR wherei n 10 purportedl y the sati sfacti on of the Assessi ng Offi cer was recorded, we fi nd the same reads as under:
"3.1 I have examined the above submission of the assessee submitted vide letter dated 18.12.2014 but not inclined to accept the view that only salary of one employee pertains to expenditure attributable towards earning dividend income. From the profit and loss account, it is observed that the assessee has incurred Rs. 1916.88 lakhs as Employees Benefit Expenses and Rs. 7.60 lakhs on Bank and other financial charges. The assessee has not filed any evidence with regard to the claim that no business assets or funds out of business were utilized or no administrative expenditure is incurred in earning the dividend income. Accordingly, 1 am not satisfied with the correctness of expenditure claimed by the assessee."
13. The submi ssi on s made by the assessee vi de l etter dated 18.12.2014, referred to a bove, i s reprodu ced i n the order of the AO as under:
"The Assessee Company has earned an exempted dividend income of Rs. 3,08,09,411/- during the F.Y. 2011-12. In this regard, it is submitted that entire exempted income pertains to dividend received from investments made in certain debt based mutual funds. Company's Board of Directors has put in place a policy defining the funds where investments are required to be made. Further, making an investment in the prescribed debt based mutual funds is like choosing Fixed Deposits from various available options which do not include any expenditure. Now, just because the income from dividend is a tax free income as per the Act, that does not mean that the 'expense have necessarily to be apportioned to earn such income. As you are aware of that 'ours is a large manufacturing concern and all the investment are mainly in electronic mode where the ECS credit of Dividend is automatically done. We can compare this Dividend income with the income from dividends on the investments in shares of companies by the individuals. Once the investment is made, there are hardly any expenses required to be incurred after that.
In any case, during the course of Tax Audit for the relevant A.Y. 2012-13, the tax auditors of the company, after taking into consideration the entire facts and detailed deliberations, considered an amount of Rs.8,79,416/- as expenditure towards earning of exempted dividend income u/s. 14A of Income Tax act, 1961. This amount of Rs.8,79,416/- has been worked out as follows:11
Disallowance u/s 14A Amt. (In Rs.) Entire Salary of Mr.Vinod Sharma 3,77,249/- (Accounts Officer) 10% Salary of Mr. M.S.Grewal 2,23,856/- (Company Secretary) Sub Total 6,01,105/- Add: 46.30% (% age of 2,78,311/- Administrative expenses to the salary) for Admn. Exp. Gross Total 8,79,416/-
This disallowance has been depicted in clause 17(1) of the Tax Audit report and was also disallowed in the computation of Income from business or profession under schedule BP of the Income Tax Return.
In view of the above facts we herein submit that no further disallowance is warranted in the case of Assessee Company during the A.Y. 2012-13 u/s. 14A read with Rule 8D. Further, in order to substantiate our claim, we rely on the following precedents:
14. Comi ng to the proposi ti on regardi ng the sati sfacti on of t he Assessi ng Of fi cer u/s 14A o f the Act whi ch has been l ai d do wn by the j uri sdi cti onal Hi gh Court i n the case of Abhi s hek I ndustri es Ltd.( 2016) 380 I TR 652( P&H) and Deepak Mi tt al ( supra) , we fi nd that the Hon 'bl e Hi gh Court i n the case of Abhi shek I ndustri es Ltd. ( supra) , whi l e deal i ng wi th the i ssue, hel d that the sati sfacti on to be recorded must b e based on credi bl e and rel evant evidence. The Hon'bl e Hi gh Court has hel d that onus to prove that the cl ai m of the assessee was i ncorrect l i es on the shoul ders of the Revenue and the Assessi ng O ffi cer cannot state that he i s not sati sfi ed about the correc tness of the cl a i m of the assessee by maki ng general observati on. The Ho n'bl e Hi gh Court has categ ori cal l y hel d tha t on the basi s o f cl ear and cogent materi al onl y can be bas ed u/s 14A di sa l l o wing the assessee's cl ai m. The Hon'bl e High Court has l aid do wn the sai d proposi ti on at para 9 of i ts order as under : 12
"Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the revenue. Thus, if the Assessing Officer is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest free income as opposed to the assessee's own funds, the Assessing Officer may legitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under Section 14A of the Act, disallowing such a claim. As there is no tangible material on record that could have enabled the Assessing Officer to record satisfaction in terms of Section 14A of the Act, findings recorded by the CIT(A) and the ITAT that the Assessing Officer has failed to discharge this onus are neither perverse nor arbitrary and, therefore, do not call for interference."
15. The Hon'bl e Hi g h Court has rei terated the sai d proposi ti on i n the case of Deepak Mi ttal ( 2013) 361 I TR 131( P&H) as under:
"9. When consistent case of the assessee, despite notice given by the Assessing Officer to give details of the expenditure made on earning of exempted income in the nature of dividend, version of the assessee was that he had not made any expenditure on earning such income, the Assessing Officer in terms of sub-section 2 of Section 14-A of the Act was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the 13 assessee but the Assessing Officer instead relying on Rule 8-D of the Rules applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt which is not the case of the present assessee, which was clearly a wrong application introduced as a substitute for sub-section 2 of Section 14-A of the Act and thus was not permissible in law.
16. No w appl yi ng th e aforesai d prop osi ti on l ai d dow n by the Hon'bl e H i gh Court to the facts of the pre sent case, we fi nd that t he assessee ha d stated that i ts enti re i nvestments were made i n debt ori ented mutual funds, that the company's B oard of Di rectors had put i n pl ac e a pol i c y defi ni ng funds where i nvestments were requi red to be made and maki ng sai d i nvestment was equi val ent to choosing fi xed deposi ts from vari ous avai l abl e opti ons whi ch does not entail i ncurri ng any e x pendi ture. The a ssessee had al so submi tted that i t i s a l arg e concern and al l i nvestments are mai nl y i n el ectroni c mode whereas ECS credi t to di vi dend is automati cal l y done. Thus the assessee had submi tted that the i nvestments hardl y entai l ed i ncurri ng of any e xpenses. Further the assessee had submi tted that i t had di sal l o wed e xpenses of t wo of i ts empl o yees, bei ng 100% of i t s Accounts Offi cer and 10% sal ar y of i ts Company Secretar y and further 46.30% of sal ar y gi ven to these persons, on account of admi ni strati ve e xpenses i ncurred. No w, the Assessi ng Offi cer, we fi nd, has recorded his sati sfacti on vis-a-vi s the i ncorrectness o f the cl ai m of the assessee wi thout any cogent basi s, as a bare readi ng of para 3.1 of the order, where the Asses si ng Offi cer has e xpressed hi s s ati sfacti on, 14 reveal s. The Ass essi ng Offi cer has di sbel i eved the assessee's cl ai m si nce the di sal l o wance made by the as sessee was mi ni scul e as compared to the e xpenses i ncurred on empl o yees benefi t e xpenses and i nterest e xpenses. Cl earl y, thi s al one cannot be the basi s for di sbel i evi ng the assessee's e xpl anati on and contenti on. More parti cul arl y, consi deri ng the fact the as sessee has e xpl ai ned as to wh y it was i ncurri ng onl y a smal l amount of e xpendi ture for t he earni ng of di vi dend i ncome. The Assessi ng Offi cer whi l e re jecti ng assessee's contenti on has not stated as to ho w the contenti on of the assessee that si nce al l i nvestments were made i n debt ori ented funds and there was a pol i c y l ai d do wn for maki ng the sai d i nvestments and al l investments were made el ectroni cal l y, therefore, no e xpendi ture was i ncurred, was i ncorrect. The Assessi ng Offi cer whil e recordi ng hi s sati sfacti on has nei ther controverted the contenti on of th e assessee, nor has brought out any fal l ac y i n the cl ai m of the assessee. The Assessi ng Offi cer has merel y stated that si nce the assessee had i ncurred huge e xpenses on empl o yees and i nterest i t cannot contribute onl y a ver y smal l port i on to the earni n g of di vi dend i nc ome. For the above reasons, we fi nd that the basi s wi th the Assessi ng Offi cer for arri vi ng at sati sfacti on that the cl ai m of the assessee of e xpenses i ncurred for the purpose of earni ng di vi dend i ncome was i ncorrect, was nei ther based on any evi dence, nor ha s any cogent bas i s and was merel y a general statement. As h el d by the Hon'bl e juri sdi cti onal Hi gh Court i n the case of A bhi shek I ndustries Ltd. And CI T Vs. Deepak 15 Mi ttal ( supra) , t he Assessi ng Off i cer had not e xh i bi ted val i d sati sfacti on regardi ng i ncorrectness of the cl ai m of the assessee. The Assessi ng Offi cer in the absence of sati sfacti on regardi ng correctness of the cl a i m of the assessee, coul d not have therefore proceeded to appl y Rul e 8D for the purpose of di sal l o wi ng e xpenses i ncurred for earni ng e xempt i ncome. For thi s reason, we hol d that the di sal l o wance made u/s 14A amo unti ng to Rs.27, 20,584/- i s unwarranted and i s thereby di rected to be del eted.
17. The Ld. counsel for assessee has al so rai sed the argument before us that i n any case no di sal l o wance on account of i nterest e xpendi ture i ncurred coul d be made by i nvoki ng Rul e 8 D( 2) ( i i ) of the I ncome Ta x Rul es, 1962 si nce the assessee had not i ncurred any i nterest e xpendi ture at al l and al so for the reason that i t had enough o wn surpl us funds avai l abl e w i th i t for the pur pose of maki ng i nvestment. The Ld. counsel for assessee ha d demonstrated both these facts to us by dra wi ng our attenti on to the annual accounts of the assessee f or the i mpugned assessment year. We fi nd meri t i n thi s contenti on of the Ld. counsel for assessee. As poi nted out to us , the Annual Acc ounts of the asse ssee sho w total fi nance cost i ncurred duri ng the year amounting to Rs.7.60 l acs, out of whi ch onl y 0. 21 l acs was on a ccount of i nterest on over draft whi l e the r est rel ated to ot her i nterest e xpenses and were not i n the nature of borro wi ng charges, as i s evi dent from the detai l provi ded i n the annual account of the assessee and al so pl aced before us and reproduced 16 above. At the same ti me, we fi nd that the di sal l o wance made under Rul e 8D( 2) ( i i ) amounted to Rs.1.27 l acs. Th e i nterest e xpenses attri butabl e to i nter est beari ng fun ds in the present case not e xceedi ng to Rs .0.21 l acs the di sal l o wance coul d not in any case have exceeded the said amount. Further we fi nd t hat i t has been c l earl y demonstrated before us that the assessee had suffi ci ent own i nterest free funds to make the impugned i nvestments and, therefore, the presumpti on i n such cases i s that the i nvestment has been made out of the same. The Ho n'bl e Punjab an d Har yana Hi gh Court has l ai d do wn the sai d proposi ti on i n the conte xt of secti on 14A, i n the case of C I T vs Ma x I ndi a Ltd., I TA No.186 of 2013 ( O&M) dated 6.9.2016 ,hol di ng as under:
"9. This presumption is unfounded. Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. There is no reason for it not to. The basis of the presumption as we will elaborate later is that an assessee would invest its funds to its advantage. It gains nothing by investing interest free funds towards other assets merely on account of the interest free funds having decreased. In that event so long as even after the decrease thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force."17
18. I n vi e w of the above, no di sal l owance of i nterest e xpendi ture was warranted i n the facts of the present case.
19. We therefore hol d that in the absence of sati sfacti on recorded by the Ass essi ng Offi cer vi s-à-vi s the i ncorrectness of the cl ai m of the assessee of e xpenses di sal l o wabl e u/s 14A of the Act and further on account of suffi ci ent o wn funds avai l abl e wi th the assessee for the purpose of maki ng i nvestments whi ch earned e xempt income, the di sal l o wance of Rs.27,20,584/- made u/s 14A of the Act was unwarranted i n the presen t case. The or der of the Ld.CI T( Appeal s) i s, therefore, set asi de on thi s count and the di sal l o wance made u/s 14A amo unti ng to Rs.27, 20,584/- i s di rected to be del eted. The grounds of appeal raised by the assessee are, therefore, al l o wed.
20. I n effect, the appeal of the assessee i s al l o wed. ITA No.1259/Chd/2016 (A.Y. 2013-14):
21. The assessee in the present appeal has raised the following grounds:
6. That the order passed by the Learned CIT (A) is bad in law being based on conjectures and surmises and without appreciating material on record.
7. That the learned CIT (A) has erred in law and on facts of the case by confirming the disallowance of Rs.28,88,140/- made by Ld. AO u/s 14A by applying Rule 8D of Income Tax Rules 1962.
8. That the learned CIT (A) has erred in law and on facts of the case by making the provisions of Section 14A read with 18 Rule 8D applicable to the Appellant Company in a mechanical manner.
9. That the Learned CIT(A) has erred in law and on facts of the case by ignoring the disallowance made by the Appellant Company himself in respect of earning the exempted income u/s 14A of Income Tax Act, 1961.
10.That the appellant craves to leave, add or modify any ground of appeal before the disposal of Appeal."
22. I t i s r e l e va n t t o o b s e r v e h er e t h at i t w a s c o m mo n ground b e t w ee n both the parties that the facts and c i r c u m s t an c e s of t h i s a p p e a l ar e s i m i l a r t o t ha t i n I TA N o . 1 2 5 8 / Ch d / 2 01 6 . Th e findings g i ve n in I TA N o . 1 2 5 8 / Ch d / 2 01 6 , t h e r e fo r e , w e h o l d , s h a l l a pp l y t o t h i s a p p e a l a l s o w i th e q u a l f o rc e .
23. I n the resul t, both the appeal s of the assessee are al l o wed.
Order pronounced in the open court.
Sd/- Sd/-
(BHAVNESH SAINI) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 1 s t June 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh