Income Tax Appellate Tribunal - Chandigarh
Swaraj Engines Limited, Mohali vs Assessee on 5 May, 2016
I N T H E I N C O M E T A X AP P EL L AT E T R I BU N A L
D I VI S I O N B EN C H , C H AN D I G A R H
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND Ms. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA Nos. 154 & 155/CHD/2015
A.Ys: 2010-11 & 2011-12
M/s Swaraj Engines Ltd., Vs The Addl.CIT,
Plot No. 2, Industrial Focal, Range - VI,
Phase IX, SAS Nagar, Mohali.
Mohali.
PAN: AACCS2990N
(Appellant) (Respondent)
Appellant by : Ms. Rattan Kaur
Respondent by : Shri Manjit Singh,DR
Date of Hearing : 03.05.2016
Date of Pronouncement : 05.05.2016
O R D E R
PER BHAVNESH SAINI,JM Both the appeals by assessee are directed against different orders of ld. CIT(Appeals)-II Chandigarh dated 21.11.2014 for assessment year 2010-11 and 2011-12, challenging the disallowance of Rs. 19,97,207/- and Rs. 21,85,407/- made by Assessing Officer under section 14A applying Rule 8D of the income Tax Rules. 2
2. Both the parties mainly argued in assessment year 2010-11 and submitted that issue is same in both the appeals
3. We have heard ld. Representatives of both the parties and perused the material available on record. The facts are taken from assessment year 2010-11 for the purpose of disposal of both the appeals.
4. The brief facts of the case are that assessee had earned dividend income of Rs. 29,600,822/- during the year under consideration. The Assessing Officer noticed that assessee had incurred operating and administrative expenses of Rs. 2257.77 lacs and bank and other financial charges of Rs. 2.86 lacs and so he worked out the disallowance under section 14A at Rs.22,45,649/- and made the addition of Rs. 19,97,207/- after deducting the amount disallowed by the assessee on this account of Rs. 2,48,442/-.
5. During the course of appellate proceedings, the assessee has submitted that Assessing Officer has not brought on record any expenditure which was incurred by the assessee to earn exempt income and has applied Rule 8D of the IT Rules in a mechanical manner. The assessee also relied upon decision of Hon'ble Punjab & Haryana High Court in the case of Deepak Mittal 361 ITR 131.
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6. The ld. CIT(Appeals) considered the issue in the light of provisions of Section 14A of the Act and noted that as per provisions of Section 14A(2), the Assessing Officer has to determine the amount of expenditure incurred in relation to exempt income as per the method prescribed under Rule 8D of the IT Rules. The ld. CIT(Appeals) noted that if Assessing Officer is not satisfied with the claim of assessee that no expenditure had been incurred or about the correctness of claim of expenditure, it is mandatory for him to compute the expenditure relating to the exempt income as per Rule 8D. The assessee disallowed salary of Rs. 2,48,442/- for earning exempt income which is not correct. The ld. CIT(Appeals) also noted that in this case, assessee had not filed any evidence before the Assessing Officer with regard to claim that no business assets or funds out of business were utilized or no administrative expenses were incurred in earning the dividend income. The assessee had not explained before Assessing Officer or before him as to which funds have been used for all the purposes. The ld. CIT(Appeals) found that there is commonality of funds and management in relation to business activity and investment activity, income from which does not form part of the total income. The ld. CIT(Appeals), accordingly, dismissed this ground of appeal of the assessee.
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7. The ld. counsel for the assessee reiterated the submissions made before authorities below and submitted that assessee has not incurred any expenditure for earning exempt income and that no interest bearing funds have been diverted to make investments leading to tax exempt income. She has referred to PB-41 which is balance sheet as on 31.03.2010 and submitted that reserves and surplus of assessee were in a sum of Rs. 11032.21 lacs, whereas the investments (PB-45) are in a sum of Rs. 5771.51 lacs which includes investments made in earlier years as well. She has, therefore, submitted that assessee has sufficient funds, therefore, no disallowance could be made on this issue and she also relied upon order of ITAT Chandigarh Bench in the case of M/s Hero Cycles Ltd. Vs Addl. CIT etc. in ITA 314/2013 dated 16.02.2016. On the other hand, ld. DR relied upon orders of the authorities below.
8. We have considered rival submissions. The assessee submitted before Assessing Officer that entire exempted income pertains to dividend received from investments made in certain debit based mutual funds. Making an investment in the prescribed debt based mutual fund is like choosing fixed deposit with 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, does not mean that the expenses 5 have necessarily to be apportioned to earn such income. The assessee submitted before ld. CIT(Appeals) that Assessing Officer has not brought any evidence on record that any expenditure was incurred by assessee to earn exempt income.
9. The assessee, for the first time submitted before us that assessee has sufficient reserves and surplus which were more than the investments made to earn exempt income. It is also first time argued before us that no interest bearing funds have been diverted to make investments to earn exempted income. Hon'ble Punjab & Haryana High Court in the case of CIT Vs Abhishek Industries Ltd. 380 ITR 652 held as under :
Section 14A of the Income-tax Act, 1961, empowers an Assessing Officer to disallow expenditure in relation to exempted income from shares if interest bearing funds have been used by the assessee. Section 14A may only be invoked if the assessee has made investments in purchase of shares out of borrowed funds. As a consequence, if the assessee has invested his own money in purchase of shares, there is no question of disallowance under section 14A. Section 14A 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 6 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 have been used to earn exempted income. Section 14A, being in the nature of an exception, was 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 disallowing such a claim.
The assessee made a categorical submission of fact before the Assessing Officer that no interest bearing funds had been diverted to make investments leading to tax exempt income The Assessing Officer, under section 14A read with Rule 8D of the Income-tax Rules, 1962, disallowed expenditure in respect of the dividend earned by the assessee holding that interest bearing funds had been used to earn tax-free dividend. The Commissioner (Appeals) held that the Revenue had not been able to prove that interest bearing funds were used. This was confirmed by the Tribunal holding that as the Assessing Officer had failed to prove that interest bearing funds were used, it would not invite disallowance under section 14A. On appeal:
Held, dismissing the appeal, that as there was no tangible material on record that could have enabled the Assessing Officer to record satisfaction in terms of section 14A the findings recorded by the Commissioner (Appeals) and the Tribunal that the Assessing Officer had failed to discharge this onus were neither perverse nor arbitrary and, therefore, did not call for interference". 9(i) Same views taken by Hon'ble Punjab & Haryana High Court in the case of CIT Vs Kapsons Associates in ITA 354 of 2013 dated 04.08.2015. The assessee has 7 now clearly stated that some investments were old and that total investments have been made out of reserves and surplus and that no expenditure have been incurred for earning the dividend income. Therefore, these matters require consideration at the level of Assessing Officer because the authorities below have not given any finding on the same particularly when this point is raised for the first time. It also appears that Assessing Officer has not recorded any satisfaction in the assessment order in terms of Section 14A of the Income Tax Act. Therefore, the factual finding of fact is required to be recorded by the authorities below in the light of above judgements of Hon'ble Punjab & Haryana High Court.
9(ii) In this view of the matter, we set aside the orders of authorities below and restore matter in issue to the file of Assessing Officer with direction to re-decide this issue in the light of submissions of the assessee and in the light of decision of Hon'ble Punjab & Haryana High Court referred to above and in the light of decision of ITAT Chandigarh Bench in the case of Hero Cycles (supra). The Assessing Officer shall give reasonable opportunity of being heard to the assessee.
10. In the result, appeal of the assessee in ITA 154/2015 for assessment year 2010-11 is allowed for statistical purposes.
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11. In assessment year 2011-12 in ITA 155/2015, the orders of authorities below are set aside in terms of order passed in ITA 154/2015 and similar issue is restored to the file of Assessing Officer with direction to re-decide the matter afresh by giving reasonable sufficient opportunity of being heard to the assessee. The appeal of the assessee is allowed for statistical purposes.
12. In the result, both the appeals of the assessee are allowed for statistical purposes.
Order pronounced in the Open Court.
Sd/- Sd/- (ANNAPURNA GUPTA) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 5th May, 2016. 'Poonam' Copy to:
The Appellant, The Respondent, The CIT(A), The CIT,DR Assistant Registrar, ITAT/CHD