Income Tax Appellate Tribunal - Chandigarh
Sel Manufacturing Co. Ltd., Ludhiana vs Addl. Cit, Ludhiana on 7 February, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.880/Chd/2009
(Assessment Year : 2006-07)
The Income Tax Officer, Vs. M/s SEL Manufacturing Co. Ltd.,
Ward-1(3), Plot No.273-74, Dhandari Khurd,
Ludhiana. G.T. Road, Ludhiana.
PAN: AAHCS9189E
ITA No.76/Chd/2012
(Assessment Year : 2007-08)
ITA No.106/Chd/2012
(Assessment Year : 2008-09)
The J.C.I.T.(OSD), Vs. M/s SEL Manufacturing Co. Ltd.,
Circle-1, 274, G.T. Road, Dhandari Kalan,
Ludhiana. Ludhiana.
PAN: AAHCS9189E
Appellant by : S/Shri Ashwani Kumar
Aditya Kumar
Respondent by : Shri Sushil Kumar, CIT DR
ITA No.1250/Chd/2012
(Assessment Year : 2009-10)
The A.C.I.T., Vs. M/s SEL Manufacturing Co. Ltd.,
Circle-1, 274, G.T. Road, Dhandari Kalan,
Ludhiana. Ludhiana.
PAN: AAHCS9189E
And
ITA No.1117/Chd/2012
(Assessment Year : 2009-10)
M/s SEL Manufacturing Co. Ltd., Vs. The Addl.CIT,
274, G.T. Road, Dhandari Kalan, Range 1,
Ludhiana. Ludhiana.
PAN: AAHCS9189E
(Appellant) (Respondent)
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Assessee by : S/Shri Ashwani Kumar
Aditya Kumar
Department by : Shri Sushil Kumar, CIT DR
Date of hearing : 25.10.2016
Date of Pronouncement : 07.02.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
The appeals in ITA No.880/Chd/2009, ITA No.76/Chd/2012, ITA No/106/Chd/2012 and ITA No.1250/Chd/2012 are filed by the Revenue and the appeal in ITA No.1117/Chd/2012 is cross appeal, directed against separate orders of learned Commissioner of Income Tax (Appeals)-1, Ludhiana, dated 12.6.2009, 2.11.2011, 2.11.2011, 12.9.2012 and 12.9.2012 relating to assessment years 2006-07, 2007-08, 2008-09, 2009-10 respectively, passed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act').
2. Since identical issue was involved in all the appeals, they were heard together and are being disposed off by a common and consolidated order.
3. We shall first take up the appeal of the Revenue filed in ITA No.880/Chd/2012.
ITA No.880/Chd/2009 (Assessment Year 2006-07):
4. Ground No.1 raised by the revenue reads as under :
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"1. That the Ld. CIT(A) has erred in law and facts in allowing the deduction @ 100% of eligible profits under the provisions of section 80IB of the Income Tax Act, 1961 as against @ 75% of eligible profits restricted by the Assessing Officer.
5. Brief facts relevant to the issue are that assessee company is engaged in the manufacturing, trading and export of hosiery goods, manufacturing dyeing and trading of knitted cloth and manufacturing of yarn, etc. For the assessment year under consideration, the assessee claimed deduction of 100% of its profits, under section 80IB of the Act. The AO,by referring to information obtained during the course of survey under section 133A of the Act carried on the premises of the assessee on 5.2.2003 and on which date searches were also conducted at the premises of the sister concerns of the assessee at Ludhiana, pointed out that the production capacity of the unit of the assessee for assessment years 2002-03, 2003- 04 was estimated by the Assessing Officer at 13, 30,000/- pieces and 8 lacs pieces respectively being 50% of its actual production and therefore, deduction under section 80IB of the Act was allowed to the assessee @ 50% of the eligible profits for the relevant block period. The AO found that the same yardstick was applied in the assessment years 2004-05 and 2005-06 because as per the Assessing Officer the infrastructure/man power during these years remained the same. The AO thereafter held that though in the assessment year 2005-06 the stand of the Department was not confirmed by the CIT (Appeals), the decision of 4 the CIT (Appeals) was not accepted by the Department and second appeal before the I.T.A.T. in this regard was filed. Keeping in view these facts the Assessing Officer held the deduction under section 80IB of the Act to be eligible to the assessee @ 75% of the eligible profits and consequently disallowed the balance adding the same to the income of the assessee. The Ld. CIT (Appeals) allowed assessee's claim following the order of the CIT (Appeals) in the preceding year i.e. assessment year 2005-06.
6. Before us, it was common ground between the parties that the issue in appeal was covered by the decision of the Tribunal in assessee's own case for assessment year 2005-06 whereby the addition made was deleted following the order of the Tribunal in the block assessment period in the case of the assessee. The Ld. counsel for the assessee placed on record a copy of the order of the Tribunal for the relevant year i.e. 2005-06 in ITA No.875/Chd/2008 dated 231.12.2009.
7. On going through the above mentioned order of the Tribunal, we find that identical addition relating to scaling down of deduction claimed under section 80IB of the Act by the Assessing Officer passed in block assessment and survey conducted on assessee's premises was considered. The Tribunal, we find upheld the order of the CIT (Appeals) whereby the action of the Assessing Officer was set aside, relying upon the order of the Tribunal in the appeal relating to block assessment 5 proceedings for the period 1.4.1996 to 5.2.2003. The relevant portion of the order of the Tribunal is reproduced hereunder :
20. On this issue, we find that the .Assessing Officer in t h e impugned order has noticed the .block assessment of t h e assesses for the block period ending on 5.2.2003, wherein the claim of the assessee regarding deduction u/s 80IB had been discussed in detail.
The Assessing Officer has referred to the block assessment to observe that production as declared by the assessee was not acceptable. The claim of the Assessing Officer was that the assessee company was not capable of producing the finished products as claimed. The Assessing Officer has also referred to survey u/s 133A of the Act at the premises of the assessee wherein machinery inventorised f e l l short of the machines recorded in the books of account. The case made out was that the production was being carried out in the premises of a sister concern and it was thereafter diverted to the industrial undertaking of the assessee company so as to c l a i m higher benefits under section 80IB of the Act, The findings of the block assessment were r e l i e d upon by the Assessing Officer in t h e impugned assessment also. . The Assessing Officer has concluded that considering the infrastructure available w i t h the assessee and the material on record, the assessee could achieve only 50% of the production shown. He, therefore, considered only half of t h e production declared as e l i g i b l e for benefit u/s 80IB of the Act. The Commissioner of Income-tax (A) has deleted the addition by relying on the order of his predecessor in assessee's own case while dealing with the b l o c k a s s e s s me n t . I n t h i s r e g a r d , we f i n d t h a t 6 t h e assessment made by the Assessing Officer for the block period 1 . 4 . 1 9 9 6 to 5.2.2003 was in appeal before the Tribunal vide I.T.(SS)A.No.1 08 & 109/Chandi/2005 (supra.). The Tribunal considered a similar addition regarding scaling down of deduction u/s 8QIB of the Act by the Assessing Officer. The Tribunal has upheld the order of the Commissioner of Income-tax (A) whereby the action of the Assessing Officer was set aside. The relevant portion of the order of the Tribunal is reproduced as under :-
" 9 . 4 In nutshell, all what emerges from the above is that undisclosed income should be computed only on the b as is of docu men ts f ound as a resul t of search , and. such material or information as are available with the Assessing Officer and relatable to such evidence found as a result of search. It has been judicially held that only such evidence which has been found as a result: of a search alone, can be made a b as is to de ter mine the undiscl osed i n c o m e o f t h e a s s e s s e s wh i l e f r a m i n g a n assessment' under Chapter XIVB of the Act. The block assessment therefore, must be confined to the m a te r i al d e te c te d as a r e s u l t o f S e ar c h an d evidences collected thereto and not beyond that. In arriving at the above conclusion apart from the judicial pronouncement cited above, we are also supported by a catena of judgements, which are not being cited here for the sake of brevity.
9 . 5 Applying the abovesaid settled principles to the f ac ts o f th e pr e sen t c as e , i t is seen th at th e Assess ing * Of f icer in res tr ic ting the cl ai m of deductions under section 80HHC and 807A of the Act, has not relied upon any material found as a result of search on the appellant. The evidences relied upon by the Assessing Officer in arriving at the conclusion that the .production declared by the appellant ' i s inflated can be categorized into following:
(a) Statement recorded of Sh. S.K. Wadhwa and Sh.
Neeraj Saluja in the coarse of search of M/s Saluja International, a partnership firm at Ludhiana;
(b) Inventory prepared at the factory premises of the assesses at Baddi during the course of survey under section 133A of the Act;
(c) Post search enquiries made- from the transport operators;
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(d) Statement recorded of 'Manager of the assesses, company in the' course of survey under section 133A of the Act;
(e) Certain evidences impounded as a result of survey at the factory premises of the assesses company at Baddi.
"9.6 From the aforesaid, it is evident that there is no material detected as a result of search on the assessee company, It is thus clear that in the absence of any evidences having been detected as a result of search on the assessee company, the conclusion of the Assessing Officer to restrict the claim of deductions under section 80HHC and 80IB of the Act by assuming that there is inflated production Js altogether without jurisdiction and beyond the scope of provisions contained in Chapter XIVB. In our opinion,' since very, fundamental aspect to restrict the claim of deduction has not been satisfied, the disallowance perse is unsustainable and therefore, the CIT(A) was justified in deleting the same. It may be added here that it is not in dispute that the assessee company had filed its return of income for .each of the assessment years namely assessment year 2002-03 and 2003-04 on within the prescribed period. The returns so filed by the assessee wherein deductions- Claimed under section .80IB of the Act of Rs.14,67,75,459/- and 19,81,12,898/- respectively stood accepted and allowed. Thus, the factum of the claim of deduction was duly disclosed and allowed in regular assessment made under the Act and however, since no evidence has been found as a result of search on the assessee company, the disallowance of claim of deduction is altogether untenable in a block assessment under 'Chapter XIV- B of the Act. Infact, all what has happened is that certain material has been gathered as a result of search, which cannot be a ground to restrict the claim of deduction.
9 . 7 In light of the above discussion on the position of law and facts of the case, in our view,, it has been rightly held by the CIT(A) that the Assessing Officer was not justif ied in making the addition of the undisclosed income of the assessee by disallowing the claim of deductions under section 80MHC and 80IB of the Act.
However, in light of submissions having been made by the parties on merits, we deem it expedient 10 deal this case on merits also hereinafter.
10. The first and foremost basis adopted by the Assessing' Officer to suggest that the, assessed had inflated its production at its industrial undertaking at Baddi is on the 8 basis that as a result of search on M/s Saluja International at Bajra Road, a separate unit on , the left hand side was found and T-shirts manufactured by this un-it were found to be packed in envelopes bearing the name of the assessee company. On the date of search, statement of Sh. S.K. Wadhwa, Manager of M/s Saluja International was recorded wherein he had stated in question no. 15 as under :
Q.15 I s s o me o t h e r c o n c e r n ' s s t o c k l y i n g i n this premises except Saluja International.
A. No"
10.1 Infact, on specifically be ing asked as to whether the assessee company is also carrying on manufacturing from this premises of M/s Saluja International, he had replied that he did not know about same though he had confirmed that few packets of plastic T-shirts had the labels "manufactured by Saluja Exim Pvt. Lid." on them.
Infact, on specific enquiry being asked in question no. 21 and 22, he had stated as under:
"Q. 2.1 When the T-shirts 'are being manufactured in Bajra Road, premises, and packed with the brand stating that they are manufactured by Saluja Exim Pvt.:Ltd., then the logical conclusions is that Saluja Exim Pvt. Ltd. is having its manufacturing, facility at the premises also. What have you to say?
Ans. I cannot comment on this.
Q. 22, M/s Saluja Exim Pvt. Ltd. has shows its manufacturing facility at Baddi (H.P.) as per records, however, if has set up a parallel manufacturing facility at Bajra Road, factory premises. In view of the same, why it should not, be concluded that the various benefits given by the Govt. to the Industry set up at "Baddi" is being misappropriated by M/s Saluja Exim Pvt. Ltd. What have you to say?
Ans. I do not know about the benefits given by the Govt. --------- I can not say that I look after the production work only at Bajra Road, premises only."
10.2 Moreover, on the said date, the statement of Sh.Neeraj Saluja had a so been recorded wherein, he had stated in question no. 4 and 5 as under:
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"Q. 4 As the whole stock lying in these premises has been found according as per our listby you, the finished stock ire. the T-shirts packed with the transparent polythene matter
------------Saluja Exim Ltd. is printed. Kindly
-----------whether the stock belongs to Saluja Exim Ltd. or Saluja International.
Ans. You have found --------------- of stock-T- shirts, Boxes------- -and vestor, out of which only T- shirts are packed in polythene printed with. Her name of Saluja Exim have happened due to non- availability of packing material. In the case of other two. items nothing is mentioned but the goods belongs to Saluja International. This may have happened due to negligence of the staff. Q.5 Kindly produce any packing material with Saluja International printed on it or any tag of Saluja International.
Ans. There is lot of packing material on which nothing is printed: As I told you, it i s out of stock so I cannot produce : any packing material or tag of Saluja International at present.
10.3 It will be thus seen on careful perusal of the above statement that no inference can be recorded that the assessee was carrying on any manufacturing activities at the premises of M/s Saluja International. Mere fact that packing material of' the assessee company has been utilized cannot be assumed to allege and hold that the assessee is carrying on manufacturing activities at Ludhiana and not at Baddi. Infact, it has been duly explained by the partner, of M/s Saluja International that such incorrect affixing of labels happened due to non availability of packing material, as M/s Saluja International is nothing but a group concern of the assessee and it is a case of negligence of staff and no more, it is thus clear that affixation of labels on the T-shirts found at the premises of M/s Saluja International cannot be made a basis to hold that the assessee is carrying on manufacturing activities at Ludhiana and not at its industrial undertaking at Baddi. Further, in the order of assessment, the Assessing Officer has laid much emphasis on the inadequate machinery installed at the undertaking of the assessee company, at Baddi. The findings so recorded are in disregard of the replies and evidences filed by the assessee wherein the assessee had explained that a live demonstration can be given at the factory premises on any convenient .day and if only 10 about 60% to 70% of the installed capacity of the machineries are put to use, about 8,000 to 10,000 pieces can be manufactured in a day. It has been explained and submitted by the assessee that the entire supply of machinery installed are purchased from Singapore based company and in s u p p o r t, a r e p o r t f r o m S i n g ap o r e b as e d c o mp an y namely M/s Juki PTE Ltd., Singapore had been placed on record. It was also explained that the entire machinery was not available at the time of survey of the assessee company on 5.2.2003 and part of machinery had been sent for repairs/overhaul at the registered office at Ludhiana wherein the representative of the Singapore based company conducted the repairs. The copy of the report received from the supplier was also pl ac e d on re co r d. T he As ses s in g of f icer h as n o t rebutted any of the above .explanation tendered by the assessee but has merely disbelieved the same. Infact, all what he has held is that such an explanation is an af ter thought and the report appears to be an af ter made evidence. It is thus clear that the entire rejection of the explanation is based on surmises, conjectures and ^suspic ion. T he Assessing Off icer, without appreciating the f actual evidences as led by the assessee, has clearly proceeded on assumptions and presumptions. Infact, in regard to the request made by the assessee for a live demonstration, he has merely held in para 1 of the order as under:
" In th i s r e g ar d , i t s e e n th a t D D I T h ad al r e ad y made a s pot visit to the f ac tory to enquire and about estimate the normal capacity of manufacturing of the factory."
10.4 It is thus clear that the; Assessing Off icer has only proceeded to rely upon the enquiries made by DDIT and did not conduct any investigation whatsoever though a specific request was made by the assessee. In l ight of the above f actual situation, it cannot be held that there was inadequate machinery available with the assessee to carry on the stated manufacturing activities. Our above conclusion, is amply supported by the fact, which remains unrebutted, that in the succeeding year namely assessment, year 2004-05, the assessee had manufactured 27,07,416 pieces with the same machinery and same capacity and such production stands duly accepted by excise authorities Infact, even in assessment years 2002-03 and 2003-04, production made by the assessee is 24,46,000 pieces for financial year 2001-02 and 2,07,543 piece f or f inancial year 2002-03 which is far less than the production done in financial year 2003-04 of 27,07,416 pieces. Moreover, the entire sales made by the assessee stand accepted by Sales Tax Department, The copies of the sales tax o r d e r s h av e 11 b e e n p l ac e d o n r e c o r d . In f ac t, wh a t emerges is that the entire supplies are made by the assessee from Baddi which is duly supported by Form No. 26A issued by Sales Tax Department.
10.5 In view of the aforesaid discussion, we conclude by holding that the CIT(A) was justif ied in deleting the additions made by the Assessing Officer by re-computing the deduction u/s 80IB and 80HHC of the Act. Accordingly, the Revenue has to fail on Ground No. 2, even on facts."
21. Following the aforesaid precedent, we f i n d no error in the approach of the Commissioner of Income- tax(A) in deleting the addition. The Commissioner of Income-tax(A) has followed the order of his predecessor dated 30.5.2005 (supra) which has since been approved by the Tribunal vide order dated 18.9.2009 (supra). As a result thereof, the Ground of appeal raised by the Revenue is dismissed.
22. Resultantly, the appeal of the Revenue in I.T.A.No.532/Chandi/2008 is dismissed."
8. No change in the facts and circumstances have been brought to our notice. Therefore, following the aforestated decision we uphold the order of the CIT (Appeals) in deleting the addition made on account of restricting the deduction claimed under section 80IB to 75% as against 100% claimed by the assessee. As a result ground No.1 raised by the Revenue is dismissed.
9. Ground No.2 raised by the Revenue reads as under :
2. That the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs.59,01,329/- made by the A.O. on account of disallowance of interest on non-
business interest free advances.
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10. Brief facts relating to the issue are that the Assessing Officer noticed that the assessee had made interest free advances amounting to Rs.3.42 crores to the following:
Name Amount of advance Date
Akhil Malhotra Rs.20,00,000/- 01.06.2005
Saurabh Knitwears Rs.88,00,000/- Old balance
Sport King Synthetics Rs.26,00,000/- Old balance
Saluja Cotex Pvt. Ltd. Rs.2,08,00,000/- Share Application Money
Later changed as Advance
11. In addition the AO found that an interest free advance of Rs.22.32 crores was outstanding in the account of M/s S.E. Exports as on 31-03-2005 which was transferred to the capital account of the assessee in piecemeal during the year. On being confronted as to why interest pertaining to the same not be disallowed in view of the decision of the Hon'ble Jurisdictional High Court in the case of CIT Vs. Abhishek Industries Ltd. (2006) 286 ITR 1, the assessee replied that all were business advances. The Assessing Officer rejected the assessee's contention in the absence of any evidence and further noted that the advance to one M/s Saurabh Knitwears was old and no attempt was made to recover the same. The Assessing Officer held that since the assessee had failed to discharge its onus to prove that the interest was paid on loans taken for business purpose, the balance interest remaining , after making disallowance under section 14A of the Act, amounting to Rs.59,01,329/- was disallowed 13 following the decision of the Hon'ble Jurisdictional High Court in the case of Abhishek Industries Ltd. (supra).
12. The Ld. CIT (Appeals) deleted the addition made by stating that the interest bearing term loans taken by the assessee could not have been used other than for business purposes. He further held that the amount given to M/s Saluja Cotex Pvt. Ltd. was by way of share application for business purpose and no disallowance could be made on interest pertaining to the same. As regards advance to M/s Saurabh Knitwears and M/s Sport King Synthetics the Ld. CIT (Appeals) held that they were old advances and no disallowance of interest pertaining to the same had been made in the past. The investment made in M/s S.E. Exports was also held to be for business purpose. Further since the advances were found covered by own interest free funds of the assessee in the form of share capital/reserves/surplus, the disallowance made was deleted.
13. Before us, the Ld. DR argued that deletion of disallowance by holding certain advances as for business purpose was not based on any evidence. The Ld. DR pointed out that the Assessing Officer had specifically mentioned that the assessee had failed to establish commercial expediency in the case of these advances. Further, the Ld. DR objected to the observations of the Ld. CIT (Appeals) that the term loans are used for business purposes only, stating that this was a mere presumption 14 which could not be the basis for deleting the disallowance made. The Ld. DR stated that the onus was on the assessee to establish commercial expediency of the advances made. He relied upon the decision of the Hon'ble Apex Court in the case of S.A. Builders Ltd. Vs. CIT, 288 ITR 1 and in the case of Hero Cycles Pvt. Ltd. Vs. CIT, 379 ITR 347. The Ld. DR also contended that the CIT (Appeals) had incorrectly borrowed the proposition that where mixed funds are available and own funds are more than advances made, the presumption is that the advance has been made out of own funds, from the case law cited. Ld DR also contended that the assessee had never stated either before the AO or the CIT(A) that its own funds exceeded interest free advances but had only stated that it had substantial own reserves and share capital. Further the Ld. DR argued that the principle of res-judicata does not apply to income tax proceedings.
14. The Ld. counsel for the assessee, on the other hand, argued that on account of availability of enough own funds there was no reason to make any disallowance at all and placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. Vs. CIT 381 ITR 107(P&H), CIT Vs. Kapsons Associates, 381 ITR 204(P&H) and Hero Cycles Ltd. vs. CIT 379 ITR 347(SC).
15. We have heard the rival contentions. We find that though the Ld.DR has contested the deletion of the 15 disallowance of interest made u/s 36(1)(iii) on various counts ,the Ld Counsel for the assessee has supported the order of the Ld.CIT(A) on one count only ,which is the availability of enough own interest free funds to make the impugned advances. Ld Counsel has relied upon various decisions of the jurisdictional high court as cited above which in the context of section 36(1)(iii) have laid down the proposition that where there are sufficient interest free funds available, the presumption in such cases would be that the advances have been made out of the same and hence there can be no occasion for making disallowance of any interest on account of the interest free advances made. We are in complete agreement with the Ld.Counsel of the assessee in this regard. Moreover we find that the LD CIT(A)has given a factual finding in this regard stating that the amount advanced interest free is far less than the share capital and free reserves of the assessee company. The Ld. CIT (A) ,while deleting the disallowance by agreeing to this proposition advanced by the assessee held as under:
"The A.O. has also considered the amount invested by the appellant as its share capital as partner in the firm M/s S.E. Exports. However, such investment is without any doubt the business investment and therefore, ratio of decision of Abhishek Industries (supra), would not apply and no part of the interest could be disallowed in respect of such investment.
In addition to the above, as pointed out by the Id. Counsel, the Hon'ble Punjab and Haryana High Court in the 16 case of CTT Vs. Motor Sales Ltd (supra), following ratio of the decision of the Hon'ble Supreme Court in the case of M/s S.A.Builders Ltd Vs. CIT (Appeals) and Another 288 ITR 1 (SC), dismissed the appeal of the revenue in the light of findings of CIT(A) that the assessee had paid up capital/reserves/surplus of more than such interest-free advances. The Decision of the Hon'ble Supreme Court, in the case of Munjal Sales Corpn. 298 ITR 298 (SC), (2008) 3 DTR (SC) 217 may also be referred to in this regard Therefore, keeping in view the ratio of these decisions, as the amount advanced interest-free, if for arguments sake considered as such, is far less than paid up share-
capital/reserve/surplus of the appellant, no disallowance of interest could be made as done by the A.O."
16. This finding of fact has not been controverted before us by the Ld DR.In view of the same we find no infirmity in the order of the Ld.CIT(A) deleting the disallowance made on account of interest amounting to Rs.59,01,329/-, u/s 36(1)(iii) of the Act.
17. The ground raised by the revenue is therefore dismissed.
18. Ground No.3 raised by the Revenue reads as follows :
3. That the Ld. CTT(A) has erred in law and facts in deleting the addition of Rs.2,67,11,842/- made by the A.O. on account of disallowance u/s 14A of the Income Tax Act, 1961.
19. Brief facts relating to the issue are that the Assessing Officer made disallowance under section 14A of 17 the Act of financial expenses amounting to Rs.2,67,11,842/- on account of investment made by the assessee in shares, bonds, government security and capital for partnership concerns, on all of which, income earned in the form of interest, dividend and share of profit was claimed as exempt under various provisions of section 10 of the Act. The Ld. CIT (Appeals) deleted the disallowance for the following reasons :
a) All investments were old and no disallowance was made for interest for any such investment in the preceding year.
b) No disallowance under section 14A could be made by computing expenses on proportionate basis as held by the Hon'ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. Vs. JCIT in ITA No.205/Chd/2008 vide order dated 4.7.2008.
c) No nexus of interest bearing funds and investments made, has been established.
d) Investments were covered by the paid-up share capital/surplus/free reserves of the assessee.
Therefore, no part of interest bearing borrowed funds could be taken to be invested by the assessee. The decision of the Hon'ble Apex Court in Munjal Sales Corporation Vs. CIT, 298 ITR 298 was followed by the Ld. CIT (Appeals).
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20. Before us, the Ld. DR stated that the provisions of section 14A(1) of the Act were very clear requiring expenses relating to exempt income to be disallowed and therefore, financial expenses in proportion to investment made had to be disallowed.
21. The Ld. counsel for the assessee, on the other hand, stated that the disallowance was unwarranted in the absence of satisfaction of the AO that the claim of the assessee that no expenses had been incurred was incorrect. The Ld. counsel for the assessee relied upon the judgement of the Hon'ble Jurisdictional High Court in the case of CIT Vs. Abhishek Industries Ltd., 380 ITR 652 and CIT Vs. Kapsons Associates 381 ITR 204 in this regard.
22. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record.
23. In this ground raised before us also we find that though the Ld.DR has contested the deletion of disallowance on various counts, the Ld.Counsel for the assessee while supporting the order of the CIT(A) has only raised the issue of absence of satisfaction of the AO that the claim of the assessee of not incurring any expenditure for earning exempt income was incorrect. We shall therefore be adjudicating the issue of disallowance made 19 u/s 14A raised in this ground before us via-vis the said satisfaction of the AO only.
24. We have gone through the judgements cited by the Ld DR of the jurisdictional High Court . In CIT Vs. Abhishek Industries Ltd., 380 ITR 652 the Hon'ble High Court emphasized the importance of recording of satisfaction by the Assessing Officer that the interest bearing funds were used for making investments earning exempt income and further went on to state that the satisfaction should be based on credible evidence and the onus lies on the Revenue in this regard. At para 9 of its order the Hon'ble High Court held as follows :
"Section 14A of the Act requires the Assessing Off icer to record satisf action th at in terest bear ing f u n d s h a v e b e e n u s e d t o e a r n t a x f r e e i n c o me . T h e s a t i s f a c t i o n t o b e r e c o r d e d mu s t b e b a s e d upon credible and relevant evidence. The onus, theref ore, to prove that interest bearing f unds we r e u s e d , l i e s s q u a r e l y o n t h e s h o u l d e r s o f t h e revenue. T hus, if the Assessing Off icer is able to ref er to relevant material wh i l e recording s a t i s f a c t i o n t h a t b o r r o we d f u n d s we r e u s e d t o earn interest free i n c o me as opposed to the a s s e s s e e ' s o wn f u n d s , t h e A s s e s s i n g O f f i c e r m a y legitimately disallo w such a claim. T he Assessing O f f i c e r , h o we v e r , c a n n o t , by recording general observations, particularly wh e r e the assessee has denied using interest bearing f unds, proceed t o i n f e r t h a t i n t e r e s t b e a r i n g i n c o me mu s t h a s b e e n u s e d t o e a r n e x e m p t e d i n c o me . S e c t i o n 1 4 A of the Act, being in the nature of an exception, 20 h a s t o b e c o n s t r u e d s t r i c t l y a n d o n l y wh e r e t h e Assessing Off icer records satisf action, on the basis of clear and cogent material, shall an order be passed under Section 14A of the Act, d i s a l l o wi n g s u c h a c l a i m . A s t h e r e i s n o t a n g i b l e material on record that could have enabled the A s s e s s i n g O f f i c e r t o r e c o r d s a t i s f a c t i o n i n t e r ms of Section 14A of the Act, f indings recorded by the CIT(A) and the IT A T that the Assessing Off icer has f ailed to discharge this onus are neither perverse nor arbitrary and, theref ore, do not call f or interference."
25. The Jurisdictional High Court in the case of Kapsons Associates reiterated this view following its judgement rendered in the case of Abhishek Industries (supra).
26. Examining the facts of the case in the light of the aforestated decisions we find that in the present case the assessee was found to have made investments amounting to Rs.17,80,78,288/-, income from which exempt under section 10 as follows :
Investments Amount
US - 64 Bonds Rs. 99,97,307/-
Shares - State Bank of
Bikaner and Jaipur Rs. 2,02,500/-
Share capital in S.E. Exports Rs.16,78,78,,481/-
Total : Rs.17,80,78,288/-
27. In an answer to query raised by the Assessing Officer, the assessee categorically stated that the 21 investment in partnership concern had been made out of advances given in preceding years and no fresh investment was made in the impugned year. Therefore, no interest expenses was incurred in the year for earning the exempt income and thus no disallowance could be made under section 14A of the Act . The Assessing Officer, we find made disallowance by stating that, had the advance not been adjusted against share capital, the same would have been returned to banks reducing liability to interest of the company. Thus, we find that there was no satisfaction of the AO that the assessee had incurred any interest expenditure while making the impugned investments and least of all based on any credible evidence in this regard. The AO, we find, did not establish any nexus between interest bearing funds and the investments made. In the absence of satisfaction of the Assessing Officer with respect to incurrence of expenses for earning exempt income which is a sine qua non for invoking section 14A of the Act no disallowance under section 14A of the Act could be made as reiterated time and again by The Hon'ble Jurisdictional High Court in the case of Kapsons Associates (supra) and Abhishek Industries Ltd. (supra.).
28. Thus in the absence of satisfaction we hold that no disallowance could be made under section 14A of the Act.
29. The ground raised by the revenue is therefore dismissed.
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30. In the result the appeal of the Revenue is dismissed.
I T A N o . 7 6 / C h d / 2 0 1 2 (Assessment Year 2007-08) :
31. It is relevant to observe here that both the parties submitted that the ground Nos.1, 2 and 3 raised in this appeal are similar to ground Nos.2, 3 and 1 raised in ITA No.880/Chd/2009. We therefore hold that the findings given in ground Nos.2, 3 and 1 in ITA No.880/Chd/2009 vide paras 14 to 15, 23 to 27 and 7 to 8 respectively shall apply to these grounds also with equal force. I T A N o . 1 0 6 / C h d / 2 0 1 2 (Assessment Year 2008-09):
32. This is to observe here that the ground Nos.1, 2, 3 & 4 raised in this appeal are similar to ground Nos.2, 3 and 1 raised in ITA No.880/Chd/2009 and the findings given in ground Nos.2, 3 and 1 in ITA No.880/Chd/2009 vide paras 14 to 15, 23 to 27 and 7 to 8 respectively shall apply to these grounds also mutatis mutandis. I T A N o . 1 2 5 0 / C h d / 2 0 1 2 (Assessment Year 2009-10):
33. It is relevant to observe here that the only effective ground being ground No.1 raised in this appeal is similar to ground No.1 raised in ITA No.880/Chd/2009 and the findings given in ground No.1 in ITA No.880/Chd/2009 vide paras 7 to 8 shall apply to this ground also with equal force.
I T A N o . 1 1 1 7 / C h d / 2 0 1 2 (Assessment Year 2009-10): 23
34. It is observed that the only ground raised in this appeal is similar to ground No.3 raised in ITA No.880/Chd/2009 and the findings given in ground No.3 in ITA No.880/Chd/2009 vide paras 23 to 27 shall apply to this ground also mutatis mutandis.
35. In the result;
i) The appeals of the Revenue in ITA
No.880/Chd/2009, ITA No.76/Chd/2012, ITA
No/106/Chd/2012 and ITA No.1250/Chd/2012 are dismissed.
ii) The appeal of the assessee in ITA
No.1117/Chd/2012 is allowed.
Order pronounced in the open court.
Sd/- Sd/-
(BHAVNESH SAINI) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 7 t h February, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh
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