Appel v. M/S Ganeshay Overseas Industries Limited

Gurbax SinghIN THE HIGH COURT OF PUNJAB AND HARY ANA AD n2%4 c.50 |2017.04.03 16:22CHANDIGARH. ITA No. 14 of 2017 (O&M)Date of decision: 20.02.2017. The Pr. Commissioner of Income Tax (Central), Ludhiana ..-.-- Appel Vs. M/s Ganeshay Overseas Industries Limited ..-.Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTALHON’BLE MR. JUSTICEK RAMENDRA JAIN.HON’BLE MR. JUSTICEK RAMENDRA JAIN. Present: Mr. Rajesh Katoch, Advocate for the appellant. Ajay Kumar Mittal,J. 1]This order shall dispose of ITA Nos. 14 and 32 of 2017 asaccording of the learned counsel for the appellant, the issue involved in boththe appeals is identical. However, the facts are being extracted from ITA No.14 of 2017 |ITA No. 14 of 2017 has been preferred by the appellant-revenue under Section 260A of the Income Tax Act, 1961 which (in short,“the Act’) against the order dated 19.10.2015, Annexure A.III, passed by theIncome Tax Appellate Tribunal, Division Bench, Chandigarh (in short, “theTribunal”) in ITA No. 236/Chd/2015, for the assessment year 2010-11,claiming following substantial questions of law. (1) Whether on the facts and in the circumstances of the case,the Hon’ble Income Tax Appellate Tribunal, Division Bench, Chandigarh has erred in law in deleting the entire addition of<84,00,560/- made by the AO under Section 14A of the IncomeTax Act, 1961 which was confirmed by the CIT(A) to theextent ofz23,16,000/- without appreciating the specific|findings of the AO as well as of the CIT(A) that the assesseehad not been able to substantiate its claim of not having anynexus between the interest expenditure/administrative expensesand the earning of the tax-free income, though opportunity wasallowed by the AO to the assessee, in this regard? (11) Whether on the facts and in the circumstances of the case,the Hon’ble Income Tax Appellate Tribunal, Division Bench,Chandigarh has erred in law in dismissing the appeal of therevenue against the decision of the CIT(A) who had restrictedthe addition under Section 14A of the Income Tax Act to the|extent of the exempt income of|e23,16,000/-whereas as per|Section 14A of the Act, the expenses which are relatable toearning of exempt income have to be considered fordisallowance, irrespective of the fact whether any such incomehas been earned during the relevant year or not and thereforethe disallowance under Section 14A of the Act cannot be!restricted to the extent of amount of the exempt income?” onA tew facts relevant for the decision of the controversyinvolved as narrated in ITA No. 14 of 2017 may be noticed. During thecourse of assessment proceedings for the assessment year in question, theAssessing Officer noticed that the assessee had made investments to the tuneof|<67,50,41,000/- in previous year which was shown in the balance sheetfor the period ending 31.03.2010. However, the assessee had not shown anyincome on this amount except a dividend income ofy23,16,000/- which wasclaimed as exempt under Section 10(34) of the Act in the computation ofincome. The assessee was asked by the Assessing Officer to show cause asto why disallowance of proportionate expenses as per Rule 8D of the Income onA tew facts relevant for the decision of the controversyinvolved as narrated in ITA No. 14 of 2017 may be noticed. During thecourse of assessment proceedings for the assessment year in question, theAssessing Officer noticed that the assessee had made investments to the tuneof|<67,50,41,000/- in previous year which was shown in the balance sheetfor the period ending 31.03.2010. However, the assessee had not shown anyincome on this amount except a dividend income ofy23,16,000/- which wasclaimed as exempt under Section 10(34) of the Act in the computation ofincome. The assessee was asked by the Assessing Officer to show cause asto why disallowance of proportionate expenses as per Rule 8D of the Income Tax Rules, 1962 (in short, “ the Rules’) be not made. The assessee did notfile any reply. Thus, in accordance with the Rule 8D of the Rules, read withSection 14A of the Act, the disallowance was worked out at<84.00,560/-which was disallowed and added back to the income of the assessee undersection 14A of the Act. Aggrieved by the order, the assessee filed an appealbefore the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide orderdated 18.12.2014, Annexure, A.II, the CIT(A) restricted the disallowance ofd84,00,560/- to the extent of the exempted income ofy23,16,000/-. Not|satisfied with the order, the assessee as well as the revenue filed crossappeals before the Tribunal. The Tribunal allowed the appeal filed by theassessee and dismissed the one filed by the revenue, deleting the entireaddition made by the Assessing Officer under Section I4A of the Act,holding that the interest expenditure incurred by the assessee during the yearwas not having nexus to the earning of the tax-free income. Thus, nodisallowance on account of interest expenditure under Section 14A of theAct could be made. Hence, the instant appeals by the revenue. 4 We have heard learned counsel for the appellant. |5 Admittedly, the assessee had made investments to the tune of ©d67,50,41,000/- in the previous year which was shown in the balance sheetfor the period upto 31.03.2010. The assessee had not shown any income onthis amount except dividend income of223,16,000/- which was claimed asexempt under Section 10(34) of the Act. The assessee was asked by theAssessing Officer to explain the position. The Assessing Officer afterexamining the matter disallowed the amount ofy84,00,560/- and added thesame to the income of the assessee under Section 14A of the Act. The appealfiled by the assessee was partly allowed by the CIT(A) restricting theamount of disallowance tod23,16,000/- Thereafter, both the assessee as well as the revenue filed cross appeals before the Tribunal. The Tribunalvide order dated 19.10.2015, Annexure A.II], allowed the appeal filed by theassessee and dismissed the one filed by the revenue, deleting the entireaddition made by the Assessing Officer under Section 14A of the Act. Thecategorical finding recorded by the Tribunal is that the investment in theearlier year was ofy63,30,41,000/-. At the end of the current year, theamount came fod67,50,41,000/-. Thus, the increase ofd4,20,00,000/- wason account of transfer of share application money to share allotment. Theinvestments were made in the earlier year and no new investment had beenmade in the current year. Thus, it was concluded that the investments madein the earlier year were made out of own funds of the assessee and noborrowed funds were used for such investments. It was further recorded that|the interest paid during the year did not have any nexus to the investmentsand thus, no tax free income from these investments was earned. Therelevant findings recorded by the Tribunal read thus:- “7. We have heard the learned representative of both the parties,perused the findings of the authorities below and considered thematerial available on recod. It is seen from the perusal of thebalance sheet, Profit & Loss Account and the schedulesannexed thereto (Paper Book Page-1l) that the investment inearlier year was of<63,30,41,000/-, while it is to an amount of<67,50,41,000/- at the end of the current year, the increase of<4,20,00,000/- is on account of transfer of share applicationmoney to share allotment, as is evident from page 4 of thePaper Book. As such, it is quite evident that the investmentswere made in earlier year, no new investment has been made inthe current year. From the perusal of Paper Book page 8, whichis Annexure-20 to the Profit & Loss Account, it appears that nointerest to bank or otherwise was paid in the earlier year, whichgoes to prove that the investments having been made in earlieryear were made out of own funds of the assessee and no borrowed funds were used for such investments. As regardsinterest of<66,91,327/- being paid this year, it is seen from theperusal of Annexure-3 of the balance sheet placed a Paper BookPage-3 that ICICI working capital limit amounting to<49,99,98,560/- was raised during the year, which was notthere in the preceding year, which further goes to prove that theinterest paid during the year does not have any nexus to theinvestments and thus no tax free income from these investmentswas earned. Therefore, any disallowance of interest expenditurebeing related to earning tax-free income cannot be made in thisCase. 8. There is no need to go further on the issue of disallowance ofinterest part of the expenses related to earning tax free income,as from the explanation and evidences brought on record by theassessee, aS Stated hereinabove, it is proved beyond doubt thatthe interest expenditure incurred by the assessee during the yeardoes not have any nexus to earning of tax-free income. Relyingon the judgment of the Hon’ble Jurisdictional Punjab &Haryana High Court in the case of Bright Enterprises PrivateLimited Vs. CIT, ITA 224 of 2013 (O&M) dated 27.07.2015,we hold that on the facts and circumstances, no disallowance onaccount of interest expenditure under Section 14A of the Actcan be made in this case. 9. As regards the administrative expenses part of thedisallowance under Section 14A of the Act, the assessee has allalong been contending before the lower authorities that therewas no need for it to incur any such expenditure, the AssessingOffice straightaway, without commenting on such claim of theassessee, embarked upon computation under Rule 8D of theIncome Tax Rules for the purpose of Section 14D of the Act.She has nowhere recorded her satisfaction that how such claim|of the assessee is not acceptable to her. From the perusal of thewhole order of the Assessing Officer, no such satisfaction canbe inferred directly or indirectly. In such circumstances, therecording of satisfaction of the Assessing Officer is a must, asheld by the Hon’ble Jurisdictional Punjab & Haryana High Court in the case of CIT Vs. Deepak Mittal. 36CCH 51 (2013)(P&H). There are a number of other judgments of various HighCourts and Benches of the Tribunal. However, for the sake ofbrevity, we see no need to mention all of those. Therefore, inthe circumstances, no disallowance on account of expensesunder Section 14A of the Act can be made.” 6.The findings have been recorded by the Tribunal afterappreciating the factual position on record and the relevant provisions oflaw, which have not been shown to be illegal or perverse by the learnedcounsel for the appellant. Thus, no substantial question of law arises.Consequently, both the appeals stand dismissed (Ajay Kumar Mittal)Judge February 20, 2017 Whether speaking/reasoned Whether reportable (Ramendra Jain)Judge JudgeYes/NoYes