Commissioner Of Income Tax-I, Ludhiana v. M/S Abhishek Inustries Ltd.,Ludhiana

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income Tax Appeal No.320 of 2013 Date of Order: 27.01.2015 Commissioner of Income Tax-I, Ludhiana ..Appellant Versus M/s Abhishek Inustries Ltd.,Ludhiana ..Respondent CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE B.S.WALIA Present:Mr. Rajesh Katoch, Advocate,for the appellant. Ms.Radhika Suri, Sr. Advocate, withMs. Rinku Dahiya, Advocate,for the respondent. RAJIVE BHALLA, J (Oral) The revenue is before us challenging order dated17.04.2013, passed by the Income Tax Appellate Tribunal,Chandigarh Bench 'B'. Chandigarh (hereinafter referred to as 'theITAT'). Before we record our opinion, it would be necessary tobriefly refer to the facts. The assessee filed a return of income on30.09.2008, declaring an income of Rs.13,05,01,310/-, followed by arevised return, declaring an income of Rs.1,04,37,640/-. TheAssessing Officer completed assessment under Section 143(3) of theIncome Tax Act, 1961 (hereinafter referred to as 'the Act') by makingnumerous additions, and disallowing certain exemptions claimed by the assessee. The present appeal relates to Rs.2,37,67,894/-,disallowed by the Assessing Officer, under Section 14A of the Actread with Rule 8D of the Income Tax Rules (hereinafter referred to as'the Rules'), by holding that interest bearing funds had been used toearn tax free dividend etc. Aggrieved by this order, the assessee filed an appeal.The CIT(A)-I, Ludhiana, deleted the addition by holding that therevenue has not been able to prove that interest bearing funds wereused. The revenue filed an appeal before the ITAT, ChandigarhBench 'B', Chandigarh, which was dismissed on 17.04.2013, byaffirming the order passed by the CIT(A)-I, Ludhiana. Counsel for the revenue submits that the ITAT has erredin confirming the deletion made by the CIT(A). The onus to provethat interest bearing funds were not used while making investmentsthat earned dividend in the shape of exempted income lay upon theassessee. The Assessing Officer rightly drew an inference againstthe assessee as he failed to discharge the onus. The CIT(A) has bywrongly placing the onus upon the revenue and by holding that therevenue has failed to discharge its onus, deleted this addition. TheITAT has affirmed the order passed by the CIT(A) without appraisingthe record which reveals that interest bearing funds were used toearn dividend, which was claimed as exempted income. Counsel for the revenue has framed the followingsubstantial questions of law:- “i) Whether on the facts and circumstances of the caseand in law, the Hon'ble ITAT is correct in confirming the order of CIT(A) deleting the disallowance ofRs.2,37,67,894/- made under Section 14A read withRule 8D, on account of interest on loans, oninvestments earning tax free income in the form ofdividend. ii) Whether on the facts and in the circumstances ofthe case and in law the Hon'ble Income TaxAppellate Tribunal was justified in relying on thedecision of jurisdictional High Court in the case ofM/s Hero Cycles Ltd. for the Assessment Year2004-05 ignoring the provision of Rule 8D insertedw.e.f. 24.03.2008 and applicable from assessmentyear 2008-09.” Counsel for the revenue has framed the followingsubstantial questions of law:- “i) Whether on the facts and circumstances of the caseand in law, the Hon'ble ITAT is correct in confirming the order of CIT(A) deleting the disallowance ofRs.2,37,67,894/- made under Section 14A read withRule 8D, on account of interest on loans, oninvestments earning tax free income in the form ofdividend. ii) Whether on the facts and in the circumstances ofthe case and in law the Hon'ble Income TaxAppellate Tribunal was justified in relying on thedecision of jurisdictional High Court in the case ofM/s Hero Cycles Ltd. for the Assessment Year2004-05 ignoring the provision of Rule 8D insertedw.e.f. 24.03.2008 and applicable from assessmentyear 2008-09.” Counsel for the assessee submits that a perusal of theimpugned orders reveals that the Assessing Officer admitted that itis not possible to refute or rebut the assessee's statement thatinvestments were not sourced from interest bearing funds. TheAssessing Officer having failed to adduce or refer to any evidencethat could prove that interest bearing funds were utilised for earningtax free income, the CIT(A) rightly deleted these additions. The ITAThas rightly affirmed the order passed by the CIT(A). It is furthersubmitted that the questions of law framed by the revenue havealready been answered against the revenue inCITv. Hero CyclesLtd. [2006] 323 ITR 518 (P&H),CITv. Winsome Textile InustriesLtd. [2009] 319 ITR 204 (P&H)and Commissioner of Income Taxv. Deepak Mittal [2014) 361 ITR 131 (P&H). We have heard counsel for the parties and perused theimpugned order. The Assessing Officer disallowed dividend earned by theassessee by holding that interest bearing funds had been used toearn this income. The CIT(A) set aside this finding by holding thatthe Assessing Officer has failed to prove that interest bearing fundswere used by the assessee. The ITAT has affirmed this finding byholding that as the Assessing Officer has failed to prove that interestbearing funds were used, it would not invite disallowance underSection 14A of the Act. A relevant extract from the order passed bythe ITAT reads as follows:- “8. I have considered the facts of the case and it isseen that the appellant has made a categoricalsubmission of fact before the AO that no interestbearing funds had been diverted to makeinvestments leading to tax exempt income. TheAO has not established as a matter of fact that thecontention put forwarded by the assessee waserroneous or misleading. In fact the AO hasobserved that it was not possible to disprove theclaim of the assessee in this regard. It clearlymeant that the mandatory requirement as stipulatedby Section 14A with regard to the satisfaction thatcertain expenditure had been incurred to earn thetax exempt income, has not been fulfilled.”seen that the appellant has made a categoricalsubmission of fact before the AO that no interestbearing funds had been diverted to makeinvestments leading to tax exempt income. TheAO has not established as a matter of fact that thecontention put forwarded by the assessee waserroneous or misleading. In fact the AO hasobserved that it was not possible to disprove theclaim of the assessee in this regard. It clearlymeant that the mandatory requirement as stipulatedby Section 14A with regard to the satisfaction thatcertain expenditure had been incurred to earn thetax exempt income, has not been fulfilled.”Section 14A of the Act empowers an Assessing Officer to disallow, exempted income if interest bearing funds have been used,by the assessee. The scope and ambit of Section 14A of the Actcame up for consideration inCITv. Winsome Textile Inustries Ltd.(supra). After appraisal of Section 14A of the Act, a Division Benchof this Court held that Section 14A of the Act, may only be invoked ifthe assessee has made investments in purchase of shares out ofborrowed funds. As a consequence if the assessee has invested hisown money in purchase of shares, there is no question ofdisallowance under Section 14A of the Act. A relevant extract fromthe judgment in CITv. Winsome Textile Inustries Ltd. (supra)reads as follows:- “Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H)relates to the provisions of Section 36(1) (iii) andSection 14A which has been invoked in this casewhich stands on a different footing. Even ifdeduction under Section 36(1)(iii) is ordinarilyavailable in respect of borrowed funds utilised forthe purpose of business. Section 14A carves out anexception in so far as any expenditure which isrelatable to the earning of dividend income notsubject to tax is to be disallowed. It would berelevant to point out that the Hon'ble Supreme Courtin the case of Rajasthan State WarehousingCorporation v. CIT [2000] 242 ITR 450 held that inthe case of indivisible business where part ofbusiness income is exempt the expenditure cannotbe apportioned and part relating to income isexempt cannot be disallowed (judgment datedFebruary 23, 2000). However, the Finance Act,2001, incorporated section 14A with effect from April 1, 1962, which provides for disallowance ofexpenditure relating to income not included in thegross total income. Therefore, it is to be ascertainedas to whether the assessee has made theinvestment in purchase of shares out of borrowedfunds or invested its own funds. If the assesseehas invested its own money in the purchase ofshares then there is no question of anydisallowance in respect of interest on borrowedfunds u/s 14A. However, if the borrowed fundshave been utilised for purchase of shares of M/sWinsome Yarns Limited, disallowance u/s 14A shallhave to be calculated even when investment hasbeen made in the course of business of theassessee and the assessee qualifies for deductionu/s 36(1)(iii). So, however, section 14A providesthat no deduction shall be allowed in respect ofexpenditure incurred by the assessee in relating toincome which does not form part of the total incomeunder the Act. So, it is, therefore, necessary to findout if any expenditure was incurred by the assesseefor making investment in the shares of WinsomeYarns Limited. During the course of assessmentproceedings the assessee had furnished writtensubmission in which it was claimed, the paragraph 5of the letter that investment in the shares ofWinsome Yarn Limited was made out of theassessee's own fund and not out of any borrowedfunds. Before the Commissioner of Income Tax(Appeals) also, vide letter dated March 15, 2007 theassessee had reiterated that investment in thepurchase of the shares of Winsome Yarn Limited inthe year 1993-94 had no nexus with the borrowedfunds. The Assessing Officer as per the assessment order has not refuted the claim of theassessee but has made a disallowance on theground that had the said invested in shares wereavailable with the assessee, the assessee wouldnot have been required to raise loans to that extentand incur expenditure on interest on such loans. Inour considered view, the disallowance has got to bemade u/s 14A if any expenditure relating to theearning of income which is not chargeable to taxhas been debited to the accounts by the assessee.Since in this case, the assessee has not incurredany expenditure for making investment in thepurchase of shares of Winsome Yarn Limited, nodisallowance is warranted u/s 14A. We, therefore,find no justification to interfere with the order of theCommissioner of Income Tax (Appeals) in havingdeleted the disallowance. The ground of appealraised by the revenue in this regard in thusdismissed.” Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used toearn tax free income. The satisfaction to be recorded must be basedupon credible and relevant evidence. The onus, therefore, to provethat interest bearing funds were used, lies squarely on the shouldersof the revenue. Thus, if the Assessing Officer is able to refer torelevant material while recording satisfaction that borrowed fundswere used to earn interest free income as opposed to the assessee'sown funds, the Assessing Officer may legitimately disallow such aclaim. The Assessing Officer, however, cannot, by recording generalobservations, particularly where the assessee has denied using Income Tax Appeal No.320 of 2013 interest bearing funds, proceed to infer that interest bearing incomemust has been used to earn exempted income. Section 14A of theAct, being in the nature of an exception, has to be construed strictlyand only where the Assessing Officer records satisfaction, on thebasis of clear and cogent material, shall an order be passed underSection 14A of the Act, disallowing such a claim. As there is notangible material on record that could have enabled the AssessingOfficer to record satisfaction in terms of Section 14A of the Act,findings recorded by the CIT(A) and the ITAT that the AssessingOfficer has failed to discharge this onus are neither perverse norarbitrary and, therefore, do not call for interference. Even otherwise, the controversy, in our consideredopinion, is squarely covered in favour of the assessee by thejudgment inCITv. Winsome Textile Industries Ltd.(supra). We,therefore, find no reason to interfere with findings recorded by theIncome Tax Appellate Tribunal, answer the questions of law againstthe revenue and dismiss the appeal accordingly. (RAJIVE BHALLA) JUDGE January 27, 2015nt (B.S.WALIA) JUDGE