Commissioner Of Income Tax-Ii v. M/S Hero Cycles Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No. 331 of 2009 (O&M)Date of decision: November 4, 2009 Commissioner of Income Tax-II...Appellant Versus M/s Hero Cycles Ltd. ...Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE GURDEV SINGH Present: Mr. Rajesh Sethi, Advocate, for the revenue. ORDER 1.The revenue has preferred this appeal under Section 260A ofIncome Tax Act, 1961 (for short, “the Act”) for the assessment year 2004-05 against the order of Income Tax Appellate Tribunal, Chandigarh Bench'B', passed in ITA No. 247/Chandi/2008 on 4.7.2008, proposing to raisefollowing substantial question of law:- “(i) Whether on the facts and in law, the Hon'ble ITAT waslegally justified in deleting the disallowance of Rs.3,48,04,375/- under Section 14A of the Income-tax Act,1961 by ignoring the evidence relied on by the AssessingOfficer and holding that a clear nexus has not beenestablished that the interest bearing funds have beenvested for investments generating tax free dividendincome.”legally justified in deleting the disallowance of Rs.3,48,04,375/- under Section 14A of the Income-tax Act,1961 by ignoring the evidence relied on by the AssessingOfficer and holding that a clear nexus has not beenestablished that the interest bearing funds have beenvested for investments generating tax free dividendincome.” The assessee is engaged in manufacturing of cycles and parts of ITA No. 331 of 2009 two-wheelers in multiple units. It earned dividend income, which isexempted under Section 10 (34) and (35). The Assessing Officer made aninquiry whether any expenditure was incurred for earning this income andas a result of the said inquiry addition was made by way of disallowanceunder Section 14A (3), which was partly upheld by the CIT (A). TheTribunal held that there was no nexus with the expenditure incurred and theincome generated. The finding recorded are as under:- “We have perused the same and find that the plea of theassessee that the entire investments have been made out of thedividend proceeds, sale proceeds, debenture redemption etc., isborne out of record. In fact the CIT (Appeals) has also come toa categorical finding that in so far as other units are concerned,none of their funds have been utilized to make the investmentsin question. One aspect which is evident that the interestincome earned by the main unit, Ludhiana, exceeds theexpenditure by way of interest incurred by it, thus obviating theapplication of Section 14A of the Act. Even with regard to thefunds of the main unit, Ludhiana the funds flow positionexplained shows that only the non-interest bearing funds havebeen utilized for making the investments. At pages 3 to 6 ofthe paper book are placed the details of the Bank accounts,wherein the amount of dividend, sale proceeds of shares,debenture redemption etc. have been received and later oninvested in the investments in question. Such funds areostensibly without any burden of interest expenditure. Thus, onfacts we do not find any evidence to show that the assessee has incurred interest expenditure in relation to earning to the taxexempt income in question. We find that all the details inquestion were produced before the Assessing Officer and theCIT (Appeals) also. The entire evidence in this regard, whichis submitted before the lower authorities have been compiled inthe paper book, to which we have already adverted to in theearlier part of the order. Therefore, merely because theassessee has incurred interest expenditure on funds borrowed inthe main unit, Ludhiana, it would not ipso-facto invite thedisallowance under Section 14A, unless there is evidence toshow that such interest bearing funds have been invested in theinvestments which have generated the 'tax exempt dividendincome.' As noted earlier, there is no nexus established by theRevenue in this regard and therefore, on a mere presumption,the provisions of Section 14A cannot be applied. Thus, we findthat the CIT (Appeals) erred in part sustaining the addition. Infact, in the absence of such nexus, the entire addition made wasrequired to be deleted. We accordingly hold so.”We have heard learned counsel for the revenue. 3.Learned counsel for the appellant relies upon Section 14A (2)and Rule 8D (1) (b) to submit that even where the assessee claimed that noexpenditure had been incurred, the correctness of such claim could be goneinto by the Assessing Officer and in the present case, the claim of theassessee that no expenditure was incurred was found to be not acceptable bythe Assessing Officer and thus disallowance was justified. We are unable toaccept the submission. 4.In view of finding reproduced above, it is clear that theexpenditure on interest was set off against the income from interest and theinvestment in the share and funds were out of the dividend proceeds. Inview of this finding of fact, disallowance under Section 14A was notsustainable. Whether, in a given situation, any expenditure was incurredwhich was to be disallowed, is a question of fact. The contention of therevenue that directly or indirectly some expenditure is always incurredwhich must be disallowed under Section 14A and the impact of expenditureso incurred cannot be allowed to be set off against the business incomewhich may nullify the mandate of Section 14A, cannot be accepted.Disallowance under Section 14A requires finding of incurring ofexpenditure where it is found that for earning exempted income noexpenditure has been incurred, disallowance under Section 14A cannotstand. In the present case finding on this aspect, against the revenue, is notshown to be perverse. Consequently, disallowance is not permissible. Wehave taken this view earlier also in ITA No. 504 of 2008 (Commissioner ofIncome Tax Chandigarh II vs. M/s Winsome Textile Industries Limited, Chandigarh), decided on 25.8.2009, wherein it was observed as under:- “6. Contention raised on behalf of the revenue is that even ifthe assessee had made investment in shares out of its ownfunds, the assessee had taken loans on which interest was paidand all the money available with the assessee was in commonkitty, as held by this Court in CIT v. Abhishek IndustriesLimited,(2006) 286 ITR 1 and therefore, disallowance undersection 14A was justified. the assessee had made investment in shares out of its ownfunds, the assessee had taken loans on which interest was paidand all the money available with the assessee was in commonkitty, as held by this Court in CIT v. Abhishek IndustriesLimited,(2006) 286 ITR 1 and therefore, disallowance undersection 14A was justified. 7. We do not find any merit in this submission. Judgment of “6. Contention raised on behalf of the revenue is that even ifthe assessee had made investment in shares out of its ownfunds, the assessee had taken loans on which interest was paidand all the money available with the assessee was in commonkitty, as held by this Court in CIT v. Abhishek IndustriesLimited,(2006) 286 ITR 1 and therefore, disallowance undersection 14A was justified. the assessee had made investment in shares out of its ownfunds, the assessee had taken loans on which interest was paidand all the money available with the assessee was in commonkitty, as held by this Court in CIT v. Abhishek IndustriesLimited,(2006) 286 ITR 1 and therefore, disallowance undersection 14A was justified. 7. We do not find any merit in this submission. Judgment of this Court in Abhishek Industries(supra) was on the issue ofallowability of interest paid on loans given to sister concerns,without interest. It was held that deduction for interest waspermissible when loan was taken for business purpose and notfor diverting the same to sister concern without having nexuswith the business. Observations made therein have to be readin that context. In the present case, admittedly, the assessee didnot make any claim for exemption. In such a situation, Section14A could have no application.” 5.In view of the above, we are of the opinion that no substantialquestion of law arise. 6.The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE November 4, 2009 prem (GURDEV SINGH ) JUDGE