M/S Avon Cycles Ltd., Ludhiana v. Commissioner Of Income Tax, Ludhiana & Another

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. Date of Decision: 20.08.2014 LT.A.No.277 of 2013 M/s Avon Cycles Ltd., Ludhiana ...Appellant Versus Commissioner of Income Tax, Ludhiana & another ...Respondents CORAM: HON'BLE MR. JUSTICK HEMANT GUPTA ©HON'BLE MR. JUSTICE FATEH DEEP SINGH| 1. Whether Reporters of local papers may be allowed to see the judgment? |2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present :Mr. Aalok Mittal, Advocate, for the appellant. Ms. Savita Saxena, Advocate, for the respondents. | HEMANT GUPTA, J. The present appeal under Section 260 A of the Income Tax Act,|1961 (for short ‘the Act’) 1s directed against an order passed by the Income TaxAppellate Tribunal, Chandigarh Bench, Chandigarh on 17.01.2013 relating to|the assessment year 2008-09. The appellant has raised the following substantial questions of law: (1)Whether in facts and circumstances of the present case, the)learned authorities have erred in invoking the provisions of)Section 14A read with Rule 8D without any finding that any)expenditure has been incurred for earning exempt income 1s)legally unsustainable the eyes of law?learned authorities have erred in invoking the provisions of)Section 14A read with Rule 8D without any finding that any)expenditure has been incurred for earning exempt income 1s)legally unsustainable the eyes of law? (11)Whether in facts and circumstances of the case, the learned|authorities below erred in law in making the provisions of Section|14A read with Rule 8D applicable to the assessee in a mechanicalmanner without controverting the fact finding in favour of the)assessee?|authorities below erred in law in making the provisions of Section|14A read with Rule 8D applicable to the assessee in a mechanicalmanner without controverting the fact finding in favour of the)assessee?| (111)Whether the learned authorities below erred in ignoring the)disallowance made by the assessee himself in respect of earningthe exempt income and invoking Section 14A and Rule 8D?disallowance made by the assessee himself in respect of earningthe exempt income and invoking Section 14A and Rule 8D? (iv)Whether in fact and circumstances of the case, the action of theauthorities below, the impugned orders are legally sustainable inthe eyes of law’?authorities below, the impugned orders are legally sustainable inthe eyes of law’? The argument raised in the present appeal is that the dividend|income of Rs.22,47,454/- and long term capital gains at Rs.93,77,270/- was out|of the funds available with the assessee and 1s, thus, exempted from tax. The learned Assessing Officer in its order dated 27.12.2010|(Annexure A-1) found that the assessee had borrowed certain funds on which|liability to pay interest 1s being incurred and on the other hand, certain amountshad been invested in earning tax free dividend income. The Assessing Officer|returned a finding that in view of the massive turnover of the assessee and its|complicated flow of funds, it 1s difficult to identify as to which funds have been|used for what purpose. It 1s admitted by the assessee that there 1s unity of|control, commonality of funds and management in relation to ‘business activity’and ‘investment activity income from which does not or shall not form part ofthe total income’. Consequently, the Assessing Officer disallowed|Rs.47,68,522/- from the exempted income. In further appeal, the Commissioner of Income Tax (Appeals) vide its order dated 28.09.2011 (Annexure A-2) returned a finding that the petitioner|has earned an interest income of Rs.3,95,64,326/- as against payment of interest|of Rs.2,91,79,406/-. The interest payment of Rs.2,91,79,406/- includes interest|on Term Loan amounting to Rs.83,20,558/-. The Commissioner also returned a|finding that income earned on interest 1s much more than the payment of|interest. Thus, the Commissioner of Income Tax (Appeals) set aside the| disallowance made by the Assessing Officer in terms of Section 14 A of the Act| In further appeal, the Commissioner of Income Tax (Appeals) vide its order dated 28.09.2011 (Annexure A-2) returned a finding that the petitioner|has earned an interest income of Rs.3,95,64,326/- as against payment of interest|of Rs.2,91,79,406/-. The interest payment of Rs.2,91,79,406/- includes interest|on Term Loan amounting to Rs.83,20,558/-. The Commissioner also returned a|finding that income earned on interest 1s much more than the payment of|interest. Thus, the Commissioner of Income Tax (Appeals) set aside the| disallowance made by the Assessing Officer in terms of Section 14 A of the Act| and Rule 8D of the Income Jax Rules. In subsequent appeal, the Income Tax Appellate Tribunal recorded| the following findings: disallowance made by the Assessing Officer in terms of Section 14 A of the Act| and Rule 8D of the Income Jax Rules. In subsequent appeal, the Income Tax Appellate Tribunal recorded| the following findings: aeOn the perusal of the provisions of Rule 8D of the Income Tax Rules,we find that the expenditure relatable to the earning of exempt income is equalto aggregate of the amount of expenditure directly relatable to the incomewhich does not form part of the total income 1.e. Rule 8D(2)(1) and thedisallowance of interest as provided under Rule 8D(2)(1) and furtherdisallowance computed under Rule 8D(2)(iu1) of the Income Tax Rules. Thedisallowance made by the assessee on account of direct expenditure relatableto the earning of exempt income 1.e. fee paid for portfolio management totalingRs.13,95,065/- 1s disallowable under Rule 8D(2)(1) of the Income Tax Rules.Under the provisions of Rule 8d(2)(11)” the interest relatable to the investmentin tax free funds is to be computed and as per the working of the assessee itselfthe same comes to Rs.10,49,851/-. Consequently, we direct the AssessingOfficer to disallow Rs.10,49,851/- being the interest so relatable to the earningof exempt income. We find no merit in the alternate plea raised by theassessee that no disallowance of interest is called for after setting off theinterest paid and interest received, where there is no interest payment.Admittedly the assessee had paid total interest of Rs.2.92 crores out of whichinterest paid on term loan raised for specific purpose totals to Rs.1.70 croresand balance interest paid by the assessee is Rs.1.21 crores. The funds utilizedby the assessee being mixed funds and in view of the provisions of Rule8D(2)(11) of the Income Tax Rules the disallowance is confirmed atRs.10,49,851/-. We find no merit in the adhoc disallowance made by the CIT.(Appeals) at Rs.5,00,000/-. Consequently, ground of appeal raised by theRevenue 1s partly allowed and ground raised by the assessee 1n cross-objection1s allowed.”we find that the expenditure relatable to the earning of exempt income is equalto aggregate of the amount of expenditure directly relatable to the incomewhich does not form part of the total income 1.e. Rule 8D(2)(1) and thedisallowance of interest as provided under Rule 8D(2)(1) and furtherdisallowance computed under Rule 8D(2)(iu1) of the Income Tax Rules. Thedisallowance made by the assessee on account of direct expenditure relatableto the earning of exempt income 1.e. fee paid for portfolio management totalingRs.13,95,065/- 1s disallowable under Rule 8D(2)(1) of the Income Tax Rules.Under the provisions of Rule 8d(2)(11)” the interest relatable to the investmentin tax free funds is to be computed and as per the working of the assessee itselfthe same comes to Rs.10,49,851/-. Consequently, we direct the AssessingOfficer to disallow Rs.10,49,851/- being the interest so relatable to the earningof exempt income. We find no merit in the alternate plea raised by theassessee that no disallowance of interest is called for after setting off theinterest paid and interest received, where there is no interest payment.Admittedly the assessee had paid total interest of Rs.2.92 crores out of whichinterest paid on term loan raised for specific purpose totals to Rs.1.70 croresand balance interest paid by the assessee is Rs.1.21 crores. The funds utilizedby the assessee being mixed funds and in view of the provisions of Rule8D(2)(11) of the Income Tax Rules the disallowance is confirmed atRs.10,49,851/-. We find no merit in the adhoc disallowance made by the CIT.(Appeals) at Rs.5,00,000/-. Consequently, ground of appeal raised by theRevenue 1s partly allowed and ground raised by the assessee 1n cross-objection1s allowed.” Still aggrieved, the appellant 1s before this Court by raising the|abovementioned substantial questions of law. Learned counsel for the appellant refers to Bombay High Court|judgment reported as_Commissioner of Income Tax Vs. Reliance Utilities and Still aggrieved, the appellant 1s before this Court by raising the|abovementioned substantial questions of law. Learned counsel for the appellant refers to Bombay High Court|judgment reported as_Commissioner of Income Tax Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340as well as a Division Bench judgment of this|Court in)Commissioner of Income Tax Vs. Hero cycles Ltd. (2010) 323 ITRCourt in)Commissioner of Income Tax Vs. Hero cycles Ltd. (2010) 323 ITR Shall be presumed that the funds available with the assessee were sufficient to meet the investments out of 1ts own funds and that borrowed funds were not|utilized for investment. Therefore, interest, 1f any, paid on borrowed funds|cannot be disallowed in terms of Section 14 A of the Act read with Rule 8D of|the Income Tax Rules. | InReliance Utilities and Power Ltd. case (supra), the Revenue was in appeal before the Bombay High Court against an order passed by the IncomeTax Appellate Tribunal, where negating the argument of the Revenue that|shareholders funds to the tune of over Rs.172 crores was utilized for the purposeof fixed assets in terms of the balance-sheet. It was found that a clear finding offact was recorded that assessee had interest free funds of 1ts own which had beengenerated in the year in question, which has been invested for earning exempt|income. | Similarly, inHero cycles Ltd. case (supra), again the Revenue wasin appeal. The Court has noticed that the Tribunal has held that the expenditureon interest was set off against the income from interest and the investment tn theShare and funds were out of the dividend proceeds. In view of the finding offact, disallowance under Section |14A of the Act was not found to be sustainable.The Court observed that as to whether any expenditure incurred was to be|disallowed is a question of fact. It was held to the following effect: “In view of the finding reproduced above, it is clear that the expenditure oninterest was set off against the income from interest and the investment in theShare and funds were out of the dividend proceeds. In view of this finding offact, disallowance under Section 14A was not sustainable. Whether, 1n a givensituation, any expenditure was incurred which was to be disallowed, it 1s aquestion of fact.... interest on the investments made. Such being a finding of fact, we do not find| that any substantial question of law arises for consideration of this Court. Consequently, the present appeal is dismissed. (HEMANT GUPTA)JUDGE 20.08.2014 |Vimal (FATEH DEEP SINGH)JUDGE