Avon Cycles Ltd. V. Commissioner of Income Tax, Ludhiana and another

ITA/277/2013

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M/s Avon Cycles Ltd. appealed against the order of the Income Tax Appellate Tribunal, which had disallowed certain expenses claimed by the company under Section 14A read with Rule 8D of the Income Tax Rules. The dispute centered on whether the expenses incurred in earning exempt income (dividend and long-term capital gains) were justifiably disallowed by the tax authorities. The Assessing Officer initially disallowed these expenses, which was upheld by the Commissioner of Income Tax (Appeals) but later contested by the company. The Tribunal's decision, which was based on the mixed funds used by the company for investments, was challenged in the High Court. The High Court, referencing previous judgments, concluded that the issues were factual in nature and did not raise any substantial questions of law, leading to the dismissal of the appeal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 675188 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 20-08-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Vs. Reliance Utilities and Power Ltd., Commissioner of Income Tax Vs. Hero cycles Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: SAVITA SAXENA
• Assessee Lawyers: AALOK MITTAL
• Keywords: Disallowance; Exempt income; Mechanical application; Mixed funds; Tax free dividend income
• Section: 14A; 8D; 260-A

Judgement Text

"IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision: 20.08.2014 I.T.A.No.277 of 2013 M/s Avon Cycles Ltd., Ludhiana ...Appellant Versus Commissioner of Income Tax, Ludhiana & another ...Respondents CORAM: HON'BLE MR. JUSTICE 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’) is directed against an order passed by the Income Tax Appellate 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: (i) 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 is legally unsustainable the eyes of law? (ii) 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 mechanical manner without controverting the fact finding in favour of the assessee? VIMAL KUMAR 2014.09.04 12:02 I attest to the accuracy and integrity of this document Chandigarh ITA No.277 of 2013 2 (iii) Whether the learned authorities below erred in ignoring the disallowance made by the assessee himself in respect of earning the exempt income and invoking Section 14A and Rule 8D? (iv) Whether in fact and circumstances of the case, the action of the authorities below, the impugned orders are legally sustainable in the 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 is, 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 is being incurred and on the other hand, certain amounts had 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 is difficult to identify as to which funds have been used for what purpose. It is admitted by the assessee that there is 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 of the 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 is much more than the payment of interest. Thus, the Commissioner of Income Tax (Appeals) set aside the VIMAL KUMAR 2014.09.04 12:02 I attest to the accuracy and integrity of this document Chandigarh ITA No.277 of 2013 3 disallowance made by the Assessing Officer in terms of Section 14 A of the Act and Rule 8D of the Income Tax Rules. In subsequent appeal, the Income Tax Appellate Tribunal recorded the following findings: “21. On 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 equal to aggregate of the amount of expenditure directly relatable to the income which does not form part of the total income i.e. Rule 8D(2)(i) and the disallowance of interest as provided under Rule 8D(2)(ii) and further disallowance computed under Rule 8D(2)(iii) of the Income Tax Rules. The disallowance made by the assessee on account of direct expenditure relatable to the earning of exempt income i.e. fee paid for portfolio management totaling Rs.13,95,065/- is disallowable under Rule 8D(2)(i) of the Income Tax Rules. Under the provisions of Rule 8d(2)(ii)” the interest relatable to the investment in tax free funds is to be computed and as per the working of the assessee itself the same comes to Rs.10,49,851/-. Consequently, we direct the Assessing Officer to disallow Rs.10,49,851/- being the interest so relatable to the earning of exempt income. We find no merit in the alternate plea raised by the assessee that no disallowance of interest is called for after setting off the interest paid and interest received, where there is no interest payment. Admittedly the assessee had paid total interest of Rs.2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs.1.70 crores and balance interest paid by the assessee is Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at Rs.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 the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed.” Still aggrieved, the appellant is 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 340 as well as a Division Bench judgment of this Court in Commissioner of Income Tax Vs. Hero cycles Ltd. (2010) 323 ITR 518, to contend that in view of the balance-sheet produced by the assessee, it VIMAL KUMAR 2014.09.04 12:02 I attest to the accuracy and integrity of this document Chandigarh ITA No.277 of 2013 4 shall be presumed that the funds available with the assessee were sufficient to meet the investments out of its own funds and that borrowed funds were not utilized for investment. Therefore, interest, if 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. In Reliance Utilities and Power Ltd. case (supra), the Revenue was in appeal before the Bombay High Court against an order passed by the Income Tax Appellate Tribunal, where negating the argument of the Revenue that shareholders funds to the tune of over Rs.172 crores was utilized for the purpose of fixed assets in terms of the balance-sheet. It was found that a clear finding of fact was recorded that assessee had interest free funds of its own which had been generated in the year in question, which has been invested for earning exempt income. Similarly, in Hero cycles Ltd. case (supra), again the Revenue was in appeal. The Court has noticed that the Tribunal has held that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of the finding of fact, 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 on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, it is a question of fact……” In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an VIMAL KUMAR 2014.09.04 12:02 I attest to the accuracy and integrity of this document Chandigarh ITA No.277 of 2013 5 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 (FATEH DEEP SINGH) Vimal JUDGE VIMAL KUMAR 2014.09.04 12:02 I attest to the accuracy and integrity of this document Chandigarh "