M/s Empire Packages (P) Ltd., Chandigarh V. DCIT, Chandigarh

ITA 1186/CHANDI/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9988 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-11-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 26-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S MITTAL
• Keywords: Capital asset; Depreciation; Earning of tax free income; Commercial expediency; Onus to prove; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.1186/CHD/2013 (ASSESSMENT YEAR : 2010-11) M/S EMPIRE PACKAGES (P) LTD., VS. THE D. C.I.T., # 18, SECTOR 9-A, CIRCLE 1(1), CHANDIGARH. CHANDIGARH. PAN: AAACE5023G APPELLANT BY : SHRI MOHIT DHIMAN RESPONDENT BY : SHRI S.S. MITTAL, DR DATE OF HEARING : 06.04.2016 DATE OF PRONOUNCEMENT : 23.05.2016 O R D E R PER H.L.KARWA, V.P. : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINS T THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX, CHANDIGARH DATED 15.10.2013 FOR ASSESSMENT YEAR 20 10- 11, PASSED UNDER SECTION 250(6) OF THE INCOME TAX A CT, 1961 (IN SHORT THE ACT). 2. GROUND NO.1 OF THE APPEAL IS GENERAL IN NATURE AND, HENCE NO COMMENTS ARE BEING OFFERED. 3. GROUND NO.2 OF THE APPEAL READS AS UNDER : 2 2. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE ID. COMMISSIONER OF INCOME TAX (APPEALS) GRAVELLY ERRED I N UPHOLDING THE ACTION OF THE ID. ASSESSING OFFICER B Y TREATING THE EXPENSES OF RS.25,01,147/- INCURRED ON REPAIR AND M AINTENANCE OF BUILDING AND TUBEWELL AS CAPITAL EXPENDITURE INS TEAD OF REVENUE EXPENDITURE. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THA T THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.28,97,246/- TO THE PROFIT & LOSS ACCOUNT ON ACCOUNT OF REPAIR AND MAINTENANCE OF BUILDING. WHILE EXAMINING THE LEDG ER ACCOUNT OF THE ASSESSEE, THE ASSESSING OFFICER NOTI CED THAT SOME OF THE ENTRIES WERE LIKE CAPITAL NATURE, THE L EDGER OF THESE ENTRIES ARE REPRODUCED HERE-IN-BELOW : REPAIR& MAINTENANCE OF B UILDING BEFORE SEPT. DATE NATURE OF EXPENDITURE VOUCHER AMOUNT 14.07.2009 SUBIR CONSTRUCTION AMT. CREDITED TO SUBIR CONSTRUCTIONS ON A/C REPAIR WORK OF OLD SHED MAKING CONTRACT (RENT AMOUNT) PAYABLE TO HIM 77 2,00,000/- 20.07.2009 SUBIR CON$TRUCTI6N AMT. CREDITED TO SUBIR CONSTRUCTIONS ON A/C REPAIR WORK OF OLD SHED MAKING CONTRACT (RENT AMOUNT) PAYABLE TO HIM 107 4,00, 000/- 08.09.200* SUBIR CONSTRUCTION AMT. CREDITED TO SUBIR CONSTRUCTIONS ON A/C REPAIR WORK OF OLD SHED MAKING CONTRACT (RENT AMOUNT) PAYABLE TO HIM 17 4,00,000/- AFTER SEPT. 31.03.2010 TUBE WELL (AMOUNT PAID ON A/C OLD TUBE WELL REPAIR CHARGES TO BUILDING REPAIR A/C) 382 5,28,624/- 31.03.2010 SURBIR CONST. (BILL NO. 29.28.2010 ON A/C REPAIR OF OLD SHED FOR RS. 17.04.460/- OUT OF WHICH 2 LAC BOOKED ON 14.07.2009 396 7,04,460/- 31.03.2010 CABIN REPAIR (AMOUNT OF REPAIR OF OLD PARTIPON /CAPIN TRAL TO REPAIR AND MAINTENANCE BUILDING A.C 433 4,52,333/- 3 5. THE ASSESSING OFFICER ASKED THE ASSESSEE TO SUBMIT THE DETAILS OF ABOVE EXPENSES AND EXPLAIN TH E NATURE. IN RESPONSE TO THE AFORESAID QUERY, THE AS SESSEE SUBMITTED DETAILED REPLY ON 28.1.2013. AS REGARDS THE REPAIR OF THE BUILDING, THE ASSESSEE SUBMITTED THAT EXTENSIVE REPAIRS WERE DONE AND EXPENDITURE WAS INC URRED ONLY FOR PRESERVING AND MAINTAINING ALREADY EXISTIN G ASSETS AND NO NEW ASSET WAS BROUGHT INTO EXISTENCE, NOR GAVE THE ASSESSEE FOR NEW OR DIFFERENT ADVANTAGE AN D THESE REPAIRS WERE NEEDED IMMEDIATELY AND IN THE INTEREST OF COMMERCIAL EXPEDIENCY. THE ASSESSEE FURTHER EXPLAI NED THAT THE NATURE OF BUSINESS WAS SUCH THAT THE PACKI NG MATERIAL WAS BEING DAMAGED WITH THE LEAKING ROOFS. THE ASSESSEE CLAIMED THAT ONLY THE DAMAGED PORTION OF T HE BUILDING WAS REPAIRED. AS REGARDS THE REPLACEMENT OF TUBEWELL, THE ASSESSEE SUBMITTED THAT THERE WAS ALR EADY A TUBEWELL INSTALLED IN THE FACTORY AND THE ASSESSEE HAD TO ONLY CHANGE THE SAME AND HAS TO REPLACE THE TUBEWEL L. THUS, THE ASSESSEE CLAIMED THAT THE EXPENDITURE OF RS.28,97,246/- WAS INCURRED ON ACCOUNT OF REPAIR AN D MAINTENANCE OF THE GODOWN. THE ASSESSING OFFICER D ID NOT FIND ANY MERIT IN THE CONTENTION OF THE ASSESSEE AN D TREATED THE ENTIRE EXPENDITURE OF CAPITAL NATURE. HOWEVER, THE ASSESSING OFFICER ALLOWED THE DEPRECIATION ON T HE AMOUNTS OF EXPENDITURE SPENT ON TUBEWELL. AFTER A LLOWING 4 DEPRECIATION, THE ASSESSING OFFICER ADDED A SUM OF RS.25,01,147/- TO THE TOTAL INCOME OF THE ASSESSEE. 6. ON APPEAL, THE LEARNED CIT (APPEALS) UPHELD THE ACTION OF THE ASSESSING OFFICER, HOWEVER, THE LEARN ED CIT (APPEALS) DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON TUBEWELL @ 15%. 7. AGGRIEVED BY THE ORDER OF THE LEARNED CIT (APPEALS), THE ASSESSEE HAS COME UP IN APPEAL BEFOR E THE TRIBUNAL. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALSO PERUSED THE MATERIALS AVAILABLE ON RECORD. TH E ASSESSING OFFICER HAS OBSERVED THAT UNDER THE HEAD REPAIR AND MAINTENANCE OF BUILDING THE TOTAL AMOUNT OF RS.28,97,246/- SPENT BY THE ASSESSEE WAS CAPITAL IN NATURE. HE FURTHER POINTED OUT THAT THE DETAILS OF THE EXPENDITURE SUBMITTED BY THE ASSESSEE REVEALED THAT THESE EXPENDITURES WERE IN CAPITAL NATURE. THE ASSESSING OFFICER FURTHER POINTED OUT THAT THE EXPENDITURE SP ENT ON TUBEWELL AND NEW SHED CONSTRUCTIONS WERE CLEARLY IN THE NATURE OF CAPITAL EXPENDITURE. THE ASSESSING OFFIC ER HAS NOT GIVEN ANY FURTHER REASON FOR REJECTING THE CLAI M OF THE ASSESSEE. IT IS APPARENT FROM THE RECORD THAT THE ASSESSEE HAD REPAIRED OLD SHED AND SPENT ABOUT RS.17 LACS. THE ASSESSEE HAD ALSO SPENT AN AMOUNT OF RS.5,28,624/- ON ACCOUNT OF REPAIR OF TUBEWELL. FURTHERMORE, THE AS SESSEE INCURRED AN EXPENDITURE OF RS.4,52,333 ON REPAIR OF CABIN. 5 THUS, THE TOTAL EXPENDITURE INCURRED BY THE ASSESSE E ON ACCOUNT OF REPAIR AND MAINTENANCE WAS RS.26,85,417/ -. THE EXPLANATION OF THE ASSESSEE REGARDING THE REPAI RS OF THE BUILDING WAS THAT THE FACTORY IS FAR AWAY FROM THE INDUSTRIAL AREA AND IS IN A REMOTE PLACE AWAY FROM DERABASSI AND HAS A FACTORY ON 3 ACRES OF LAND AND THE COVERED AREA OF THE FACTORY IS MORE THAN 1 LAC SQ.F T. THE SAID FACTORY WAS SET UP IN THE YEAR 1995. THE MAIN BUSINESS OF THE ASSESSEE IS MANUFACTURING OF VERY SENSITIVE MATERIAL FOR NESTLE INDIA LTD., COLGATE P OLYMOLIVE LTD., HINDUSTAN UNILIVER LTD., LOTUS BEAUTY CARE PR ODUCTS LTD. AND SKOL BREWARIES LTD., ETC. IT IS CLAIMED THAT THE ASSESSEE HAD TO CARRY OUT MAJOR REPAIRS OF THE BUIL DING AND EVEN THE ROOFS WERE LEAKING BADLY AND THE WATER WAS LEAKING IN THE GODOWN ITSELF. SO THE ASSESSEE HAD TO REPLACE THE ROOF AND FLOOR. IT IS CLAIMED THAT THE LEAKAGE CAUSED A GREAT DAMAGED TO THE MATERIAL DURING RAINS SO THE ASSESSEE HAD NO OPTION BUT TO REPLACE THE ROOFS , FLOOR AND ELECTRICAL SYSTEM. THE ENTIRE EXPENDITURE WAS INCURRED IN THE NORMAL COURSE OF BUSINESS. SHRI MO HIT DHIMAN, LEARNED COUNSEL FOR THE ASSESSEE POINTED OU T THAT NO NEW ASSETS WERE CREATED WHICH IS OF ENDURING BEN EFIT OF THE ASSESSEE. IT WAS ONLY THE EXTENSIVE REPAIRS, WHICH WERE REQUIRED. HE ALSO SUBMITTED THAT THESE EXPENS ES WERE INCURRED FOR THE PURPOSE OF PRESERVATION, MAINTENANCE, PROPER UTILIZATION OF ASSETS AND FOR R ESTORING 6 IT TO ITS ORIGINAL CONDITION WHICH THE ASSESSEE HAS DONE AND NO ADDITION OR IMPROVEMENT WAS MADE IN THE BUIL DING AND THE EXPENDITURE WAS NOT INCURRED FOR BRINGING I NTO EXISTENCE OF NEW ASSETS OR TO OBTAIN ANY NEW OR DIF FERENT ADVANTAGE. IT IS NOTICED THAT IN ITS REPLY, THE AS SESSEE HAS SUBMITTED THE OBSERVATIONS OF THE AUDITORS OF PRINC IPLE TO WHOM SUBSTANTIAL SUPPLIES WERE MADE. THE ASSESSEE REFERRED TO PARA 6.5 OF THE PRINCIPLE AUDITORS OBSERVATIONS, WHICH READS AS UNDER : 6.5 SUBSTANTIALLY MEETS; DRAINS OPEN INSIDE PRODU CTION AREA IN THE CONDENSATE RECOVERY AREA AND LOADING BAY. FLOORING IS OF CONCRETE BUT DAMAGED FLOOR FOUND IN FRONT OF THE LAB AREA. GAPS/WATER MARKS WERE SEEN ALONGWITH THE CEILING/WALL AT THE LOADING WAY. GAPS AT THE CEILING OF CONDENSATE RECOVERY AREA WHICH IS ADJACENT TO PRODUCTION AREA AND BIRDS FEATHER WERE OBSERVED ON THE FLOOR. SCRAP MATERIAL STORED ALONGW ITH THE WALL AT THE LOADING BAY. C BOXES, PARTITIONS FOUND LAYING ALONGWITH THE WALL IN PRODUCTION AREA. FLIES WERE SEEN IN THE LOADING AND UNLOADING STATIONS WITH OPEN DRAINS AT THE LOADING BAY. LOADING/UNLOADING BAYS ARE NOT PROTECTED AGAINST THE ENTRY OF PESTS INSIDE THE PRODUCTION AREA. GAP OBSERVED IN THE CEILING AT THE LOADING BAY WITH WATERMARKS OF LEAKAGES. BAREFOOTED EMPLOYEES WERE SEEN WORKING IN PRODUCTION AREA. MATERIAL IS STACKED/STORED ALONGWI TH THE WALL AND DIRECTLY ON THE FLOOR. WAREHOUSE UNLOADING AND LOADING BAY: EXTERNAL AREA VERY DIRTY WITH OPEN DRAINS FULL OF WATER AND LOTS OF FILES ABOVE THE DRA INS. NAKED TUBE LIGHT IN THE DISPATCH AREA. WINDOW GLASSE S ARE NOT FILMED. AUDITOR WAS NOT ASKED TO FOLLOW ANY PLANT GMP RELATED SPECIFIC INSTRUCTIONS. GLUE TANK WAS 7 VERY DIRTY WITH LOTS OF GLUE SPREADING IN THE OUTSIDE AREA AND OVER THE EQUIPMENT SWITCHES. HANDS WASH IS AVAILABLE AT THE ENTRANCE OF PRODUCTION FLOOR BUT AUDITOR WAS NOT ASKED TO WASH HIS HANDS WHILE GOING TO PLANT VISIT. 9. THERE IS NO MATERIAL ON RECORD TO CONTROVERT TH IS CONTENTION OF THE ASSESSEE THAT ONLY LEAKING ROOFS WERE REPLACED, WHICH WERE DAMAGING THE PACKING MATERIAL OF THE ASSESSEE. IN OUR OPINION, THESE REPAIRS WERE DUE T O WEAR AND TEAR OF THE BUILDING DURING ITS USE FOR A NUMBE R OF YEARS AND THESE WERE DONE TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET AND THE OBJECT OF EXPENDITUR E WAS NOT TO BRING ANY NEW ASSET INTO EXISTENCE OR TO OBT AIN THE NEW OR DIFFERENT ADVANTAGE. FROM THE ABOVE, IT IS CLEAR THAT THE FACTORY BUILDING OF THE ASSESSEE WAS IN A DEPLETED CONDITION, WHICH WAS SET UP IN THE YEAR 1995. THE OBSERVATION OF THE AUDITORS OF PRINCIPLE TO WHOM SUBSTANTIAL SUPPLIES WERE BEING MADE IS ALSO VERY R ELEVANT TO SUPPORT THE CLAIM OF THE ASSESSEE THAT IT HAS TO CARRY OUT MAJOR REPAIRS OF THE BUILDING AND THE ROOFS WER E LEAKING BADLY AND WATER WAS LEAKING IN THE GODOWN I TSELF. IN OUR OPINION, THE REPAIRS OF THE FACTORY BUILDING WERE UNDERTAKEN IN THE NORMAL COURSE OF USER FOR THE PUR POSE OF PRESERVATION, MAINTENANCE AND PROPER UTILIZATION OR FOR RESTORING TO ITS ORIGINAL CONDITIONS. IT APPEARS T HAT THE ASSESSING OFFICER HAS TREATED THE ENTIRE EXPENDITUR E AS CAPITAL IN NATURE ON THE GROUND OF THE QUANTUM OF EXPENDITURE. IN OUR CONSIDERED VIEW, THE FACT THAT THE 8 PROCESS OF REPAIR TOWARDS SUBSTANTIAL REPLACEMENT, CANNOT MAKE THE EXPENDITURE AS CAPITAL IN NATURE. AS WE HAVE ALREADY NOTED HERE-IN-ABOVE THAT THE ASSESSEE IS SU PPLYING MATERIAL TO THE MULTI-NATIONAL COMPANIES FOR WHICH THE UPKEEP OF THE BUILDING IS VERY IMPORTANT. EVEN A S MALL DAMAGE TO THE GOODS WOULD RENDER THE WHOLE PRODUCT AS NON-SALEABLE. IN OUR OPINION, THERE IS SUBSTANCE I N THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE EXPENDITURE INCURRED ON REPAIRS WAS FOR THE PUR POSE OF BUSINESS TO BE CARRIED ON MORE EFFICIENTLY AND MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHE D, AND THEREFORE, THE EXPENDITURE SHOULD BE TREATED AS INC URRED ON REVENUE ACCOUNT. AS REGARDS THE TUBEWELL, WHICH WAS INSTALLED IN THE FACTORY, IT IS STATED THAT THE TUB EWELL HAD DRIED AND THE ASSESSEE HAD TO REPLACE THE SAME BY LOWERING IT FURTHER. NO NEW TUBEWELL WAS INSTALLED . THUS, NO NEW ASSET CAME INTO EXISTENCE. THE EXISTING TUB EWELL WAS REPLACED. THERE IS NO MATERIAL ON RECORD TO CO NTROVERT THE ABOVE CONTENTION OF THE ASSESSEE. IN OUR OPINI ON, THE EXPENSES INCURRED TOWARDS DEEPENING OF EXISTING TUB EWELL ARE CERTAINLY IN THE NATURE OF REVENUE. FURTHERMOR E, FROM THE DETAILS SUBMITTED BY THE ASSESSEE, IT IS CLEAR THAT THE EXPENDITURE IN QUESTION WAS INCURRED FOR MAINTENANC E OF TUBEWELL. THE PROCESS OF DEEPENING IS LINKED WITH ITS USER. WE MAY ALSO OBSERVE HERE THAT THE FINDINGS G IVEN BY THE LEARNED CIT (APPEALS) ARE ALSO WITHOUT ANY SUBS TANCE. THE LEARNED CIT (APPEALS) HAS OBSERVED THAT THE ASS ESSEE MUST HAVE CERTAINLY GOT DONE SOME WORK OF CAPITAL N ATURE. 9 HE FURTHER OBSERVED THAT THE AMOUNT CLAIMED TO HAVE BEEN SPENT ON REPAIRS IS EXTREMELY LARGE AND IT IS IMPRO BABLE TO SPEND SUCH A HIGH AMOUNT ON REPAIRS. IN OUR OPINIO N, THESE OBSERVATIONS OF THE LEARNED CIT (APPEALS) ARE NOT TENABLE AND HENCE, WE REJECT THE SAME. IN OUR OPI NION, WHETHER A PARTICULAR REPAIR IS REALLY NEEDED OR NOT OR WHAT AMOUNT TO BE SPENT, THE MATTER IS TO BE DECIDED BY THE ASSESSEE AS IT IS THE PREROGATIVE OF THE ASSESSEE T O TAKE APPROPRIATE REPAIR AT APPROPRIATE TIME. THE REPAIR S MAY BE MAJOR REPAIRS, SPENDING CONSIDERABLE AMOUNT OF M ONEY, WHICH AMOUNT WOULD NOT TAKE AWAY CHARACTER OF REPAI R. IN OUR OPINION, THE QUANTUM OF EXPENDITURE CANNOT BE T HE DECIDING FACTOR AS TO WHETHER THE EXPENDITURE IS CA PITAL OR REVENUE IN NATURE. THERE IS NO MATERIAL ON RECORD THAT THE ASSESSEE HAS CREATED ANY NEW ASSET SO THAT THEY COULD BE OF A LASTING OR ENDURING BENEFIT TO THE ENTERPRI SE IN ISSUE. THE LEARNED CIT (APPEALS) HAS OBSERVED THAT AN AMOUNT OF RS.4,52,333/- HAS BEEN SPENT ON REPAIRS O F CABIN. HE FURTHER OBSERVED THAT THE ASSESSEE MUST HAVE GOT CHANGED EVERYTHING IN THE CABIN, WHICH AMOUNTS TO REPLACEMENT OF THE OLD CABIN AND EXPENDITURE HAS TO BE TREATED AS CAPITAL IN NATURE. THE FINDINGS OF THE LEARNED CIT (APPEALS) ARE BASED ON PRESUMPTIONS AND ASSUMPTIONS . HE HAS NOT GIVEN ANY COGENT REASON IN THIS REGARD. THUS, CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE PRESENT C ASE, WE ARE OF THE VIEW THAT THE AUTHORITIES BELOW HAVE NOT COR RECTLY 10 APPRECIATED THE FACTS OF THE PRESENT CASE AND ALSO SETTLED LEGAL POSITION. ACCORDINGLY, WE SET ASIDE THE FIND INGS OF THE AUTHORITIES BELOW ON THIS ISSUE AND ALLOW THE G ROUND RAISED BY THE ASSESSEE. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE ENTIRE EXPENDITURE C LAIMED BY THE ASSESSEE UNDER THE HEAD REPAIRS AND MAINTENA NCE OF THE BUILDING (OLD SHED), TUBEWELL AND CABIN. W E ALSO DIRECT THE ASSESSING OFFICER TO WITHDRAW THE AMOUNT OF DEPRECIATION, IF ANY, ALLOWED TO THE ASSESSEE ON TH E AMOUNT SPENT ON REPAIR OF TUBEWELL. 10. GROUND NO.3 OF APPEAL RAISED BY THE ASSESSEE READS AS UNDER : 3. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ID. COMMISSIONER OF INCOME TAX (APPEALS) GRAVELLY ERRED IN UPHOLDING THE ADDITION OF RS.76,075/- MADE BY THE I D. ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A OF THE I.T. ACT, 1961. 11. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD MADE INVESTMENTS OF RS.10,87,172/- IN THE SHARES OF VARIOUS COMPANIES. THE ASSESSING OFFICE R TOOK THE VIEW THAT THE INCOME EARNED, IF ANY, FROM THESE INVESTMENTS, WOULD BE IN THE NATURE OF DIVIDEND, WH ICH IS EXEMPT. THE ASSESSEE COULD NOT SPECIFY THE EXPENDI TURE INCURRED IN RELATION TO THE INVESTMENTS MADE BY IT AND SO THE ASSESSING OFFICER COMPUTED DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE INCOME TAX RULES, 19 62, 11 R.W.S.14A OF THE ACT. THE ASSESSING OFFICER DISALL OWED RS.76,075/-. 12. ON APPEAL, THE LEARNED CIT (APPEALS) CONFIRMED THE DISALLOWANCE AND, HENCE THE ASSESSEE IS IN APPE AL BEFORE THE TRIBUNAL. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS. SHRI MOHIT DHIMAN, LEARNED COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE INVESTMENTS WERE NOT MADE OUT OF INTEREST BEARING LOANS BUT OUT OF CAPITAL AND RESERVES OF TH E COMPANY. HE FURTHER POINTED OUT THAT THE CAPITAL O F THE COMPANY WAS AT RS.3,31,00,140/-. THE INTEREST FREE SHARE APPLICATION MONEY WAS AT RS.6,06,500/- AND RESERVE AND SURPLUS WERE AT RS.2,63,61,069/-. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, WHEN THESE INTERE ST FREE FUNDS WERE AVAILABLE AND THE REVENUE AUTHORITIES HA VE NOT BEEN ABLE TO BRING ANY NEXUS BETWEEN TWO, THEREFORE , NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE A CT. IN OUR OPINION, THE ISSUE IS SQUARELY COVERED BY TH E DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. KAPSONS ASSOCIATES (2016) 381 ITR 204 (P&H), WHEREIN THE HON'BLE HIGH COURT HAS HELD AS UNDER : RE : QUESTION NOS.5 AND 6 THE COMMISSIONER OF INCOME-TAX (APPEALS) SOUGHT TO I NTERPRET SECTION 14A. AS WE MENTIONED EARLIER, WE REFRAIN FRO M DECIDING THE ISSUE OF LAW AND KEEP THE SAME OPEN. IT IS IMPORT ANT TO NOTE, HOWEVER, THAT IN THIS RESPECT, THE COMMISSIONER OF 12 INCOME-TAX (APPEALS) HELD IN FAVOUR OF THE ASSESSEE O N THE FACTS. MR. KATOCH SUBMITTED THAT WHERE INCOME IS CHARGEABLE TO TAX, IT IS NOT OPEN TO THE ASSESSEE TO NEVERTHELESS PAY THE TAX ON SUCH INCOME AND THEN CLAIM THAT IT IS NOT EXEMPTED INCOME EVEN THOUGH IT IS IN LAW EXEMPTED INCOME. WE REFRAIN FROM EXPRESSING ANY OPINION REGARDING THE INTERPRETATION OF SECTION 14A(1) AS IN THE PRESENT CASE, THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THE TRIBUNAL HAVE DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THE FACTS. THE ASSESSEE HAD INVESTED AN AMOUNT OF RS. 25,22,43 ,396 IN SHARES AND MUTUAL FUNDS. THE INCOME IN RESPECT THER EOF WOULD BE EXEMPTED. IN ANSWER TO A QUERY RAISED BY T HE ASSESSING OFFICER, THE ASSESSEE CATEGORICALLY STATED THAT THE INVESTMENTS IN SHARES WERE OLD INVESTMENTS WHICH HA D BEEN MADE OUT OF THE CAPITAL AND OUTSTANDING RESERVES OF THE COMPANY AND THAT NO SEPARATE AMOUNT HAD BEEN BORROW ED FOR MAKING THE SAID INVESTMENTS. IT FURTHER STATED THAT NO SPECIAL EXPENDITURE WAS INCURRED FOR EARNING THIS DIVIDEND INC OME. THE ENTIRE RECORD OF THE ASSESSEE WAS AVAILABLE. THE ASSESSEE CANNOT ESTABLISH THE NEGATIVE. IF THE ASSESSING OFFI CER DISBELIEVED THE ASSESSEE, IT WAS FOR HIM TO HAVE ESTABLI SHED THE SAME FROM THE RECORDS OR OTHERWISE. THE ASSESSING O FFICER HAS NOT EVEN CONSIDERED THIS ASSERTION EXPRESSLY MADE BY THE. ASSESSEE. THE ASSESSING OFFICER'S CONCLUSION THAT T HE ASSESSEE HAD NOT PROVIDED DETAILS OF EXPENSES INCURRED ON MAKI NG THESE INVESTMENTS, THEREFORE, CANNOT BE ACCEPTED. THE ASSES SEE'S CASE WAS THAT NO SUCH EXPENSES HAD BEEN INCURRED. IT WAS , THEREFORE, RIGHTLY OBSERVED BY THE COMMISSIONER OF I NCOME-TAX (APPEALS) THAT THE ASSESSING OFFICER HAD NOT RECORD ED ANY REASONS IN THE ASSESSMENT ORDER TO HOLD THAT ANY EXP ENDITURE HAD BEEN INCURRED ON EARNING THE EXEMPT INCOME AND THAT THE ASSESSING OFFICER HAD REJECTED THE CLAIM OF THE APPE LLANT WITHOUT GIVING ANY REASONS FOR THE SAME. WE HAVE AL READY DEALT WITH THIS ISSUE. THE CONCLUSION, THEREFORE, THAT TH E ASSESSING OFFICER HAD MECHANICALLY APPLIED RULE 8D OF THE INCO ME-TAX 13 RULES, 1962 IS WELL FOUNDED. THE TRIBUNAL REITERATE D THESE FACTS AND THE SAME POSITION. AS HELD BY A DIVISION BENCH OF THIS COURT IN I. T. A. NO. 320 OF 2013 TITLED AS CIT V. ABHISHEK INDUSTRIES LTD. DECIDED ON JANU ARY 27, 2015, ( [2016] 380 ITR 652 (P&H)) SECTION 14A REQUI RES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT THE I NTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX-FREE INCOME AND TH AT THE SATISFACTION MUST BE BASED UPON CREDIBLE AND RELEVA NT EVIDENCE. IT WAS FURTHER HELD THAT THE ONUS TO PROVE THAT INT EREST BEARING FUNDS WERE USED LIES SQUARELY ON THE REVENUE. THE I SSUE, THEREFORE, IN THIS REGARD WAS BASED ONLY ON THE FAC TS. THE LEAST THAT MUST BE SAID IN FAVOUR OF THE RESPONDENTS IS THAT THE FINDINGS OF FACT RECORDED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) AND BY THE TRIBUNAL ARE NOT PERVERSE AND THAT THE VIEW TAKEN BY THEM IS CERTAINLY A POSSIBLE VIEW. IN VIEW THEREOF, NO Q UESTION OF LAW ARISES WITH RESPECT TO THESE QUESTIONS AS WELL. 14. IN THE INSTANT CASE ALSO, THE ASSESSEE HAD INVESTED A SUM OF RS.10,87,172/- IN THE SHARES OF V ARIOUS COMPANIES. THE CONTENTION OF THE ASSESSEE IS THAT THE INVESTMENTS IN SHARES HAD BEEN MADE OUT OF THE CAPI TAL AND OUTSTANDING RESERVES OF THE COMPANY AND THAT NO SEPARATE AMOUNT HAD BEEN BORROWED FOR MAKING THE SA ID INVESTMENTS. THE ASSESSEE FURTHER CLAIMED THAT NO SUBSTANTIAL EXPENDITURE WAS INCURRED FOR EARNING DI VIDEND INCOME. IN THE INSTANT CASE, THE REVENUE AUTHORITI ES HAVE NOT GIVEN ANY FINDING THAT THE ASSESSEE HAD EARNED ANY EXEMPT INCOME IN THIS YEAR. FURTHERMORE, THE ASSES SING OFFICER HAS NOT RECORDED ANY SATISFACTION TO THE EF FECT THAT THE INTEREST BEARING FUNDS HAVE BEEN USED TO EARN T AX FREE INCOME. THERE IS NO FINDING THAT THE INTEREST BEAR ING FUNDS WERE USED FOR MAKING THE INVESTMENTS IN THE S HARES. 14 THUS, IN VIEW OF THE JUDGMENT OF THE HON'BLE JURISDICTIONAL IN THE CASE OF KAPSONS ASSOCIATES ( SUPRA), WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDIT ION OF RS.76,075/- MADE UNDER SECTION 14A OF THE ACT. THI S GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALLOWED. 15. GROUND NO.4 OF THE APPEAL READS AS UNDER : 4. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE ID. COMMISSIONER OF INCOME TAX (APPEALS) GRAVELLY ERRED IN UPHOLDING THE ADDITION OF RS. 2,16,136/- MADE BY THE ID. ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 36(I)(III) ON THE ADVANCE GIVEN TO M/S SODEM E FRANCE AT RS. 63,05,285/-. 16. WHILE FRAMING THE ASSESSMENT, THE ASSESSING OFFICER MADE AN ADDITION OF RS.2,16,136/- UNDER SEC TION 36(1)(III) OF THE ACT. THE ASSESSEE HAD ADVANCED A N AMOUNT OF RS.63,05,285/- TO M/S SODEME FRANCE. WHE N THE ASSESSING OFFICER ASKED THE ASSESSEE ABOUT THE PURPOSE OF GIVING THE AFORESAID ADVANCE, IT WAS SUB MITTED THAT THE ADVANCE WAS GIVEN FOR PURCHASE OF MACHINER Y, WHICH WAS NOT DELIVERED AND THE SAID COMPANY HAD BE COME BANKRUPT. THE ASSESSEE HAD FILED A SUIT IN THE COU RT OF LIQUIDATOR IN FRANCE, BUT THE SUIT WAS DISMISSED, S INCE THE PARTY WAS DECLARED BANKRUPT. THE ASSESSEE FUR THER CLAIMED THAT IT IS IN FACT A BAD DEBT AND NO SUCH I NTEREST CAN BE DISALLOWED ON THE AMOUNT WHICH THE ASSESSEE CAN NOT RECOVER. THE ASSESSING OFFICER DID NOT FIND A NY MERIT 15 IN THE REPLY OF THE ASSESSEE AND HE, THEREFORE, DIS ALLOWED AN AMOUNT OF RS.2,16,136/- UNDER SECTION 36(1)(III) OF THE ACT. 17. ON APPEAL, THE LEARNED CIT (APPEALS) UPHELD TH E ORDER OF THE ASSESSING OFFICER AND, HENCE THE ASSES SEE IS IN APPEAL BEFORE THE TRIBUNAL. 18. WE HAVE HEARD THE RIVAL SUBMISSIONS. SHRI MOH I DHIMAN, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE ADVANCED A SUM OF RS.63,05,285/- TO M/ S SODEME FRANCE FOR PURCHASE OF MACHINERY. HOWEVER, THE SELLER DID NOT DELIVER THE MACHINERY AND THE SAID C OMPANY BECAME BANKRUPT AND THE ASSESSEE HAD FILED A SUIT I N THE COURT OF LIQUIDATOR IN FRANCE AND THE SUIT WAS DISM ISSED AS THE SAID COMPANY WAS DECLARED AS BANKRUPT. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, IT WAS BAD DEBT AND TILL DATE NO AMOUNT HAS BEEN RECOVERED FROM THE SAID COMPANY. HE FURTHER POINTED OUT THAT THER E IS NO SCOPE FOR RECOVERY, IT WAS FUTILE TO BURDEN THE ASS ESSEE WITH INTEREST. 19. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HON'BLE JURISDICTIONAL IN THE C ASE OF CIT VS. SURAJ DEV DADA (2014) 367 ITR 78 (P&H), WHE REIN THE HON'BLE HIGH COURT HAS HELD AS UNDER : 16 8. IN VIEW OF THE FINDINGS RECORDED BY THE CIT(A) AS WELL AS THE TRIBUNAL, THERE WAS NO JUSTIFICATION FOR MAKING A N ADDITION OF RS.3,50,000/- UNDER SECTION 36(1)(III) OF T HE ACT. THE ASSESSEE HAS NOT CHARGD ANY INTEREST ON TH E AMOUNT ADVANCED TO M/S NALANDA SPINNERS AS THE AMOUNT ADVANCED TO NALANDA SPINNERS WAS NOT RETURNED FOR WHICH A CIVIL SUIT WAS FILED AND WITH THE ASSISTANCE OF INFLUENTIAL PEOPLE, THE SAME WAS RECOVERED. MOREOVER, FOR THE ASSESSMENT YEARS 2006-0 7 AND 2007-08, SIMILAR ADDITIONS HAD BEEN DELETED WHICH HAS ATTAINED FINALITY. 20. IN THE INSTANT CASE ALSO, THE ASSESSING OFFIC ER DISALLOWED INTEREST OF RS.2,16,136/- ON THE GROUND THAT THE AMOUNT GIVEN TO THE AFORESAID PARTY AS ADVANCE WAS WITHOUT ANY COMMERCIAL EXPEDIENCY. IN THIS CASE AL SO, THE ASSESSEE HAD NOT CHARGED ANY INTEREST ON THE AMOUNT ADVANCED TO FOREIGN COMPANY AS THE AMOUNT ADVANCED TO THE SAID COMPANY WAS NOT RETURNED FOR WHICH CIVIL S UIT WAS FILED AND THE SAID COMPANY WAS DECLARED AS BANK RUPT. IN VIEW OF THE JUDGMENT OF THE HON'BLE PUNJAB & HAR YANA HIGH COURT IN THE CASE OF SURAJ DEV DADA (SUPRA), N OTIONAL INTEREST COULD NOT BE DISALLOWED UNDER SECTION 36(1 )(III) OF THE ACT. IN FACT, THERE WAS NO CHANCE OF RECOVERY OF PRINCIPLE AMOUNT. THUS, CONSIDERING THE TOTALITY O F THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, WE DEL ETE THE ADDITION OF RS.2,16,136/- MADE BY THE ASSESSING OFF ICER AND CONFIRMED BY THE LEARNED CIT (APPEALS) UNDER SE CTION 36(1()(III) OF THE ACT. 21. ALTERNATIVELY, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COMPANY HAD OWN FUNDS 17 AND RESERVES TOTALING TO RS.5,69,98,709/-. IN OTHE R WORDS, THE ASSESSEE HAD SUFFICIENT OWN FUNDS AND, THEREFORE, NO DISALLOWANCECAN BE MADE UNDER SECTION 36(1)(III) OF THE ACT. SECTION 36(1)(III) PROVIDES THAT DEDUCTION SHOULD BE ALLOWED ON THE AMOUNT OF INTERE ST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION WHILE COMPUTING THE INCOME F ROM PROFITS AND GAINS OF BUSINESS. THE PROVISO TO SEC TION 36(1)(III) OF THE ACT PROVIDES THAT WHERE ANY AMOUN T OF INTEREST WAS PAID IN RESPECT OF CAPITAL BORROWED FO R ACQUISITION OF ASSETS, THEN SUCH INTEREST WHICH IS RELATABLE TO THE PERIOD BEGINNING FROM THE DATE ON WHICH CAPI TAL WAS BORROWED FOR ACQUISITION OF ASSET TILL THE DATE ON WHICH ASSET WAS PUT TO USE, SHALL NOT BE ALLOWED AS A DEDUCTION. IN THE INSTANT CASE, THE ASSESSEE HAD NOT BORROWED ANY CAPITAL FOR THE PURPOSES OF INVESTMENT S IN CAPITAL ASSETS FOR EXTENSION OF EXITING BUSINESS. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAD D IVERTED THE FUNDS BORROWED ON INTEREST FOR THE PURPOSE OF ADVANCING THE SAME TO THE AFORESAID COMPANY. IT IS EVIDENT FROM THE RECORD THAT THERE WERE SUFFICIENT FREE FUNDS AND RESERVES AVAILABLE WITH THE ASSESSEE TO A DVANCE THE MONEY TO THE AFORESAID COMPANY. RECENTLY, THE HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES P . LTD. VS. CIT (2015) 379 ITR 347 (SC) HELD THAT NO DISALL OWANCE OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT, CA N BE MADE IF THE ADVANCES ARE OUT OF OWN FUNDS. IN THIS VIE W OF THE MATTER ALSO, THE DISALLOWANCE MADE BY THE ASSESSING 18 OFFICER AND CONFIRMED BY THE LEARNED CIT (APPEALS) IS UNCALLED FOR. THIS GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALLOWED. 22. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF MAY, 2016 SD/- SD/- (RANO JAIN) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT DATED : 23 RD MAY, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE D R. ASSISTANT REGISTRAR, ITAT, CHANDIGARH