M/s Swaraj Engines Ltd., Mohali V. ACIT, Mohali

ITA 1258/CHANDI/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5125 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 01-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: A K JINDAL; RATTAN KAUR
• Keywords: Earning of tax free income; Retrospective amendment; Onus to prove
• Section: 14A; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.1258/CHD/2016 (ASSESSMENT YEAR : 2012-13) SWARAJ ENGINES LIMITED, VS. THE A.C.I.T., MOHALI. CIRCLE -1, MOHALI. PAN: AACS2990N & ITA NO.1259/CHD/2016 (ASSESSMENT YEAR : 2013-14) SWARAJ ENGINES LIMITED, VS. THE D.C.I.T., MOHALI. CIRCLE (6)1, MOHALI. PAN: AACS2990N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI A.K. JINDAL & MS.RATTAN KAUR RESPONDENT BY : SHRI S.K. MITTAL, DR DATE OF HEARING : 14.03.2017 DATE OF PRONOUNCEMENT : 01.06.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : THESE TWO APPEALS FILED BY THE SAME ASSESSEE ARE DIRECTED AGAINST THE SEPARATE ORDERS PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-2, CHANDIGARH DATED 2.9.2016 AND 21.10.2016 RELATING TO ASSESSMEN T YEARS 2012-13 AND 2013-14 RESPECTIVELY. 2. SINCE THE ISSUE INVOLVED IN BOTH APPEALS IS COMMON, THEY WERE HEARD TOGETHER AND ARE BEING DISP OSED 2 OFF BY THIS COMMON ORDER. FOR THE SAKE OF CONVENIE NCE WE SHALL BE DEALING WITH THE APPEAL OF THE ASSESSEE IN ITA NO.1258/2016. ITA NO.1258/CHD/2016 (A.Y. 2012-13): 3. THE ASSESSEE IN THE PRESENT APPEAL HAS RAISED TH E FOLLOWING GROUNDS: 1. THAT THE ORDER PASSED BY THE LEARNED CIT (A) IS BAD IN LAW BEING BASED ON CONJECTURES AND SURMISES AND WIT HOUT APPRECIATING MATERIAL ON RECORD. 2. THAT THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FAC TS OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS. 27,20,584 /- MADE BY LD. AO U/S 14A BY APPLYING RULE 8D OF INCOME TAX RULES 1962. 3. THAT THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FA CTS OF THE CASE BY MAKING THE PROVISIONS OF SECTION 14A RE AD WITH RULE 8D APPLICABLE TO THE APPELLANT COMPANY IN A MECHANICAL MANNER. 4. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS OF THE CASE BY IGNORING THE DISALLOWANCE MADE BY THE APPELL ANT COMPANY HIMSELF IN RESPECT OF EARNING THE EXEMPTED INCOME U/S 14A OF INCOME TAX ACT, 1961. 5. THAT THE APPELLANT CRAVES TO LEAVE, ADD OR MODIFY A NY GROUND OF APPEAL BEFORE THE DISPOSAL OF APPEAL. 4. THE ONLY ISSUE IN THE PRESENT APPEAL PERTAINS T O DISALLOWANCE OF EXPENSES MADE BY INVOKING THE PROVI SIONS OF SECTION 14A OF THE INCOME TAX ACT, 1961 (IN SHOR T THE ACT). 3 5. BRIEF FACTS RELEVANT TO THE ISSUE ARE THAT THE ASSESSEE HAD EARNED DIVIDEND OF RS.3,08,09,411/- DU RING THE YEAR. THE ASSESSING OFFICER QUESTIONED THE ASSESSE E THAT SINCE DIVIDEND INCOME WAS EXEMPT FROM TAX, THEREFOR E, EXPENSES INCURRED TO EARN THE SAME IS REQUIRED TO B E DISALLOWED AS PER SECTION 14A OF THE INCOME TAX ACT ,1961 R.W.R. 8D OF THE INCOME TAX RULES, 1962. THE ASSES SEE SUBMITTED, THAT THE TAX AUDITORS, AFTER TAKING INTO ACCOUNT RELEVANT FACTS, CONSIDERED AN AMOUNT OF RS.8,79,416 /- AS EXPENDITURE TOWARDS EARNING OF EXEMPT DIVIDEND INCO ME AND THE SAME HAD BEEN DISALLOWED WHILE COMPUTING THE T AXABLE INCOME. THE ASSESSING OFFICER FOUND THAT ONLY THE SALARY PART AND SOME ADMINISTRATIVE EXPENSES HAD BEEN CONS IDERED BY THE ASSESSEE FOR MAKING DISALLOWANCE U/S 14A OF THE ACT. HE, THEREFORE, REJECTED THE CONTENTION OF THE ASSES SEE AND COMPUTED THE DISALLOWANCE BY APPLYING RULE 8D, AS U NDER: 1) UNDER RULE 8D(2)(II) = RS.1.27 LACS 2) UNDER RULE 8D(2)(III) = RS.34.73 LACS TOTAL DISALLOWANCE = RS.36 LACS 6. THEREAFTER, AFTER REDUCING THE DISALLOWANCE MA DE BY THE ASSESSEE ITSELF IN ITS RETURN OF INCOME AMOU NTING TO RS.8,79,416/-, THE ASSESSING OFFICER MADE A NET DISALLOWANCE OF RS.27,20,584/- U/S 14A OF THE ACT A ND ADDED BACK THE SAME TO THE INCOME OF THE ASSESSEE. 4 7. THE MATTER WAS CARRIED IN APPEAL BEFORE THE LD. CIT(APPEALS) WHERE THE ASSESSEE VEHEMENTLY CONTESTE D THE DISALLOWANCE MADE, ARGUING THAT NO DISALLOWANCE OF EITHER INTEREST EXPENDITURE OR ADMINISTRATIVE EXPENSES WAS CALLED FOR BY APPLYING RULE 8D(II) & 8D(III) RESPECTIVELY, SINCE THE ENTIRE INVESTMENTS HAD BEEN MADE IN DEBT BASED MUTU AL FUNDS WHICH DID NOT REQUIRE ANY EXPENDITURE TO BE I NCURRED AS THE SAME ARE MADE THROUGH ELECTRONIC MODE AND TH E DIVIDEND WAS AUTOMATICALLY CREDITED. THE ASSESSEE ALSO ARGUED THAT IT HAD ON ITS OWN DISALLOWED 100% SALAR Y OF ITS ACCOUNTS OFFICER, 10% OF ITS COMPANY SECRETARY AND SOME EXPENSES OUT OF ADMINISTRATIVE EXPENSES THUS MAKIN G A TOTAL DISALLOWANCE OF RS.8,79,416/-. THE ASSESSEE ALSO S UBMITTED THAT THE ASSESSING OFFICER HAD NOT BROUGHT ON RECOR D ANY OTHER EXPENDITURE WHICH HAS BEEN INCURRED BY THE AS SESSEE TO EARN EXEMPT INCOME AND HAD APPLIED RULE 8D IN A MECHANICAL MANNER. RELIANCE WAS PLACED ON THE DECI SION OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. DE EPAK MITTAL (2014) 361 ITR 131. THE ASSESSEE ALSO SUBMI TTED THAT IT HAD AMPLE RESERVES AND SURPLUS AND ALL INVESTMEN TS WERE MADE FROM ITS OWN FUNDS AND, THEREFORE, ALSO NO DISALLOWANCE U/S 14A OF THE ACT WAS WARRANTED. REL IANCE WAS PLACED ON THE DECISION OF THE JURISDICTIONAL HI GH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 380 ITR 652. THE CIT(APPEALS) REJECTED BOTH THE CONTENTIONS OF T HE ASSESSEE STATING THAT THE ASSESSING OFFICER HAD CA TEGORICALLY 5 GIVEN HIS SATISFACTION THAT THE DISALLOWANCE MA DE BY THE ASSESSEE ON ITS OWN WAS NOT CORRECT. THE CIT(APPEAL S) POINTED OUT THAT THE ASSESSING OFFICER HAD OBSERVED THAT WHILE THE ASSESSEE HAD DISALLOWED SALARY OF ONE EMP LOYEE ONLY, PROFIT & LOSS ACCOUNT SHOWED EXPENSES OF RS.1 916.88 LACS AS EMPLOYEES BENEFIT EXPENSES AND RS.7.60 LA CS ON BANK AND OTHER FINANCIAL CHARGES. THE CIT(APPEALS) FURTHER POINTED OUT THAT THE ASSESSING OFFICER HAD ALSO REC ORDED HIS SATISFACTION BY OBSERVING THAT THE ASSESSEE HAD NOT FILED ANY EVIDENCE IN SUPPORT OF ITS CLAIM. THE CIT(APPEALS) HELD THAT THESE FINDINGS OF THE ASSESSING OFFICER AMOUNTED TO OBJECTIVE SATISFACTION ABOUT THE INCORRECTNESS OF THE CLAIM O F ASSESSEE OF THE EXPENDITURE INCURRED. HE THEREFORE REJECTED THE ASSESSEES CONTENTION THAT THE SAID DISALLOWANCE HA D BEEN MADE IN THE ABSENCE OF SATISFACTION OF THE ASSESSIN G OFFICER REGARDING THE INCORRECTNESS OF THE CLAIM OF THE ASS ESSEE. THE CIT(APPEALS) ALSO HELD THAT THE ASSESSEE HAD IN CURRED INTEREST EXPENSES FROM COMMON POOL OF MIXED FUNDS F OR EARNING EXEMPT INCOME AND THAT THE EXPENDITURE INCU RRED ON INFRASTRUCTURE, MAN POWER AND MANAGEMENT WAS ALSO INVOLVED IN DECISION MAKING FOR INVESTMENT PURPOSE WHICH HAD EARNED DIVIDEND INCOME. THE CIT(APPEALS) HELD THAT WHERE COMMON FUNDS HAD BEEN UTILIZED FOR EARNING NO N TAXABLE AND TAXABLE INCOME, THE COMPUTATIONAL PROVI SIONS PROVIDED UNDER RULE 8D WERE ATTRACTED FOR THE PURPO SE OF CALCULATING THE EXPENDITURE INCURRED FOR EARNING T HE EXEMPT INCOME. THE CIT(APPEALS) RELIED UPON THE DECISION OF I.T.A.T. IN THE CASE OF ANIL KUMAR SINGHANIA VS. AC IT (2014) 6 51 TAXMANN.COM 98 IN THIS REGARD AND FURTHER ON THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF AVON CYCLE LTD. THUS THE APPEAL OF THE ASS ESSEE WAS DISMISSED AND THE DISALLOWANCE MADE U/S 14A AMOUNTI NG TO RS.27,20,584/- WAS UPHELD BY THE CIT(APPEALS). 8. AGGRIEVED BY THE SAME, THE ASSESSEE HAS NOW COM E UP IN APPEAL BEFORE US. DURING THE COURSE OF HEARI NG BEFORE US, THE LD. COUNSEL FOR ASSESSEE ARGUED THAT THERE WAS ABSENCE OF SATISFACTION OF THE ASSESSING OFFICER RE GARDING INCORRECTNESS OF CLAIM OF THE ASSESSEE OF QUANTUM O F EXPENDITURE DISALLOWABLE U/S 14A OF THE ACT. THE L D. COUNSEL FOR ASSESSEE RELIED UPON THE DECISION OF TH E JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS DEE PAK MITTAL (2013)361 ITR 131 AND CIT VS ABHISHEK INDUSTRIES LT D. (2016)380 ITR 652. THE LD. COUNSEL FOR THE ASSESSE E ALSO ARGUED THAT NO DISALLOWANCE OF INTEREST IN ANY CASE COULD HAVE BEEN MADE UNDER RULE 8D(2)(II) SINCE THE ASSES SEE HAD ENOUGH OWN SURPLUS FUNDS WHICH WERE INTEREST FREE F OR THE PURPOSE OF MAKING THE SAID INVESTMENTS. THE LD. COU NSEL FOR ASSESSEE DREW OUR ATTENTION TO THE ANNUAL ACCOUNTS OF THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR PLACED AT PAPER BOOK PAGES 9 TO 19 AND POINTED OUT THAT WHILE INVES TMENTS DURING THE IMPUGNED YEAR INCREASED BY RS.2333.1 LA CS, FROM RS.5778.54 LACS IN THE PRECEDING YEAR TO RS.8111.64 LACS IN THE IMPUGNED YEAR, THE OWN INTEREST FREE FUNDS OF T HE ASSESSEE AMOUNTED TO RS.18627.80 LACS BEING THE SHA RE CAPITAL, RESERVES AND SURPLUS OF THE ASSESSEE, AND THE PROFITS 7 EARNED DURING THE YEAR BY THE ASSESSEE AMOUNTED TO RS.7727.5 LACS. THUS THE LD COUNSEL POINTED OUT TH AT THERE WERE SUFFICIENT OWN INTEREST FREE FUNDS WITH THE AS SESSEE TO FINANCE THE INVESTMENTS MADE DURING THE YEAR. THE LD. COUNSEL FOR ASSESSEE FURTHER SUBMITTED THAT AS A MA TTER OF FACT NO INTEREST EXPENDITURE HAD BEEN INCURRED BY T HE ASSESSEE DURING THE IMPUGNED YEAR AND THUS NO DISAL LOWANCE U/S 14A R.W.R.8D(2)(II) ON ACCOUNT OF INTEREST EXPE NDITURE WAS WARRANTED IN THIS CASE. THE LD. COUNSEL FOR AS SESSEE DREW OUR ATTENTION TO THE PROFIT & LOSS ACCOUNT FOR THE IMPUGNED YEAR AND POINTED OUT THAT THE TOTAL FINANC E COST DEBITED TO THE PROFIT & LOSS ACCOUNT AMOUNTED TO RS .7.60 LACS WHICH CONSISTED OF INTEREST ON OVER DRAFT RS.0 .21 LACS, BANK CHARGES RS.3.26 LACS AND OTHER INTEREST COST O F RS.4.13 LACS AS DISCLOSED IN SCHEDULE 2.20 OF THE BALANCE S HEET. THE LD. COUNSEL FOR ASSESSEE FURTHER PLACED A DETAILED BREAK UP OF OTHER INTEREST COST AS FOLLOWS: I) LATE DEPOSIT OF EXCISE DUTY RS.0.50 LACS II) INTEREST ON SUPPLEMENTARY BILLS OF VENDORS DUE TO REVISION IN RATES WITH RETROSPECTIVE EFFECT. RS.1.23 LACS III) INTEREST U/S 234C ON INCOME TAX RS.2.40 LACS TOTAL : RS.4.13 LACS 9. THUS THE LD. COUNSEL FOR ASSESSEE POINTED OUT T HAT IN FACT NO EXPENDITURE ON ACCOUNT OF INTEREST ON BO RROWED FUNDS HAD BEEN INCURRED BY THE ASSESSEE. THE LD. C OUNSEL FOR ASSESSEE ALSO STATED THAT IDENTICAL ISSUE HAD B EEN DECIDED IN ASSESSEES CASE BY THE ITAT CHANDIGARH B ENCH IN 8 ITA NOS.154 & 155/CHD/2015 RELATING TO ASSESSMENT Y EARS 2010-11 AND 2011-12 WHEREIN THE MATTER HAD BEEN SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO REDECIDE TH E ISSUE IN THE LIGHT OF THE DECISION OF THE HON'BLE PUNJAB & H ARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUPRA) AND CIT VS. KAPSONS ASSOCIATES IN ITA NO.354 OF 201 3 DATED 4.8.2015. COPY OF THE ORDER WAS PLACED BEFORE US. 10. THE LD. DR, ON THE OTHER HAND, ARGUED THAT THE ASSESSING OFFICER HAD RECORDED SATISFACTION VIS--V IS CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT ONLY EXPENSES AMOUNTING TO RS.8,79,416/- HAD BEEN INCURRED IN REL ATION TO THE EXEMPT INCOME EARNED IN THE FORM OF DIVIDEND. THE LD. DR DREW OUR ATTENTION TO PAGE 4 OF THE ASSESSMENT O RDER PARA 3.1 IN THIS REGARD AND STATED THAT THE SATISFA CTION OF THE ASSESSING OFFICER WAS RECORDED IN THE SAID PARA . 11. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PART IES, PERUSED THE ORDERS OF AUTHORITIES BELOW AND GONE TH ROUGH THE DOCUMENTS REFERRED TO BEFORE US. THE ISSUE BEF ORE US PERTAINS TO DISALLOWANCE MADE U/S 14A OF THE ACT. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAD EARNED E XEMPT INCOME IN THE FORM OF DIVIDEND AMOUNTING TO RS.3,08,09,411/- DURING THE RELEVANT YEAR OUT OF IN VESTMENTS MADE AMOUNTING TO RS.8111 LACS. THE FACT THAT INVES TMENTS MADE BY THE ASSESSEE SHOWED AN INCREASE OF RS. 2333 .1 LACS AS COMPARED TO THE PRECEDING YEAR , THAT THE OWN FU NDS OF THE ASSESSEE ,IN THE FORM OF SHARE CAPITAL AND RESE RVES AMOUNTED TO RS. 18627.80 LACS AND THE PROFITS EARNE D BY THE 9 ASSESSEE DURING THE YEAR AMOUNTED TO RS. 7727.5 LAC S ARE ALSO NOT DISPUTED. ALSO NOT DISPUTED IS THE FACT TH AT THE TOTAL INTEREST EXPENDITURE INCURRED BY THE ASSESSEE DURIN G THE YEAR AMOUNTED TO RS RS.7.60 LACS WHICH CONSISTED OF INTEREST ON OVER DRAFT RS.0.21 LACS, BANK CHARGES RS.3.26 LA CS AND OTHER INTEREST COST OF RS.4.13 LACS AS DISCLOSED IN SCHEDULE 2.20 OF THE BALANCE SHEET. THE BREAK UP OF THE OTHE R INTEREST IS ALSO NOT DISPUTED. IT IS ALSO A FACT ON RECORD THAT THE ASSESSEE HAD SUO MOTO MADE A DISALLOWANCE OF RS.8,7 9,416/- U/S 14A OF THE ACT WHICH CONSISTED OF ENTIRE SALARY OF ITS ACCOUNTS OFFICER AND 10% SALARY OF ITS COMPANY SECR ETARY AND 46% OF THE AFOREMENTIONED SALARIES ON ACCOUNT O F ADMINISTRATIVE EXPENSES AS FOLLOWS: DISALLOWANCE U/S 14A AMT.(IN RS.) ENTIRE SALARY OF MR.VINOD SHARMA (ACCOUNTS OFFICER) 3,77,249/- 10% SALARY OF MR.M.S.GREWALL (COMPANY SECRETARY) 2,23,856/- SUB TOTAL 6,01,105/- ADD: 46.30% (% AGE OF ADMINISTRATIVE EXPENSES TO THE SALARY) FOR ADM.EXP. 2,78,311/- GROSS TOTAL 8,79,416/- 12. THE FIRST ARGUMENT WHICH WAS RAISED BEFORE US AND WHICH NEEDS TO BE ADDRESSED IS REGARDING THE SATISF ACTION OF THE ASSESSING OFFICER VIS--VIS THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT THE EXPENSES INCURRED FOR EARNING THE EXEMPT INCOME AMOUNTED TO RS.8,79,416/-. ON EXAMIN ING THE ASSESSMENT ORDER AND ON READING PARA 3.1 OF THE SAME, WHICH WAS POINTED OUT TO US BY THE LD. DR WHEREIN 10 PURPORTEDLY THE SATISFACTION OF THE ASSESSING OFFIC ER WAS RECORDED, WE FIND THE SAME READS AS UNDER: 3.1 I HAVE EXAMINED THE ABOVE SUBMISSION OF THE AS SESSEE SUBMITTED VIDE LETTER DATED 18.12.2014 BUT NOT INCL INED TO ACCEPT THE VIEW THAT ONLY SALARY OF ONE EMPLOYEE PE RTAINS TO EXPENDITURE ATTRIBUTABLE TOWARDS EARNING DIVIDEND I NCOME. FROM THE PROFIT AND LOSS ACCOUNT, IT IS OBSERVED TH AT THE ASSESSEE HAS INCURRED RS. 1916.88 LAKHS AS EMPLOYEE S BENEFIT EXPENSES AND RS. 7.60 LAKHS ON BANK AND OTHER FINAN CIAL CHARGES. THE ASSESSEE HAS NOT FILED ANY EVIDENCE WITH REGARD TO THE CLAIM THAT NO BUSINESS ASSETS OR FUNDS OUT OF BUSINESS WE RE UTILIZED OR NO ADMINISTRATIVE EXPENDITURE IS INCURRED IN EARNIN G THE DIVIDEND INCOME. ACCORDINGLY, 1 AM NOT SATISFIED WITH THE CO RRECTNESS OF EXPENDITURE CLAIMED BY THE ASSESSEE. 13. THE SUBMISSIONS MADE BY THE ASSESSEE VIDE LETT ER DATED 18.12.2014, REFERRED TO ABOVE, IS REPRODUCED IN THE ORDER OF THE AO AS UNDER: 'THE ASSESSEE COMPANY HAS EARNED AN EXEMPTED DIVIDE ND INCOME OF RS. 3,08,09,411/- DURING THE F.Y. 2011-12. IN TH IS REGARD, IT IS SUBMITTED THAT ENTIRE EXEMPTED INCOME PERTAINS TO D IVIDEND RECEIVED FROM INVESTMENTS MADE IN CERTAIN DEBT BASED MUTUAL FUNDS. COMPANY'S BOARD OF DIRECTORS HAS PUT IN PLACE A POL ICY DEFINING THE FUNDS WHERE INVESTMENTS ARE REQUIRED TO BE MADE. FU RTHER, MAKING AN INVESTMENT IN THE PRESCRIBED DEBT BASED MUTUAL F UNDS IS LIKE CHOOSING FIXED DEPOSITS FROM VARIOUS AVAILABLE OPTI ONS WHICH DO NOT INCLUDE ANY EXPENDITURE. NOW, JUST BECAUSE THE INCOME FROM DIVIDEND IS A TAX FREE INCOME AS PER THE ACT, THAT DOES NOT MEAN THAT THE 'EXPENSE HAVE NECESSARILY TO BE APPORTIONE D TO EARN SUCH INCOME. AS YOU ARE AWARE OF THAT 'OURS IS A LARGE MANUFACTURING CONCERN AND ALL THE INVESTMENT ARE MA INLY IN ELECTRONIC MODE WHERE THE ECS CREDIT OF DIVIDEND IS AUTOMATICALLY DONE. WE CAN COMPARE THIS DIVIDEND IN COME WITH THE INCOME FROM DIVIDENDS ON THE INVESTMENTS IN SHARES OF COMPANIES BY THE INDIVIDUALS. ONCE THE INVESTMENT IS MADE, TH ERE ARE HARDLY ANY EXPENSES REQUIRED TO BE INCURRED AFTER THAT. IN ANY CASE, DURING THE COURSE OF TAX AUDIT FOR THE RELEVANT A.Y. 2012-13, THE TAX AUDITORS OF THE COMPANY, AFTER TAK ING INTO CONSIDERATION THE ENTIRE FACTS AND DETAILED DELIBER ATIONS, CONSIDERED AN AMOUNT OF RS.8,79,416/- AS EXPENDITURE TOWARDS E ARNING OF EXEMPTED DIVIDEND INCOME U/S. 14A OF INCOME TAX ACT , 1961. THIS AMOUNT OF RS.8,79,416/- HAS BEEN WORKED OUT AS FOLL OWS: 11 DISALLOWANCE U/S 14A AMT. (IN RS.) ENTIRE SALARY OF MR.VINOD SHARMA (ACCOUNTS OFFICER) 3,77,249/- 10% SALARY OF MR. M.S.G REWAL (COMPANY SECRETARY) 2,23,856/- SUB TOTAL 6,01,105/- ADD: 46.30% (% AGE OF ADMINISTRATIVE EXPENSES TO THE SALARY) FOR ADMN. EXP. 2,78,311/- GROSS TOTAL 8,79,416/- THIS DISALLOWANCE HAS BEEN DEPICTED IN CLAUSE 17(1) OF THE TAX AUDIT REPORT AND WAS ALSO DISALLOWED IN THE COMPUTATION O F INCOME FROM BUSINESS OR PROFESSION UNDER SCHEDULE BP OF THE INC OME TAX RETURN. IN VIEW OF THE ABOVE FACTS WE HEREIN SUBMIT THAT NO FURTHER DISALLOWANCE IS WARRANTED IN THE CASE OF ASSESSEE C OMPANY DURING THE A.Y. 2012-13 U/S. 14A READ WITH RULE 8D. FURTHE R, IN ORDER TO SUBSTANTIATE OUR CLAIM, WE RELY ON THE FOLLOWING PR ECEDENTS: 14. COMING TO THE PROPOSITION REGARDING THE SATISFACTION OF THE ASSESSING OFFICER U/S 14A OF TH E ACT WHICH HAS BEEN LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD.(2016) 380 ITR 652(P&H) AND DEEPAK MITTAL (SUPRA), WE FIND THAT THE HONBLE HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUPR A), WHILE DEALING WITH THE ISSUE, HELD THAT THE SATISFACTION TO BE RECORDED MUST BE BASED ON CREDIBLE AND RELEVANT EVI DENCE. THE HON'BLE HIGH COURT HAS HELD THAT ONUS TO PROVE THAT THE CLAIM OF THE ASSESSEE WAS INCORRECT LIES ON THE SHO ULDERS OF THE REVENUE AND THE ASSESSING OFFICER CANNOT STATE THAT HE IS NOT SATISFIED ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE BY MAKING GENERAL OBSERVATION. THE HON'BLE HIGH COURT HAS CATEGORICALLY HELD THAT ON THE BASIS OF C LEAR AND COGENT MATERIAL ONLY CAN BE BASED U/S 14A DISALLOWI NG THE ASSESSEES CLAIM. THE HON'BLE HIGH COURT HAS LAID DOWN THE SAID PROPOSITION AT PARA 9 OF ITS ORDER AS UNDER : 12 SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX FREE INCOME. THE SATISFACTION TO BE RECORDE D MUST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE. THE ONUS, THEREFORE, TO PROVE THAT INTEREST BEARING FUNDS WERE USED, LIES SQUARELY ON THE SHOULDERS OF THE REVENUE. THUS, IF THE ASSESSING OFFICER IS ABLE TO REFER TO RELEVANT MATER IAL WHILE RECORDING SATISFACTION THAT BORROWED FUNDS WERE USE D TO EARN INTEREST FREE INCOME AS OPPOSED TO THE ASSESSEE'S O WN FUNDS, THE ASSESSING OFFICER MAY LEGITIMATELY DISALLOW SUCH A CL AIM. THE ASSESSING OFFICER, HOWEVER, CANNOT, BY RECORDING G ENERAL OBSERVATIONS, PARTICULARLY WHERE THE ASSESSEE HAS DE NIED USING INTEREST BEARING FUNDS, PROCEED TO INFER THAT I NTEREST BEARING INCOME MUST HAS BEEN USED TO EARN EXEMPTED INCOME. SECTION 14A OF THE ACT, BEING IN THE NATURE OF AN EXCEPTION, HA S TO BE CONSTRUED STRICTLY AND ONLY WHERE THE ASSESSI NG OFFICER RECORDS SATISFACTION, ON THE BASIS OF CLEAR AND COGEN T MATERIAL, SHALL AN ORDER BE PASSED UNDER SECTION 14A OF THE ACT, DISALLOWING SUCH A CLAIM. AS THERE IS NO TANGIBLE MATER IAL ON RECORD THAT COULD HAVE ENABLED THE ASSESSING OFFICER TO RECORD SATISFACTION IN TERMS OF SECTION 14A OF THE ACT, FIN DINGS RECORDED BY THE CIT(A) AND THE ITAT THAT THE ASSESSI NG OFFICER HAS FAILED TO DISCHARGE THIS ONUS ARE NEITHER PERVER SE NOR ARBITRARY AND, THEREFORE, DO NOT CALL FOR INTERFERENCE. 15. THE HON'BLE HIGH COURT HAS REITERATED THE SAID PROPOSITION IN THE CASE OF DEEPAK MITTAL (2013) 361 ITR 131(P&H) AS UNDER: 9. WHEN CONSISTENT CASE OF THE ASSESSEE, DESPITE N OTICE GIVEN BY THE ASSESSING OFFICER TO GIVE DETAILS OF TH E EXPENDITURE MADE ON EARNING OF EXEMPTED INCOME IN T HE NATURE OF DIVIDEND, VERSION OF THE ASSESSEE WAS THAT HE HAD NOT MADE ANY EXPENDITURE ON EARNING SUCH INCOME, TH E ASSESSING OFFICER IN TERMS OF SUB-SECTION 2 OF SECTI ON 14-A OF THE ACT WAS TO PROCEED FURTHER TO COLLECT SUCH MATERIA L OR EVIDENCE TO DETERMINE EXPENDITURE, IF ANY, INCURRED BY THE 13 ASSESSEE BUT THE ASSESSING OFFICER INSTEAD RELYING ON RULE 8 -D OF THE RULES APPLIED AS A FORMULA, APPLICABLE TO AN ASS ESSEE WHO HAS INCURRED EXPENDITURE BY WAY OF INTEREST WHI CH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RE CEIPT WHICH IS NOT THE CASE OF THE PRESENT ASSESSEE, WHICH WAS C LEARLY A WRONG APPLICATION INTRODUCED AS A SUBSTITUTE FOR SUB -SECTION 2 OF SECTION 14-A OF THE ACT AND THUS WAS NOT PERMISSI BLE IN LAW. 16. NOW APPLYING THE AFORESAID PROPOSITION LAID DO WN BY THE HON'BLE HIGH COURT TO THE FACTS OF THE PRESE NT CASE, WE FIND THAT THE ASSESSEE HAD STATED THAT ITS ENTIR E INVESTMENTS WERE MADE IN DEBT ORIENTED MUTUAL FUNDS , THAT THE COMPANYS BOARD OF DIRECTORS HAD PUT IN PLACE A POLICY DEFINING FUNDS WHERE INVESTMENTS WERE REQUIRED TO B E MADE AND MAKING SAID INVESTMENT WAS EQUIVALENT TO CHOOSI NG FIXED DEPOSITS FROM VARIOUS AVAILABLE OPTIONS WHICH DOES NOT ENTAIL INCURRING ANY EXPENDITURE. THE ASSESSEE HAD ALSO S UBMITTED THAT IT IS A LARGE CONCERN AND ALL INVESTMENTS ARE MAINLY IN ELECTRONIC MODE WHEREAS ECS CREDIT TO DIVIDEND IS AUTOMATICALLY DONE. THUS THE ASSESSEE HAD SUBMITTE D THAT THE INVESTMENTS HARDLY ENTAILED INCURRING OF ANY EX PENSES. FURTHER THE ASSESSEE HAD SUBMITTED THAT IT HAD DISA LLOWED EXPENSES OF TWO OF ITS EMPLOYEES, BEING 100% OF ITS ACCOUNTS OFFICER AND 10% SALARY OF ITS COMPANY SECRETARY AND FURTHER 46.30% OF SALARY GIVEN TO THESE PERSONS, ON ACCOUNT OF ADMINISTRATIVE EXPENSES INCURRED. NOW, THE ASSESSIN G OFFICER, WE FIND, HAS RECORDED HIS SATISFACTION VIS -A-VIS THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE WITHOUT ANY COGENT BASIS, AS A BARE READING OF PARA 3.1 OF THE ORDER, WHERE THE ASSESSING OFFICER HAS EXPRESSED HIS SATIS FACTION, 14 REVEALS. THE ASSESSING OFFICER HAS DISBELIEVED THE ASSESSEES CLAIM SINCE THE DISALLOWANCE MADE BY THE ASSESSEE W AS MINISCULE AS COMPARED TO THE EXPENSES INCURRED ON EMPLOYEES BENEFIT EXPENSES AND INTEREST EXPENSES. CLEARLY, THIS ALONE CANNOT BE THE BASIS FOR DISBELIEVING THE ASSESSEES EXPLANATION AND CONTENTION. MORE PARTICULARLY, CON SIDERING THE FACT THE ASSESSEE HAS EXPLAINED AS TO WHY IT WA S INCURRING ONLY A SMALL AMOUNT OF EXPENDITURE FOR TH E EARNING OF DIVIDEND INCOME. THE ASSESSING OFFICER WHILE REJ ECTING ASSESSEES CONTENTION HAS NOT STATED AS TO HOW THE CONTENTION OF THE ASSESSEE THAT SINCE ALL INVESTMEN TS WERE MADE IN DEBT ORIENTED FUNDS AND THERE WAS A POLICY LAID DOWN FOR MAKING THE SAID INVESTMENTS AND ALL INVEST MENTS WERE MADE ELECTRONICALLY, THEREFORE, NO EXPENDITURE WAS INCURRED, WAS INCORRECT. THE ASSESSING OFFICER WHI LE RECORDING HIS SATISFACTION HAS NEITHER CONTROVERTED THE CONTENTION OF THE ASSESSEE, NOR HAS BROUGHT OUT ANY FALLACY IN THE CLAIM OF THE ASSESSEE. THE ASSESSING OFFICE R HAS MERELY STATED THAT SINCE THE ASSESSEE HAD INCURRED HUGE EXPENSES ON EMPLOYEES AND INTEREST IT CANNOT CONTRI BUTE ONLY A VERY SMALL PORTION TO THE EARNING OF DIVIDEND INC OME. FOR THE ABOVE REASONS, WE FIND THAT THE BASIS WITH THE ASSESSING OFFICER FOR ARRIVING AT SATISFACTION THAT THE CLAIM OF THE ASSESSEE OF EXPENSES INCURRED FOR THE PURPOSE OF EA RNING DIVIDEND INCOME WAS INCORRECT, WAS NEITHER BASED ON ANY EVIDENCE, NOR HAS ANY COGENT BASIS AND WAS MERELY A GENERAL STATEMENT. AS HELD BY THE HON'BLE JURISDICTIONAL H IGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. AND CIT VS. DEEPAK 15 MITTAL (SUPRA), THE ASSESSING OFFICER HAD NOT EXHIB ITED VALID SATISFACTION REGARDING INCORRECTNESS OF THE CLAIM O F THE ASSESSEE. THE ASSESSING OFFICER IN THE ABSENCE OF SATISFACTION REGARDING CORRECTNESS OF THE CLAIM OF THE ASSESSEE, COULD NOT HAVE THEREFORE PROCEEDED TO APP LY RULE 8D FOR THE PURPOSE OF DISALLOWING EXPENSES INCURRED FOR EARNING EXEMPT INCOME. FOR THIS REASON, WE HOLD TH AT THE DISALLOWANCE MADE U/S 14A AMOUNTING TO RS.27,20,584 /- IS UNWARRANTED AND IS THEREBY DIRECTED TO BE DELETED. 17. THE LD. COUNSEL FOR ASSESSEE HAS ALSO RAISED T HE ARGUMENT BEFORE US THAT IN ANY CASE NO DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE INCURRED COULD BE M ADE BY INVOKING RULE 8D(2)(II) OF THE INCOME TAX RULES, 19 62 SINCE THE ASSESSEE HAD NOT INCURRED ANY INTEREST EXPENDIT URE AT ALL AND ALSO FOR THE REASON THAT IT HAD ENOUGH OWN SURP LUS FUNDS AVAILABLE WITH IT FOR THE PURPOSE OF MAKING I NVESTMENT. THE LD. COUNSEL FOR ASSESSEE HAD DEMONSTRATED BOTH THESE FACTS TO US BY DRAWING OUR ATTENTION TO THE ANNUAL ACCOUNTS OF THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR. WE FIND MERIT IN THIS CONTENTION OF THE LD. COUNSEL FOR ASS ESSEE. AS POINTED OUT TO US, THE ANNUAL ACCOUNTS OF THE ASSES SEE SHOW TOTAL FINANCE COST INCURRED DURING THE YEAR AMOUNTI NG TO RS.7.60 LACS, OUT OF WHICH ONLY 0.21 LACS WAS ON AC COUNT OF INTEREST ON OVER DRAFT WHILE THE REST RELATED TO OT HER INTEREST EXPENSES AND WERE NOT IN THE NATURE OF BORROWING CH ARGES, AS IS EVIDENT FROM THE DETAIL PROVIDED IN THE ANNUA L ACCOUNT OF THE ASSESSEE AND ALSO PLACED BEFORE US AND REPRO DUCED 16 ABOVE. AT THE SAME TIME, WE FIND THAT THE DISALLOW ANCE MADE UNDER RULE 8D(2)(II) AMOUNTED TO RS.1.27 LACS. THE INTEREST EXPENSES ATTRIBUTABLE TO INTEREST BEARING FUNDS IN THE PRESENT CASE NOT EXCEEDING TO RS.0.21 LACS THE DISA LLOWANCE COULD NOT IN ANY CASE HAVE EXCEEDED THE SAID AMOUNT . FURTHER WE FIND THAT IT HAS BEEN CLEARLY DEMONSTRAT ED BEFORE US THAT THE ASSESSEE HAD SUFFICIENT OWN INTEREST FR EE FUNDS TO MAKE THE IMPUGNED INVESTMENTS AND, THEREFORE, TH E PRESUMPTION IN SUCH CASES IS THAT THE INVESTMENT HA S BEEN MADE OUT OF THE SAME. THE HONBLE PUNJAB AND HARYA NA HIGH COURT HAS LAID DOWN THE SAID PROPOSITION IN TH E CONTEXT OF SECTION 14A, IN THE CASE OF CIT VS MAX INDIA LTD ., ITA NO.186 OF 2013 (O&M) DATED 6.9.2016 ,HOLDING AS UND ER: 9. THIS PRESUMPTION IS UNFOUNDED. MERELY BECAUSE THE INTEREST FREE FUNDS WITH THE ASSESSEE HAVE DECREASE D DURING ANY PERIOD, IT DOES NOT FOLLOW THAT THE FUNDS BORROWED ON INTEREST WERE UTILIZED FOR THE PURPOSE OF INVESTING IN ASSETS YIELDING EXEMPT INCOME. IF EVEN AFTER THE DECREASE TH E ASSESSEE HAS INTEREST FREE FUNDS SUFFICIENT TO MAKE THE INVESTMENT IN ASSETS YIELDING THE EXEMPT INCOME, THE PRESUMPTION THAT IT WAS SUCH FUNDS THAT WERE UTILIZE D FOR THE SAID INVESTMENT REMAINS. THERE IS NO REASON FOR IT N OT TO. THE BASIS OF THE PRESUMPTION AS WE WILL ELABORATE LATER IS THAT AN ASSESSEE WOULD INVEST ITS FUNDS TO ITS ADVANTAGE. IT GAI NS NOTHING BY INVESTING INTEREST FREE FUNDS TOWARDS OT HER ASSETS MERELY ON ACCOUNT OF THE INTEREST FREE FUNDS HAVING DECREASED. IN THAT EVENT SO LONG AS EVEN AFTER THE DECREASE THE REOF THERE ARE SUFFICIENT INTEREST FREE FUNDS THE PRESUMPTION THAT THEY WOULD BE FIRST USED TO INVEST IN ASSETS YIELDING EXEM PT INCOME APPLIES WITH EQUAL FORCE. 17 18. IN VIEW OF THE ABOVE, NO DISALLOWANCE OF INTER EST EXPENDITURE WAS WARRANTED IN THE FACTS OF THE PRES ENT CASE. 19. WE THEREFORE HOLD THAT IN THE ABSENCE OF SATISFACTION RECORDED BY THE ASSESSING OFFICER VIS- -VIS THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE OF EXPEN SES DISALLOWABLE U/S 14A OF THE ACT AND FURTHER ON ACCO UNT OF SUFFICIENT OWN FUNDS AVAILABLE WITH THE ASSESSEE FO R THE PURPOSE OF MAKING INVESTMENTS WHICH EARNED EXEMPT I NCOME, THE DISALLOWANCE OF RS.27,20,584/- MADE U/S 14A OF THE ACT WAS UNWARRANTED IN THE PRESENT CASE. THE ORDER OF THE LD.CIT(APPEALS) IS, THEREFORE, SET ASIDE ON THIS CO UNT AND THE DISALLOWANCE MADE U/S 14A AMOUNTING TO RS.27,20,584 /- IS DIRECTED TO BE DELETED. THE GROUNDS OF APPEAL RAIS ED BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 20. IN EFFECT, THE APPEAL OF THE ASSESSEE IS ALLOW ED. ITA NO.1259/CHD/2016 (A.Y. 2013-14): 21. THE ASSESSEE IN THE PRESENT APPEAL HAS RAISED THE FOLLOWING GROUNDS: 6. THAT THE ORDER PASSED BY THE LEARNED CIT (A) IS BAD IN LAW BEING BASED ON CONJECTURES AND SURMISES AND WITHOUT APPRECIATING MATERIAL ON RECORD. 7. THAT THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACT S OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS.28,88,140/- MADE BY LD. AO U/S 14A BY APPLYING RULE 8D OF INCOME TAX RULES 1962. 8. THAT THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FA CTS OF THE CASE BY MAKING THE PROVISIONS OF SECTION 14A READ W ITH 18 RULE 8D APPLICABLE TO THE APPELLANT COMPANY IN A MECHANICAL MANNER. 9. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS OF THE CASE BY IGNORING THE DISALLOWANCE MADE BY THE APPELLANT COMPANY HIMSELF IN RESPECT OF EARNING THE EXEMPTED INCOME U/S 14A OF INCOME TAX ACT, 1961. 10.THAT THE APPELLANT CRAVES TO LEAVE, ADD OR MODIF Y ANY GROUND OF APPEAL BEFORE THE DISPOSAL OF APPEAL. 22. IT IS RELEVANT TO OBSERVE HERE THAT IT WAS COM MON GROUND BETWEEN BOTH THE PARTIES THAT THE FACTS AND CIRCUMSTANCES OF THIS APPEAL ARE SIMILAR TO THAT IN ITA NO.1258/CHD/2016.THE FINDINGS GIVEN IN ITA NO.1258/CHD/2016,THEREFORE, WE HOLD, SHALL APPLY T O THIS APPEAL ALSO WITH EQUAL FORCE. 23. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSE E ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (BHAVNESH SAINI) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 1 ST JUNE 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH