Sh. Kanwaldeep Singh, Ludhiana V. ACIT, Ludhiana

ITA 1261/CHANDI/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5073 (ITAT-CHANDIGARH)
• Duration Of Justice: 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-07-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 02-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Question of law; Onus to prove
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE MS. DIVA SINGH, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.1261/CHD/2016 (ASSESSMENT YEAR : 2010-11) SH.KANWALDEEP SINGH PROP. VS. THE A.C.I.T., M/S NILIBAR, MALL ROAD, CIRCLE-VII, LUDHIANA. LUDHIANA. PAN: AFTPS1554H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGAL RESPONDENT BY : MS.CHANDER KANTA, ADDL.CIT, DR DATE OF HEARING : 23.05.2017 DATE OF PRONOUNCEMENT : 06.07.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINS T THE ORDER OF CIT(APPEALS)-4, CHANDIGARH DATED 4.10. 2016 RELATING TO ASSESSMENT YEAR 2010-11. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. THAT THE WORTHY COMMISSIONER OF INCOME TAX (APPE ALS) HAS ERRED IN UPHOLDING THE ADDITION OF RS. 2,72,363 /- MADE BY THE ASSESSING OFFICER AS AN EXPENDITURE INCURRED ON EARNING DIVIDEND INCOME OF RS. 14,57,438/ - BY APPLYING THE PROVISIONS OF SECTION 14A READ WITH RULE - 8D OF THE INCOME TAX ACT, 1961 AS PER PARA 5.3 OF HIS ORDER. 2. THAT THE WORTHY CIT(A) BESIDES UPHOLDING ADDITION OF RS. 2,72,363/- U/S 14A, AS ABOVE, HAS FURTHER ERRED IN ENHANCING THE AMOUNT OF RS. 22084/-AS PER PARA 5.3 OF HIS ORDER. 3. THAT THE WORTHY CIT (A) HAS ERRED IN UPHOLDING ADDITION OF RS.32,496/-ON ACCOUNT ,OF DISALLOWANCE OUT OF ADVERTISEMENT AND PUBLICITY EXPENSES BY TREATING T HE 2 EXPENSES AS PERSONAL EXPENSES AS PER PARA 7.2 OF HI S ORDER. 4. NOTWITHSTANDING THE ABOVE SAID GROUNDS OF APPEAL, THE WORTHY CIT(A) WHILE UPHOLDING ADDITION IN THE ABOVE SAID PARAS HAS ERRED IN NOT CONSIDERING THAT THE ASSESSING OFFICER WHILE MAKING ADDITION/DISALLOWANCE, HAS ERRED IN NOT GIVING CREDIT OF SUM OF RS.2.00,000/- SHOWN AS MISCELLANEOUS INCOME AND ANOTHER SUM OF RS.2,00,000/- OUT OF EXPENSES AS DISALLOWED IN THE COMPUTATION OF INCOME FILED. 5. THAT ADDITION IN THE AFORESAID PARAS HAS BEEN MA DE AGAINST THE FACTS AND CIRCUMSTANCES AND SUBMISSIONS FILED DURING THE COURSE OF HEARING BEFORE THE CIT ( A) AND ASSESSING OFFICER HAS NOT BEEN CONSIDERED PROPERLY. 6. THAT THE APE CRAVES LEAVE TO ADD OR AMEND THE GR OUNDS OF APPEAL BEFORE THE APPEAL IS FINALLY HEARD OR DIS POSED OFF. 3. GROUND NOS.5 AND 6 ARE GENERAL IN NATURE AND HENCE NEED NOT BE ADJUDICATED UPON. 4. GROUND NO.3 WAS NOT PRESSED BEFORE US AND THE SAME IS, THEREFORE, BEING TREATED AS DISMISSED. 5. GROUND NOS.1, 2 AND 4 RAISED BY THE ASSESSEE A RE CONNECTED AND RELATE TO THE SAME ISSUE OF DISALLOWA NCE OF EXPENSES MADE BY APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT. HENCE THE SAME ARE BEING TAKEN UP TOGETHE R FOR ADJUDICATION. 6. BRIEF FACTS RELEVANT TO THE ISSUE ARE THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE ASSESSEE HAD CLAIMED DIVIDEND INCOME OF RS.14,54,387/- AS EXEMPT. THE ASSESSEE WAS ASKED T O EXPLAIN THE SOURCE OF SUCH INVESTMENT AND THE EXPEN SES INCURRED FOR MAKING SUCH INVESTMENT AND IT WAS ALSO DESIRED BY THE AO TO APPLY SECTION 14A R.W.R.8D OF THE 3 INCOME TAX RULES. THE ASSESSEE SUBMITTED THAT ENTI RE INVESTMENT IN SHARES HAD BEEN MADE FROM THE OWN FUN DS OF THE ASSESSEE AND, THEREFORE, NO INTEREST ON BORROWE D FUNDS COULD BE ATTRIBUTED TO THE EARNING OF DIVIDEND INCO ME. FURTHER THE ASSESSEE CLAIMED THAT NO OTHER EXPENDIT URE HAD BEEN INCURRED FOR THE PURPOSE OF MAKING THE INVESTM ENTS. THE ASSESSEE FURTHER DEMONSTRATED FROM THE FIGURE O F INVESTMENTS IN SHARES AND MUTUAL FUNDS AS AT THE EN D OF THE IMPUGNED YEAR AND THE PRECEDING YEAR THAT THE INVESTMENTS HAD SHOWN A FALL FROM RS.7.53 CRORES AS ON 31.3.2009 TO RS.4.24 CRORES AS ON 31.3.2010. THE A SSESSEE FURTHER STATED THAT THE TOTAL PROFITS EARNED BY THE ASSESSEE DURING THE YEAR WAS RS.4.36 CRORES AND THERE WAS NO FRESH INVESTMENT MADE OUT OF THE PROFITS. THE ASSESSEE F URTHER SUBMITTED A DETAILED REPLY VIS--VIS EXPENSES INCUR RED ON THE INVESTMENTS MADE STATING THAT ALL EXPENSES CLAI MED BY THE ASSESSEE WERE IN THE CONTEXT OF THE BUSINESS CA RRIED OUT BY IT OF TRADING OF LADIES DRESS MATERIAL AND NO EX PENDITURE WAS INCURRED ON THE IMPUGNED INVESTMENTS. THE ASSE SSING OFFICER DID NOT FIND THE REPLY OF THE ASSESSEE SATI SFACTORY AND STATED THAT SECTION 14A R.W.R. 8D WAS APPLICABL E EVEN WHERE THE ASSESSEE CLAIMED THAT NO EXPENDITURE HAD BEEN INCURRED FOR EARNING DIVIDEND INCOME. HE THEREAFTE R CALCULATED THE AMOUNT OF DISALLOWANCE TO BE MADE AS PER RULE 8D AND ARRIVED AT FIGURE OF RS.2,72,363/- BEIN G 0.5% OF THE AVERAGE VALUE OF INVESTMENTS MADE BY THE ASS ESSEE AS AT THE BEGINNING AND CLOSE OF THE YEAR. ACCORDINGL Y, AN ADDITION OF RS.2,72,363/- WAS MADE TO THE TOTAL INC OME OF 4 THE ASSESSEE. THE ASSESSEE HAD ALSO CLAIMED BEFORE THE ASSESSING OFFICER THAT IT HAD SUO MOTO MADE DISALLO WANCE OF RS.2 LACS IN ITS RETURN OF INCOME AND DISALLOWANCE MADE UNDER SECTION 14A SHOULD BE ADJUSTED AGAINST THE SA ME. THE ASSESSING OFFICER REJECTED THIS CONTENTION OF T HE ASSESSEE STATING THAT THE DISALLOWANCE MADE BY THE ASSESSEE IN ITS RETURN OF INCOME WAS GENERAL IN NATURE AND DID NOT PERTAIN TO DISALLOWANCE FOR ANY SPECIFIC EXPENSES, WHILE DISALLOWANCE UNDER SECTION 14A WAS A SPECIFIC DISAL LOWANCE AND COULD NOT BE COVERED UNDER THE GENERAL DISALLOW ANCE DONE BY THE ASSESSEE IN ITS COMPUTATION OF INCOME. IN EFFECT DISALLOWANCE OF A SUM OF RS. 2,72,363/- WAS MADE U/ S 14A OF THE INCOME TAX ACT,1961. 7. THE MATTER WAS CARRIED IN APPEAL BEFORE THE LEARNED CIT (APPEALS) WHERE DETAILED SUBMISSIONS WE RE MADE BY THE ASSESSEE, REPRODUCED AT PARA 5.1 OF THE ORDER. BRIEFLY STATED, THE ASSESSEE CONTENDED THAT THE ENT IRE INVESTMENTS HAD BEEN MADE OUT OF ITS OWN FUNDS AND, THEREFORE, NO INTEREST EXPENSES WAS DISALLOWABLE UN DER SECTION 14A OF THE ACT. IT WAS ALSO SUBMITTED THAT NO EXPENDITURE HAD BEEN INCURRED FOR THE PURPOSE OF EA RNING DIVIDEND INCOME AND, THEREFORE, NO DISALLOWANCE COU LD BE MADE BY APPLYING RULE 8D(III) IN THE IMPUGNED CASE. THE ASSESSEE ALSO CONTENDED THAT THE ASSESSING OFFICER HAD NOT RECORDED ANY SATISFACTION AS TO HOW THE AFORESAID C LAIMS OF THE ASSESSEE WERE FOUND TO BE INCORRECT BY HIM BEFO RE PROCEEDING TO APPLY THE PROVISION OF RULE 8D FOR CA LCULATING 5 THE DISALLOWANCE. THE ASSESSEE CONTENDED THAT THIS WAS AGAINST THE SETTLED POSITION OF LAW IN THIS REGARD AS HELD IN VARIOUS DECISIONS OF THE HON'BLE JURISDICTIONAL HIG H COURT IN THE CASE OF CIT VS KAPSONS ASSOCIATES, 381 ITR 2 04 FOLLOWED BY THE I.T.A.T., CHANDIGARH BENCH IN THE C ASE OF M/S LOIL HEALTH FOODS LTD. IN ITA NO.235/CHD/2015PRONOUNCED ON 9.9.2015. 8. THE LEARNED CIT (APPEALS), AFTER CONSIDERING TH E SUBMISSIONS OF THE ASSESSEE, UPHELD THE DISALLOWANC E MADE BY STATING THAT THE ASSESSEE HIMSELF HAD AGREED THA T THE PROVISIONS OF SECTION 14A R.W.R. 8D WERE APPLICABLE IN THIS CASE. THE LEARNED CIT (APPEALS) HELD THAT IN VIEW OF THE SAME, THE ASSESSEE COULD NOT NOW CHANGE ITS STAND. THE LEARNED CIT (APPEALS) FURTHER UPHELD THE FINDINGS O F THE ASSESSING OFFICER THAT WHERE AN ASSESSEE CLAIMS THA T NO EXPENDITURE HAD BEEN INCURRED BY HIM IN RELATION TO EXEMPT INCOME, THE PROVISIONS OF RULE 8D WOULD APPLY. THE LEARNED CIT (APPEALS) FURTHER REWORKED THE DISALLOWANCE AS PER RULE 8D(III) AND CALCULATED THE SAME AT RS.2,94,447 THUS ENHANCING THE DISALLOWANCE MADE BY RS.22,084/-. 9. AGGRIEVED BY THE SAME THE ASSESSEE HAS FILED TH E PRESENT APPEAL BEFORE US. BEFORE US, THE LD. COUNSE L FOR THE ASSESSEE CONTESTED THE ORDER OF THE CIT (APPEAL S) ON THIS ISSUE ON SEVERAL GROUNDS. THE LD. COUNSEL FOR THE ASSESSEE IN FACT REITERATED THE SUBMISSIONS MADE BE FORE THE CIT (APPEALS) AND CONTENDED THAT THE DISALLOWANCE M ADE OUGHT TO BE DELETED FOR THE FOLLOWING REASONS: 6 1) THAT ENTIRE INVESTMENT HAD BEEN MADE OUT OF OWN FUNDS OF THE ASSESSEE AND NO BORROWED FUNDS HAD BEEN USED FOR THE PURPOSE AND, THEREFORE, NO DISALLOWANCE OF ANY PORTION OF INTEREST COULD BE MA DE UNDER SECTION 14A OF THE ACT. 2) THAT NO OTHER EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE IN RELATION TO THE INVESTMENTS MADE OR EVEN FOR THE PURPOSE OF EARNING EXEMPT INCOME. 3) THAT THE ASSESSING OFFICER HAD NOT RECORDED ANY SATISFACTION RELATING TO THE INCORRECTNESS OF THE C LAIM OF THE ASSESSEE THAT NO EXPENDITURE HAD BEEN INCURR ED FOR THE PURPOSE OF EARNING EXEMPT INCOME. 4) IT WAS ALSO CONTENDED BY THE LD. COUNSEL FOR TH E ASSESSEE THAT SINCE IT HAD SUO MOTO MADE ADDITION O F RS.2 LACS TO ITS INCOME TO COVER ANY ISSUE OR ITEM, THE ADDITION MADE SHOULD BE SET OFF AGAINST THE SAID ADDITION. 10. THE LEARNED D.R., ON THE OTHER HAND, RELIED UP ON THE ORDER OF THE LEARNED CIT (APPEALS). 11. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTIES, PERUSED THE ORDERS OF AUTHORITIES BELOW AN D GONE THROUGH THE DOCUMENTS RELIED UPON BEFORE US. THE S OLE ISSUE RAISED IN THE PRESENT GROUNDS RELATES TO DISA LLOWANCE MADE UNDER SECTION 14A OF THE ACT. IT IS EVIDENT F ROM THE ORDER OF THE ASSESSING OFFICER THAT THE DISALLOWANC E HAS BEEN WORKED OUT BY THE ASSESSING OFFICER BY APPLYIN G RULE 7 8D(III) OF THE INCOME TAX RULES CALCULATING 0.5% OF THE AVERAGE INVESTMENTS MADE BY THE ASSESSEE. THUS CLE ARLY THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS O N ACCOUNT OF OTHER EXPENSES INCURRED BY THE ASSESSEE AS PROVIDED UNDER RULE 8D(III) OF THE INCOME TAX RULES . NO DISALLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER EITHER UNDER RULE 8D(I) OR RULE 8D(II). THUS UNDISPUTEDLY , NO DISALLOWANCE ON ACCOUNT OF ANY DIRECT EXPENDITURE O R ANY INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IN RE LATION TO THE INVESTMENT MADE HAS BEEN MADE BY THE ASSESSING OFFICER. THUS THE ONLY DISALLOWANCE WITH WHICH WE ARE SEIZED IN THE PRESENT CASE IS IN RELATION TO OTHER EXPENSES INCURRED BY THE ASSESSEE AS CALCULATED BY APPLYING RULE 8D(III) TO THE FACTS OF THE CASE. IN VIEW OF THE S AME, WE FIND NO RELEVANCE IN THE ARGUMENTS ADVANCED BY THE ASSES SEE WHICH RELATE TO DISALLOWANCE OF INTEREST EXPENDITUR E INCURRED. THE ARGUMENTS STATING THAT OWN FUNDS HAV E BEEN USED BY THE ASSESSEE AND NO BORROWED FUNDS HAVE BEE N USED OR FOR THAT MATTER THAT INVESTMENTS ARE OLD AN D NO INVESTMENTS HAVE BEEN MADE DURING THE YEAR BUT IN F ACT, THAT OLD INVESTMENTS HAVE BEEN SOLD DURING THE YEAR , WE FIND ARE NOT RELEVANT TO THE ISSUE SINCE THEY ALL W OULD BE RELEVANT ONLY IN THE CONTEXT OF DISALLOWANCE OF INT EREST EXPENDITURE, IF ANY, MADE BY THE ASSESSING OFFICER. SINCE AS STATED ABOVE NO SUCH DISALLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER, THE AFORESAID CONTENTIONS RAISED BY THE LD. COUNSEL FOR THE ASSESSEE ARE NOT RELEVANT AND T HUS ARE NOT BEING CONSIDERED BY US. 8 12. THE LD. COUNSEL FOR THE ASSESSEE HAS FURTHER RAISED THE CONTENTION OF ABSENCE OF SATISFACTION OF THE ASSESSING OFFICER REGARDING CORRECTNESS OF THE CLA IM OF THE ASSESSEE THAT NO EXPENSES HAVE BEEN INCURRED BY IT FOR THE PURPOSE OF EARNING EXEMPT DIVIDEND INCOME. ON EXAM INING THIS CLAIM OF THE ASSESSEE, WE FIND MERIT IN THE SA ME. A PERUSAL OF THE ASSESSMENT ORDER AS WELL AS THE CIT (APPEALS)S ORDER REVEALS THAT THE ASSESSEE HAS REP EATEDLY CONTENDED THAT IT HAS NOT INCURRED ANY EXPENSES VIS --VIS IMPUGNED INVESTMENT MADE ON WHICH EXEMPT INCOME IN THE FORM OF DIVIDEND HAD BEEN EARNED BY THE ASSESSEE. THE SUBMISSIONS OF THE ASSESSEE IN THIS REGARD BEFORE T HE ASSESSING OFFICER REPRODUCED AT PARA 3 OF THE ASSES SMENT ORDER ARE AS UNDER: (II) IN OUR CASE, IT IS CLAIMED THAT NO EXPENDITURE HAS B EEN INCURRED BY THE APPELLANT FOR THE PURPOSE OF MAKING T HE INVESTMENTS IN MUTUAL FUNDS AND SHARES. ALSO THERE IS NO FINDING TO THE FACT THAT BORROWED FUNDS WERE USE D FOR MAKING INVESTMENTS IN MUTUAL FUNDS AND SHARES EITHER IN THE EARLIER YEARS OR IN THE CURRENT YEAR. ON THE OTHER HAND WE CAN CLARIFY THAT THE INVESTMENTS HAVE BEEN MADE FROM APPELLANTS OWN SOURCES AS UNDER: REGARDING ADDITION ON ACCOUNT OF ANY OTHER EXPENSES IS CONCERNED, IT IS SUBMITTED AS UNDER: YOUR GOODSELF HAS MENTIONED ABOUT THE EXPENDITURE INC URRED ON THE INVESTMENTS MADE IN THE SHARE AND MUTUAL FUN DS. FOR THIS, IT IS BEING SUBMITTED THAT THE BUSINESS OF TH E APPLICANT IS TRADING OF LADIES DRESS MATERIAL AND NO EXPENDITURE IS INCURRED BY THE APPLICANT IN THE INVESTMENTS LIKE MUTUAL FUNDS , DEPOSITS IN POST OFFICE, STOCK HOLDING AND TAX FREE BO NDS ETC. IF WE LOOK AT THE EXPENSES DURING THE YEAR UNDER CONSID ERATION AS COMPARED TO THE LAST YEAR, ALL THE EXPENSES ARE SIM ILAR IN NATURE AND NO ADDITIONAL EXPENSE HAD COME OUT DURING THE YEAR F OR THE PURPOSE OF THE INVESTMENTS MADE IN THE SHARES ETC. 9 IN OUR CASE ,IT IS CLAIMED THAT NO EXPENDITURE HAS BE EN INCURRED BY THE APPLICANT FOR THE PURPOSE OF MAKING THE INVES TMENTS IN THE MUTUAL FUND AND SHARES ETC. 13. THE SAME WERE REITERATED BEFORE THE LEARNED C IT (APPEALS) ALSO. THUS CLEARLY THE ASSESSEE HAS REPE ATEDLY CLAIMED THAT IT HAS INCURRED NO EXPENSES VIS--VIS THE IMPUGNED INVESTMENTS. THE ASSESSING OFFICER, WE FI ND, HAS SUMMARILY REJECTED THIS CLAIM OF THE ASSESSEE WITHO UT GIVING ANY SPECIFIC REASONS. THE RELEVANT PORTION OF THE A SSESSMENT ORDER BRINGING OUT THIS FACT AT PAGE 4 OF THE ORDER IS AS UNDER: REPLY OF THE ASSESSEE HAS BEEN CONSIDERED BUT IT HAS BEEN FOUND TO BE UNSATISFACTORY. MOREOVER CALCULA TIONS DONE BY ASSESSEE IS NOT CORRECT WHEREIN THE ASSESSEE HAS MULTIPLIED THE AVERAGE INVESTMENTS WITH 0.05%. T HE AVERAGE INVESTMENTS WERE REQUIRED TO BE MULTIPLIED BY 0.5%. THE PROVISIONS OF SECTION 14A AND CORRECT CALCULATIO N OF DISALLOWANCE U/S 14A IS PROVIDED AS UNDER: - 14. IT IS EVIDENT FROM THE ABOVE THAT THE ASSESSING OFFICER HAS SUMMARILY REJECTED THE CLAIM OF THE ASSESSEE WI THOUT POINTING OUT ANY SPECIFIC REASON FOR ARRIVING AT TH E CONCLUSION THAT THE CLAIM OF THE ASSESSEE IS NOT SATISFACTORY. THE ASSESSING OFFICER HAS NOT POINTE D OUT AS TO WHAT LED HIM TO ARRIVE AT THIS CONCLUSION. IN S UCH CIRCUMSTANCES, IT CAN BE SAFELY SAID THAT THE ASSES SING OFFICER HAD NOT RECORDED ANY SATISFACTION THAT THE CLAIM OF THE ASSESSEE THAT NO EXPENSES WERE INCURRED FOR THE PURPOSE OF EARNING DIVIDEND INCOME WAS INCORRECT. IN THE BACKGROUND OF THIS FACTUAL POSITION THE ASSESSING O FFICER, WE HOLD, COULD NOT HAVE PROCEEDED TO MAKE ANY 10 DISALLOWANCE UNDER SECTION 14A OF THE ACT. IN TERMS OF SECTION 14A(2) OF THE ACT, THE AO CAN RESORT TO RUL E 8D ONLY IF HE IS NOT SATISFIED BY THE CLAIM OF THE ASSESSEE REGARDING EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THI S SATISFACTION HAS TO BE BASED ON SOME CREDIBLE EVIDE NCE AND CANNOT BE JUST A SUMMARY SATISFACTION. THE RELIANC E PLACED BY THE LD. COUNSEL FOR THE ASSESSEE ON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS. KAPSONS ASSOCIATES (SUPRA) IN THIS REGARD IS APT. THE HON'BLE COURT IN THE SAID ORDER HAS CATEGORICALLY H ELD THAT IF THE ASSESSING OFFICER DISBELIEVED THE ASSERTION OF THE ASSESSEE, IT WAS FOR HIM TO ESTABLISH THE SAID FACT FROM THE RECORDS. THE HON'BLE HIGH COURT HELD THAT THE ASSE SSING OFFICER HAD NOT RECORDED ANY REASONS TO HOLD THAT A NY EXPENDITURE HAD BEEN INCURRED ON EARNING OF THE EXE MPT INCOME AND HAD FURTHER HELD THAT THE ASSESSING OFFI CER HAD REJECTED THE CLAIM OF THE ASSESSEE WITHOUT GIVING A NY REASONS. THE HON'BLE HIGH COURT HELD THAT THE ASSE SSING OFFICER, THEREFORE, HAD SIMPLY MECHANICALLY APPLIED RULE 8D OF THE INCOME TAX RULES AND THE HON'BLE HIGH COURT FURTHER HELD THAT SECTION 14A REQUIRES THE ASSESSING OFFICE R TO RECORD SATISFACTION DISMISSING THE CLAIM OF THE ASS ESSEE AND SATISFACTION MUST BE BASED UPON CREDIBLE AND RELEVA NT EVIDENCE. IN THE ABSENCE OF SUCH SATISFACTION NO DISALLOWANCE UNDER SECTION 14 SHOULD BE MADE. THE RELEVANT FINDINGS OF THE HON'BLE HIGH COURT AT PARA S 6 TO 10 OF THE ORDER ARE AS UNDER: 11 RE: QUESTION NOS.5 AND 6 6. THE COMMISSIONER OF INCOME-TAX (APPEALS) SOUGHT TO INTERPRET SECTION 14A. AS WE MENTIONED EARLIER, WE RE FRAIN FROM DECIDING THE ISSUE OF LAW AND KEEP THE SAME OPEN . IT IS IMPORTANT TO NOTE, HOW, THAT IN THIS RESPECT, THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD IN FAVOUR OF THE ASSESSEE ON THE FACTS. MR. KATOCH SUBMITTED THAT WHERE INCOME IS CHARGEABLE TO TAX, IT IS NOT OPEN TO THE ASSESSE E TO NEVERTHELESS PAY THE TAX ON SUCH INCOME AND THEN CLA IM 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 TH E TRIBUNAL HAVE DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THE FACTS. 7. THE ASSESSEE HAD INVESTED AN AMOUNT OF RS.25,22,43,396 IN SHARES AND MUTUAL FUNDS. THE IN COME IN RESPECT THEREOF WOULD BE EXEMPTED. IN ANSWER TO A QUE RY RAISED BY THE ASSESSING OFFICER, THE ASSESSEE CATEGORICALL Y STATED THAT THE INVESTMENTS IN SHARES WERE OLD INVESTMENTS WHIC H HAD 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 INCOME. 8. THE ENTIRE RECORD OF THE ASSESSEE WAS AVAILABLE. THE ASSESSEE CANNOT ESTABLISH THE NEGATIVE. IF THE ASS ESSING OFFICER DISBELIEVED THE ASSESSEE, IT WAS FOR HIM TO HAVE ESTABLISHED THE SAME FROM THE RECORDS OR OTHERWISE. THE ASSESSING OFFICER HAS NOT EVEN CONSIDERED THIS ASSE RTION EXPRESSLY MADE BY THE ASSESSEE. THE ASSESSING OFFI CERS CONCLUSION THAT THE ASSESSEE HAD NOT PROVIDED DETAI LS OF EXPENSES INCURRED ON MAKING THESE INVESTMENTS THERE FORE, CANNOT BE ACCEPTED. THE ASSESSEES CASE WAS THAT N O SUCH EXPENSES HAD BEEN INCURRED. IT WAS, THEREFORE, RIG HTLY OBSERVED BY HE COMMISSIONER OF INCOME-TAX (APPEALS) THAT THE ASSESSING OFFICER HAD NOT RECORDED ANY REASONS IN THE ASSESSMENT ORDER TO HOLD THAT ANY EXPENDITURE HAD B EEN INCURRED ON EARNING THE EXEMPT INCOME AND THAT THE ASSESSING OFFICER HAD REJECTED THE CLAIM OF THE APE WITHOUT GIVING ANY REASONS FOR THE SAME. WE HAVE ALREADY D EALT WITH THIS ISSUE. THE CONCLUSION, THEREFORE,, THAT THE ASSESSING OFFICER HAD MECHANICALLY APPLIED RULE 8D O F THE INCOME-TAX RULES, 1962 IS WELL FOUNDED. THE TRIBUN AL REITERATED THESE FACTS AND THE SAME POSITION. 9. AS HELD BY A DIVISION BENCH OF THIS COURT IN UI. T.A. NO.320 OF 2013 TITLED AS CIT V. ABHISHEK INDUSTRIES LTD. DECIDED ON JANUARY 27,, 2015, [2016] 380 ITR 652 (P &H) SECTION 14A REQUIRES THE ASSESSING OFFICER TO RECOR D SATISFACTION THAT THE INTEREST BEARING FUNDS HAVE B EEN USED TO EARN TAX-FREE INCOME AND THAT THE SATISFACTION M UST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE. IT WAS FURTHER HELD THAT THE ONUS TO PROVE THAT INTEREST BEARING F UNDS WERE USED LIES SQUARELY ON THE REVENUE. THE ISSUE, THEREFORE, IN THIS REGARD WAS BASED ONLY ON THE FAC TS. THE 12 LEAST THAT MUST BE SAID IN FAVOUR OF THE RESPONDENT S IS THAT THE FINDINGS OF THE FACT RECORDED BY THE COMMISSION ER OF INCOME-TAX (APPEALS) AND BY THE TRIBUNAL ARE NOT PE RVERSE AND THAT THE VIEW TAKEN B Y THEM IS CERTAINLY A POS SIBLE VIEW. IN VIEW THEREOF, NO QUESTION OF LAW ARISES W ITH RESPECT TO THESE QUESTIONS AS WELL. 10. THE APPEAL IS THEREFORE, DISMISSED. 15. THE SAID PROPOSITION HAS ALSO BEEN REITERATED BY THE HON'BLE HIGH COURT IN THE CASE OF CIT VS. ABHIS HEK INDUSTRIES LTD., 380 ITR 652 WHEREIN THE HON'BLE HI GH COURT HAS HELD AS UNDER: 9. SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAV E BEEN USED TO EARN TAX FREE INCOME. THE SATISFACTION TO BE RECO RDED MUST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE. THE ONU S, 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, HAS TO BE CONSTRUED STRICTLY AND ONLY WHERE THE ASS ESSING OFFICER RECORDS SATISFACTION, ON THE BASIS OF CLEAR A ND COGENT MATERIAL, SHALL AN ORDER BE PASSED UNDER SECTION 14A OF THE ACT, DISALLOWING SUCH A CLAIM. AS THERE IS NO TANGIBLE MAT ERIAL ON RECORD THAT COULD HAVE ENABLED THE ASSESSING OFFI CER TO RECORD SATISFACTION IN TERMS OF SECTION 14A OF THE ACT, FINDINGS 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. 16. IN THE CASE OF CIT VS DEEPAK MITTAL (2013) 36 1 ITR 131 ALSO, THE HON'BLE HIGH COURT HAS LAID DOWN THE SAID PROPOSITION. IN THE PRESENT CASE SINCE AS WE HAVE POINTED OUT ABOVE, THERE IS NO SATISFACTION OF THE ASSESSIN G OFFICER REGARDING THE INCORRECTNESS OF THE CLAIM OF THE ASS ESSEE THAT 13 NO EXPENDITURE HAD BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME, IN VIEW OF THE VARIOUS DECIS IONS CITED ABOVE, THE ASSESSING OFFICER, WE HOLD, COULD NOT HAVE RESORTED TO APPLY RULE 8D IN THE PRESENT CASE AND M AKE DISALLOWANCE UNDER SECTION 14A OF THE ACT. IN VIEW OF THE SAME, WE DELETE THE DISALLOWANCE MADE UNDER SECTION 14A AMOUNTING TO RS.2,94,447/- (RS.2,72,363+RS.22,084) GROUND NOS.1, 2 AND 4 RAISED BY THE ASSESSEE, THEREFORE, ARE ALLOWED. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 6 TH JULY, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH