M/s Kamal Encon Industries Ltd., Yamunanagar V. DCIT, Yamunanagar

ITA 1372/CHANDI/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 5338 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 15-02-2017
• Assessment Year: 2013-2014
• Appeal Filed On: 14-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ZENIA HANDA
• Keywords: Earning of tax free income; Source of fund; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH A, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.1372/CHD/2016 (ASSESSMENT YEAR : 2013-14) M/S KAMAL ENCON INDUSTRIES LTD., VS. THE D.C.I.T, (FORMERLY KEC INDUSTRIES LTD.), CIRCLE YAMUNA NAGAR. 56, INDUSTRIAL ESTATE, YAMUNA NAGAR. PAN: AAACK4706E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI TEJ MOHAN SINGH RESPONDENT BY : SMT.ZENIA HANDA, DR DATE OF HEARING : 04.10.2017 DATE OF PRONOUNCEMENT : 02.01.2018 ORDER PER ANNAPURNA GUPTA, A.M. : THIS APPEAL FILED BY THE ASSESSEE HAS BEEN PREFERRE D AGAINST THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX(APPEALS), PANCHKULA DATED 28.10.2016 RELATING T O ASSESSMENT YEAR 2013-14. 2. THE SOLE 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 SHORT T HE ACT) READ WITH RULE 8D OF THE INCOME TAX ACT RULES, 1962 . 3. BRIEFLY STATED, THE ASSESSING OFFICER HAD NOTED DURING ASSESSMENT PROCEEDINGS THAT THE ASSESSEE HAD DEBITE D EXPENSES OF RS.25,70,992/- IN THE PROFIT & LOSS ACC OUNT UNDER THE HEAD INTEREST PAID TO BANKS/DEPOSITORS. ON THE OTHER HAND, IT WAS FOUND THAT THE ASSESSEE HAD EARN ED 2 DIVIDEND AND INTEREST OF RS.63,94,536/- ON TOTAL INVESTMENTS MADE ON PURCHASE OF EQUITY SHARES, MUTU AL FUNDS, TAX FREE BONDS, ETC. THE INVESTMENT IN SHARE S CAPITAL, MUTUAL FUNDS, TAX FREE BONDS AND EQUITY SHARES WERE FOUND TO BE RS.4741.55 LACS AND THE INVESTMENTS MADE DURI NG THE YEAR IN PURCHASE OF EQUITY SHARES AMOUNTED TO RS.12 .08 CRORES. THE ASSESSING OFFICER ASKED THE ASSESSEE A S TO WHY PROPORTIONATE INTEREST AND ADMINISTRATIVE EXPENSES NOT BE DISALLOWED U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES AND AFTER CONSIDERING THE ASSESSEES REPLY, D ISALLOWED THE EXPENSES , COMPUTING THE SAME AS PER RULE 8D(2 )(II) AND 8D(2)(III) AT RS.34,71,323/-, WHICH WAS RESTRICTED TO THE EXTENT OF EXPENDITURE INCURRED ON ACCOUNT OF INTERE ST PAID TO BANK AT RS.25,70,992/-. 4. AGGRIEVED BY THE SAME, THE ASSESSEE FILED APPEAL BEFORE THE LD.CIT(APPEALS), WHO DELETED THE DISALLOWANCE M ADE AS PER RULE 8D(2)(II) BUT AT THE SAME TIME, HELD THAT THE DISALLOWANCE UNDER SUB-CLAUSE (III) TO RULE 8D(2) W AS APPLICABLE. THE LD.CIT(APPEALS) FURTHER HELD THAT FOR THE PURPOSE OF CALCULATING EXPENDITURE DISALLOWABLE AS PER RULE 8D(2)(III), INVESTMENT NOT YIELDING ANY EXEMPT INCO ME WERE ALSO TO BE EXCLUDED. THEREAFTER TAKING THE AVERAGE VALUE OF INVESTMENT AT RS.905.85 LACS AND APPLYING THE FORMA L OUTLINED IN RULE 8D(2)(III) FOR CALCULATING THE OTH ER EXPENSES DISALLOWABLE, @ 0.5% OF THE AVERAGE INVESTMENTS, TH E LD.CIT(APPEALS) UPHELD THE DISALLOWANCE U/S 14A REA D WITH RULE 8D AT RS.4,52,925/-. 3 5. AGGRIEVED BY THE SAME, THE ASSESSEE HAS COME UP IN APPEAL BEFORE US, RAISING THE FOLLOWING GROUNDS: 1. THAT THE ORDER PASSED BY LOWER AUTHORITIES IS BA D IN LAW AND AGAINST THE FACTS AND CIRCUMSTANCES OF THE C ASE. 2. THAT THE ID CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS IN MECHANICALLY APPLYING SECTION 14A READ WITH RULE 8D(2)(III) BY SUSTAINING THE DISALLOWANCE OF RS.4,52,925/- OUT OF TOTAL DISALLOWANCE OF RS.25,70 ,992/- ARBITRARILY AND WITHOUT ANY JUSTIFICATION. 3. THAT THE JUDICIAL DECISIONS HAVE NOT BEEN INTERP RETED PROPERLY WHILE SUSTAINING THE SAID DISALLOWANCE. 4. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RI GHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO, ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF APPEAL. 6. THE ONLY CONTENTION RAISED BY THE ASSESSEE BEFOR E US WAS THAT THE ASSESSING OFFICER HAD NOT RECORDED ANY SATISFACTION VIS--VIS THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENSES HAD BEEN INCURRED IN LIEU OF THE SAID INVESTMENTS. THE LD. COUNSEL FOR ASSESSEE CON TENDED THAT IN THE ABSENCE OF ANY SUCH SATISFACTION NO DISALLOWANCE, WHATSOEVER, COULD HAVE BEEN MADE U/S 14A READ WITH RULE 8D. THE LD. COUNSEL FOR ASSESSEE RE LIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COU RT IN THE CASE OF CIT VS. DEEPAK MITTAL, 361 ITR 131. 7. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE O RDERS OF THE ASSESSMENT ORDER AND CIT(APPEALS). 8. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTIE S. THE ONLY CONTENTION RAISED BEFORE US CHALLENGING TH E DISALLOWANCE MADE U/S 14A READ WITH RULE 8D IS THE ABSENCE OF SATISFACTION OF THE ASSESSING OFFICER VI S--VIS THE 4 INCORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENSES HAD BEEN INCURRED FOR EARNING ANY EXEMPT INCOME. 9. THERE IS NO DISPUTE VIS-A-VIS THE PROPOSITION OF LAW THAT DISALLOWANCE OF EXPENSES BY THE ASSESSING OFFI CER U/S 14A BY APPLYING THE COMPUTATIONAL PROVISIONS OF RUL E 8D (2), HAS TO BE NECESSARILY PRECEDED BY RECORDING OF SATISFACTION BY ASSESSING OFFICER THAT THE CLAIM OF THE ASSESSEE VIS-A-VIS SUCH EXPENSES IS INCORRECT. FURT HER THIS SATISFACTION OF THE ASSESSING OFFICER MUST BE BASED ON COGENT REASONS AND AFTER HAVING REGARD TO THE BOOK S OF ACCOUNTS OF THE ASSESSEE. THE HONBLE JURISDICTIONA L HIGH COURT HAS IN A RECENT DECISION, IN THE CASE OF PUNJ AB TRACTORS LTD. VS CIT, PATIALA & OTHERS IN ITA NO.45 8 OF 2015 DATED 03.02.2017 REITERATED THIS PROPOSITION RELYIN G UPON VARIOUS EARLIER DECISIONS AS UNDER: 18. THE NEXT QUESTION IS AS TO WHETHER IT IS NECESS ARY FOR THE ASSESSING OFFICER TO RECORD HIS REASONS FOR NOT BEI NG SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM. 19. IT IS MANDATORY FOR THE ASSESSING OFFICER TO REC ORD THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE AS SESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT OR T HAT HE IS NOT SATISFIED WITH THE ASSESSEE'S CLAIM THAT NO EXPENDITU RE HAD BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 20. THE MATTER STANDS CONCLUDED BY A JUDGMENT OF THIS COURT DATED 27.01.2015 IN COMMISSIONER OF INCOME TAX-1, LUDHI ANA V. M/S ABHISHEK INDUSTRIES LTD. LUDHIANA, ITA NO . 320 OF 2013, WHERE THE DIVISION BENCH HELD:- '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......................................' 5 21. THE JUDGMENT IN MAXOPP INVESTMENT LTD. (SUPRA) ALSO SUPPORTS THIS VIEW NAMELY THAT THE ASSESSING OFFICE R MUST RECORD REASONS FOR NOT BEING SATISFIED WITH THE COR RECTNESS OF THE ASSESSEE'S CONTENTIONS WITH REGARD TO THE ASPECT S MENTIONED IN SUB SECTIONS (2) AND (3) OF SECTION 14A . IT IS TRUE THAT THE DELHI HIGH COURT MERELY STATES THAT SUCH RE JECTION MUST BE FOR DISCLOSED COGENT REASONS. THE DISCLOSURE, HOWEVER, CAN ONLY BE IN WRITING. IT CAN 15 OF 32HARDLY BE SUGGESTED THAT THE DISCLOSURE REMAINS IN THE ASSESSI NG OFFICER'S MIND. THE ASSESSEE IS ENTITLED TO TEST THE B ASIS OF THE REJECTION OF HIS CONTENTIONS. THIS CAN BE DONE ONLY I F THE ASSESSING OFFICER RECORDS HIS REASONS FOR HIS NOT B EING SATISFIED IN WRITING. 10. IN THE PRESENT CASE, ON PERUSING THE ORDER OF T HE ASSESSING OFFICER, WE FIND THAT THE ASSESSEE HAD CL AIMED THAT IT HAD NOT INCURRED ANY EXPENSES ,WHETHER IN THE NATURE OF INTEREST OR OTHER EXPENSES IN RELATION TO THE EXEMPT DIVIDEND INCOME EARNED BY IT. ON BEING CONFR ONTED WITH THE ISSUE OF PROPORTIONATE DISALLOWANCE OF EXP ENSES U/S 14A, THE ASSESSEE HAD FILED DETAILED SUBMISSION S REPRODUCED AT PARA 4.2 OF THE ASSESSMENT ORDER. BR IEFLY STATED, THE ASSESSEE HAD CONTENDED THAT NO DISALLOW ANCE U/S 14A WAS WARRANTED VIS-A-VIS ALL THE INVESTMENTS MADE FOR THE FOLLOWING REASONS: A) SOME OF THE INVESTMENTS DID NOT YIELD ANY TAX FR EE INCOME AT ALL SINCE THEY WERE NON-DIVIDEND PAYING COMPANIES, WHILE INCOME EARNED FROM SOME OTHER LIK E MUTUAL FUNDS WERE TAXABLE. B) THE ENTIRE INVESTMENTS WERE MADE OUT OF NON INTEREST BEARING OWN FUNDS COMPRISING OF EQUITY SHA RE CAPITAL, RESERVES & SURPLUS. C) THE EARNING FROM INTEREST WAS MORE THAN THE INTEREST EXPENSES AND, THEREFORE, NO NET INTEREST EXPENSES WAS INCURRED IN RELATION TO THE EXEMPT INCOME. 6 D) THAT ALL THE OTHER EXPENSES HAD BEEN INCURRED FO R BUSINESS PURPOSE AND NO EXPENSES PERTAINED TO EXEMP T INCOME WHICH COULD BE DISALLOWED. THAT THE SAID EXPLANATION HAD BEEN ACCEPTED IN ALL EARLIER REGULA R ASSESSMENTS/RE-ASSESSMENTS AND NO SUCH DISALLOWANCE HAD EVER BEEN MADE. THE REPLY OF THE ASSESSEE REPRODUCED AT PARA 4.2 OF THE ASSESSMENT ORDER IS AS UNDER: 4.2 IN COMPLIANCE OF THE SAME THE COUNSEL FOR THE ASSESSEE FILED A WRITTEN SUBMISSIONS AS UNDER: - INVESTMENTS IN MOHAN APARTMENT PVT. LTD, M/S GABLES INFRASTRUCTURE PVT. LTD AND M/S KEC METALLIC PVT. LTD . ARE NOT YIELDING ANY TAX FREE INCOME. THESE ARE NON DIVIDEND PAYER COMPANIES. BUT IN FACT WILL YIELD TAXABLE CAPITAL G AINS WHEN SOLD. INCOME FROM INTEREST ORIENTED MUTUAL FUN D UNITS IS TAXABLE WHETHER RECEIVED AD INTEREST OR AS CAPIT AL GAIN ON SALE. 1) ' NET INVESTMENT DURING THE YEAR:- WITH THIS REGARD PLEASE BE INFORMED THAT THE INVESTMENTS AT RS. 4741.55 LAC ARE THE TOTAL AMOUNT OF INVESTMENTS AS AT THE END OF THE YEAR AND INCLUDES THE SAME AS AT THE BEGINNING OF THE YEAR. ADDITION TO INVESTMENTS DURING THE YEAR (NET OF SALES/REDEMPTION) IS AS UNDER: DESCRIPTION AMOUNT (R S. IN LAC) INVESTMENTS AS AT THE BEGINNING OF THE YEAR 3533. 26 INVESTMENTS AS AT THE END OF THE YEAR 4741.55 NET INCREASE DURING THE YEAR 1208.29 AS STATED IN THE EARLIER LETTER DATED 16.11.2015 THE NET INCREASE IN INVESTMENTS IS FURTHER SEGREGATED AS UNDER:- DESCRIPTION INVESTMENTS NOT EARNING ANY TAX FREE IN COME (RS. IN LAC) INVESTMENTS EARNING TAX FREE INCOME (RS . IN LAC) AS AT THE BEGINNING OF THE YEAR 2614.94 918.32 AS AT THE END OF THE YEAR 3848.15893.40 NET INCREASE DURING TH E YEAR (RS. IN LACS) 1233.21 (-) 24.92 FROM THE ABOVE YOUR GOODSELF WILL KINDLY OBSERVE THAT AS AGAINST THE PRO FIT FOR THE YEAR AT RS.900 LACS THE NET INCREASE IN INVESTMENTS DURING THE YEAR WERE ONLY RS.1208.29 LAC AND THAT TOO IN N OT EARNING ANY TAX FREE INCOME. ON THE OTHER HAND THE INCREASE IN TAX FREE INCOME EARNING INVESTMENTS GOT RED UCED BY RS. 24. 92 LAC. 2. SOURCE OF TOTAL INVESTMENTS: AS REGARDS THE SOURCE OF INVESTMENTS OF RS. 4741.55 LAC THE SOURCE OF FUNDS OF THE COMPANY WAS AS UNDER. 7 3 A. TOTAL NON INTEREST BEARING NET OWNED FUNDS: NON INTEREST BEARING OWN FUNDS AMOUNT (RS. IN LACS) EQ UITY SHARE CAPITAL 285. 00 RESERVES & SURPLUS (RESERVES BEING ACCUMULATED PROFITS & PREMIUMS ON ISSUE OF SHARE CAP ITAL) 7018.84 DEFERRED TAX ASSET (CREATED OUT OF PROFITS EARNED) 70.69 TOTAL NON INTEREST BEARING OWN FUNDS 7374.53 THE AFORESAID NON INTEREST BEARING OWN FUNDS OF RS. 737 4.53 LAC HAVE BEEN USED PARTLY IN WORKING CAPITAL AND PART LY IN LONG TERM ASSETS AS UNDER: B. NET OWNED FUNDS USED IN CURRENT ASSETS: DESCRIPTION AMOUNT (RS. IN LACS) TOTAL INVESTMENT IN CU RRENT ASSETS 1109.74 LESS:TOTAL CURRENT LIABILITIES (OTHE R THAN BORROWINGS) 292.41 WORKING CAPITAL 817.33 W/C FINAN CED BY WORKING CAPITAL LOAN (CASH CREDIT) 106.91 BALANCE WORKING CAPITAL FINANCED FROM NET OWNED FUNDS 710.42. C. NET OWNED FUNDS USED IN NON-CURRENT ASSETS: DESCRIPTION AMOUNT (RS. IN LACS) TOTAL INVESTMENT IN NON- CURRENT ASSETS (OTHER THAN IN INVESTMENTS) 1947.43 LESS: NON-CURRENT LIABILITIES (OTHER THAN BORROWINGS) -- N ET INVESTMENT IN NON-CURRENT ASSETS 1947.43 LESS: LONG TE RM BORROWINGS (CAR TERM LOANS) 24.87 BALANCE NON-CURRENT ASSETS FINANCED FROM NET OWNED FUNDS 1922.56 4 THE NET OWNED NON INTEREST BEARING FUNDS AS IN (A) ABOV E AFTER USING FOR FINANCING WORKING CAPITAL AS IN (B) ABOVE AND NON CURRENT INVESTMENTS (C) ABOVE REMAINS AS BELOW. D. BALANCE NET OWNED NON INTEREST BEARING FUNDS: DESCRIPTION AMOUNT (RS. IN LACS) TOTAL NET OWNED NO N- INTEREST BEARING FUNDS (A) 7374.53 LESS: WORKING CA PITAL FINANCED FROM NET OWNEDFUNDS(B) 710.42 LESS: NON- CURRENT ASSETS FINANCED FROM NET OWNED FUNDS (C) 19 22.56 BALANCE NET OWNED NON-INTEREST BEARING FUNDS 4741.55 THESE BALANCE NET OWNED NON-INTEREST BEARING FUNDS HAVE BEEN PARKED IN INVESTMENTS. DISALLOWANCE U/S 14-A: UNDER SECTION 14-A THE EXPENDITURE INCURRED IN RELATI ON TO THE EXEMPT INCOME IS ONLY TO BE DISALLOWED. IT HAS BEEN SUBMITTED ABOVE THAT THE ASSESSEE'S INCOME FOR THE YEAR AS WELL AS THE TOTAL SURPLUS NET OWNED AND NON-INTEREST BEARING FUNDS, REMAINING AFTER MEETING THE SHORTFALL REQUIR ED FOR WORKING CAPITAL AS WELL AS THE NON CURRENT INVESTMENTS , ONLY WERE PARKED IN THE TOTAL INVESTMENTS INCLUDING THE INVESTMENTS DURING THE YEAR. FURTHER IT HAS ALSO BEEN EXPLAINED IN THE REPLY DATED 16.11.2015 THAT THERE I S NO EXPENDITURE ON INTEREST IN VIEW OF THE EARNING FROM INTEREST MORE THAN THE INTEREST EXPENSE AND THEREFORE THERE IS NO EXPENSE INCURRED IN RELATION TO THE EXEMPT INCOME. TH EREFORE 8 NO DISALLOWANCE U/S 14-A IS CALLED 5 FOR. IT HAS ALS O BEEN EXPLAINED IN THE EARLIER REPLY REFERRED ABOVE THAT ALL OTHER EXPENSES ALSO HAVE INCURRED FOR THE BUSINESS PURPOS ES AND NO EXPENSE PERTAINS TO THE EXEMPT INCOME WHICH CAN BE DISALLOWED. THE SAME EXPLANATION HAS BEEN ACCEPTED IN ALL EARLIER REGULAR ASSESSMENTS/REASSESSMENTS AND NO SU CH DISALLOWANCE HAS EVER BEEN MADE. SEVERAL JURISDICTI ONAL HIGH COURT JUDGMENTS QUOTED IN THE EARLIER REPLY SU PPORT THE ASSESSEES CONTENTION. 11. THE ASSESSING OFFICER AFTER CONSIDERING THE SAM E, REJECTED THE ASSESSEES EXPLANATION REGARDING INCUR RING OF NO INTEREST EXPENDITURE ,STATING THAT THE SAME HAD NOT BEEN SUBSTANTIATED BY THE ASSESSEE. THE RELEVANT FINDIN GS OF THE ASSESSING OFFICER AT PARAS 4.3 TO 4.4 OF THE ORDER ARE AS UNDER: 4.3 THE SUBMISSION OF THE ASSESSEE HAS BEEN PERUSED AND I DO NOT FIND FORCE IN THE CONTENTS OF THE ASSESSEE T HAT THE ABOVE INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE OUT OF ITS OWN FUND AND NOT OUT OF INTEREST BEARING LOANS. WHEREA S, THE ASSESSEE PAID INTEREST OF RS.25,70,992/- ON BORROWE D FUNDS RAISED FROM THE BANKS IN THE YEAR UNDER CONSIDERATI ON. IN THE PETITION THE COUNSEL OF THE ASSESSEE HAS STATED THA T THE INVESTMENT MADE IN THE M/S MOHAN APARTMENT PVT. LTD / M/S GABLES INFRASTRUCTURE AND M/S KEC METALLIC PVT. LTD ARE NOT YIELDING ANY TAX FREE INCOME BUT IN FACT WILL YIELD TA XABLE CAPITAL GAIN WHEN SOLD. INVESTMENT IN TAX FREE BONDS AND EQUITY SHARES YIELDING THE TAX FREE INCOME BY WAY OF TAX F REE INTEREST OR DIVIDENDS ARE EQUITY SHARES IN LISTED COMPANY . EVEN THESE, ALSO YIELD TAXABLE GAIN ON SALE AS SHORT TERM CAPITAL GAIN. THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE. THE CBDT NEW DELHI VIDE ITS CIRCULAR NO . 5 OF 2014 DATED 11.02.2014 HAS CLARIFIED THAT RULE 8D RE AD WITH SECTION 14A PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEAR H AS NOT EARNED ANY EXEMPT INCOME. THE LANGUAGE USED IN RULE 8D (2(II) AND 8D(2)(III) OF I.T. RULES WHICH ARE EX TRACTED BELOW: '(II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PERVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT AN AMOUNT COMPUTED IN ACCO RDANCE WITH THE FOLLOWING FORMULA, NAMELY: - A*B/C WHERE.. B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM W HICH DOES NOT OR SHALL NOT FROM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; 9 (III) AN AMOUNT EQUAL TO ONE-HALF PERCENT OF THE AV ERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PAN OF THE TOTAL INCOME, AS APPEA RING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR.' 4.4 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, T HE ASSESSEE WAS AFFORDED SUFFICIENT OPPORTUNITIES HOWEV ER THE ASSESSEE COULD NOT SUBSTANTIATE ITS CLAIM THAT T HE INVESTMENT MADE IN PURCHASE OF SHARE/ MUTUAL FUNDS/ TAX FREE BONDS ETC. HAVE BEEN MADE OUT OF ITS OWN FUNDS AND NOT OUT OF INTEREST BEARING LOANS. AS PER CALCULATI ON OF INTEREST THE PROPORTIONATE INTEREST AS EXPENDITURE TO BE DISALLOWED UNDER RULE 8D READ WITH SECTION 14A COMES TO RS.34,71,323/-. HOWEVER, THE ASSESSEE HAS INCURRED EXPENDITURE OF RS.25,70,992/- ON ACCOUNT OF INTEREST PAID TO BANK. IN VIEW OF THE ABOVE FACTS, THE PROPORTION ATE INTEREST AS EXPENDITURE OF RS.25,70,992/- U/S 14A IS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE COMPANY. CALCULATION OF INTEREST U/S 14A READ WITH RULE 8D(2 )(II) IS AS UNDER: A) EXPENDITURE BY WAY OF INTEREST MADE DURING THE YEAR I) INTEREST PAID TO BANK RS. 25,70,992/- TOTAL INTEREST EXPENDITURE RS. 25.70.992/- --- (A) AVERAGE OF VALUE OF INVESTMENT IN SHARES CAPITAL/MU TUAL FUNDS. AS ON 01.04.2012 RS. 35,33,26,372//- AS ON'31.03.2013 RS. 47,41,54,936/- AVERAGE INVESTMENT RS. 41,37,40,654/- ------- -(B) B) AVERAGE OF TOTAL ASSETS OF THE BALANCE SHEET AS ON 01.04.2012 IS RS ,73,68,95,437/- AS ON 31.03.2013 IS RS.77,98,72,055/- AVERAGE INVESTMENT IS RS.75,83,83,746/- ---- -----(C) DISALLOWANCE U/S 14A AS PER RULE 8D(2)(II) IS AS UNDER: DISALLOWANCE = A X B / C = RS. 25,70,992 X 41,37,40,654/ 75,83,83,746 = RS. 14,02,620/- CALCULATION OF INTEREST U/S 14A READ WITH RULE 8D(2 )(III): AVERAGE INVESTMENT IN SHARES CAPITAL/MUTUAL FUNDS ET C. AS ON 01.04.2012 IS RS. 35,33,26,372/- AS ON 31.03.2013 IS RS. 47,41,54,936/- AVERAGE INVESTMENT IS RS. 41,37,40,654/- DISALLOWANCE = 0.5% OF AVERAGE INVESTMENT = RS. 41,37,40,654 X 0.5% = RS. 20,68,703/- TOTAL DISALLOWANCE AS PER RULE 8D(2) = RS.34,71,32 3/- 10 (14,02,620 + 20,68,703) (ADDITION OF RS. 25,70,992/-) THE UNDERSIGNED IS SATISFIED THAT THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF ITS INCOME WITHIN THE MEA NING OF SECTION 271(1)(C) OF THE INCOME TAX ACT, 1961. THUS PENALTY PROCEEDINGS U/S 271(1)(C) OF THE INCOME TAX ACT, 1961. 12. WE FIND THAT THE ABOVE SATISFACTION OF THE ASSE SSING OFFICER, REGARDING THE INCORRECTNESS OF THE CLAIM O F THE ASSESSEE OF NOT HAVING INCURRED ANY INTEREST EXPEND ITURE IN RELATION TO THE EXEMPT INCOME EARNED, DOES NOT FULF ILL THE CRITERIA REQUIRED BY LAW OF BEING OBJECTIVE AND BAS ED ON COGENT EVIDENCE. THE ASSESSEE HAD EXPLAINED BY WAY OF FACTS AND FIGURES EXTRACTED FROM ITS BOOKS OF ACCOUNTS, T HE DEPLOYMENT OF OWN INTEREST FREE FUNDS IN THE PURCHA SE OF SHARES/INVESTMENTS. THE ASSESSING OFFICER HAS WITHO UT POINTING OUT ANY INFIRMITY IN THE SAME SIMPLY DISMI SSED THE ASSESSEES CONTENTION AND THAT TOO ON A FALSE PREMI SE THAT THE ASSESSEES CONTENTION WAS UNSUBSTANTIATED. 13. VIS-A-VIS THE ASSESSEES CLAIM OF NOT HAVING IN CURRED ANY OTHER EXPENSE ALSO FOR EARNING THE EXEMPT INCOM E, WE DO NOT FIND ANY SATISFACTION OF THE AO REGARDING TH E INCORRECTNESS OF THE SAME IN FACT THERE IS NO WHISP ER IN THE ASSESSMENT ORDER VIS-A-VIS THIS CLAIM OF THE ASSESS EE, WHEREIN HE HAD CONTENDED THAT ALL OTHER EXPENSES HA D BEEN INCURRED FOR BUSINESS PURPOSE AND NO EXPENSE PERTAI NED TO EXEMPT INCOME. THE ASSESSEE HAD ALSO POINTED OUT TH AT THIS EXPLANATION HAD BEEN ACCEPTED IN ALL EARLIER REGULA R ASSESSMENTS/REASSESSMENTS AND NO DISALLOWANCE HAD E VER BEEN MADE. 11 14. IN THE ABSENCE OF AN OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER THAT THE CLAIM OF THE ASSESSEE OF HAVING NOT INCURRED ANY EXPENDITURE FOR EARNING EXEMPT INC OME IS INCORRECT, WE HOLD THAT THE ASSESSING OFFICER WAS P RECLUDED FROM RESORTING TO RULE 8D FOR COMPUTING AND THEREAF TER DISALLOWING EXPENSES U/S 14A OF THE ACT. IN VIEW OF THE ABOVE, WE ARE IN AGREEMENT WITH T HE CONTENTION OF THE LD.COUNSEL FOR THE ASSESSEE THAT NO DISALLOWANCE OF EXPENSES UNDER RULE 8D(2)(III) OF T HE INCOME TAX RULES WAS WARRANTED IN THE PRESENT CASE. WE, TH EREFORE, DELETE THE DISALLOWANCE MADE OF RS.4,52,925/-. GROU NDS OF APPEAL RAISED BY THE ASSESSEE, THEREFORE, STAND ALL OWED. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 2 ND JANUARY, 2018 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)S 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH