Swaraj Engines Limited, Mohali V. Addl. CIT, Mohali

ITA 154/CHANDI/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0063 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 18-02-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 11-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGHDR
• Assessee Lawyers: RATTAN KAUR
• Keywords: Opportunity of being heard; Earning of tax free income; Tangible material
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH,CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NOS. 154 & 155/CHD/2015 A.YS: 2010-11 & 2011-12 M/S SWARAJ ENGINES LTD., VS THE ADDL.CIT, PLOT NO. 2, INDUSTRIAL FOCAL, RANGE VI, PHASE IX, SAS NAGAR, MOHALI. MOHALI. PAN: AACCS2990N (APPELLANT) (RESPONDENT) APPELLANT BY : MS. RATTAN KAUR RESPONDENT BY : SHRI MANJIT SINGH,DR DATE OF HEARING : 03.05.2016 DATE OF PRONOUNCEMENT : 05.05.2016 O R D E R PER BHAVNESH SAINI,JM BOTH THE APPEALS BY ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS OF LD. CIT(APPEALS)-II CHANDIGARH DATED 21.11.2014 FOR ASSESSMENT YEAR 2010-11 AND 2011-12, CHALLENGING THE DISALLOWANCE OF RS. 19,97,207/- AND RS. 21,85,407/- MADE BY ASSESSING OFFICER UNDER SECTION 14A APPLYING RULE 8D OF THE INCOME TAX RULES. 2 2. BOTH THE PARTIES MAINLY ARGUED IN ASSESSMENT YEA R 2010-11 AND SUBMITTED THAT ISSUE IS SAME IN BOTH TH E APPEALS 3. WE HAVE HEARD LD. REPRESENTATIVES OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. THE FACTS ARE TAKEN FROM ASSESSMENT YEAR 2010-11 FO R THE PURPOSE OF DISPOSAL OF BOTH THE APPEALS. 4. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HA D EARNED DIVIDEND INCOME OF RS. 29,600,822/- DURING T HE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER NO TICED THAT ASSESSEE HAD INCURRED OPERATING AND ADMINISTRA TIVE EXPENSES OF RS. 2257.77 LACS AND BANK AND OTHER FINANCIAL CHARGES OF RS. 2.86 LACS AND SO HE WORKED OUT THE DISALLOWANCE UNDER SECTION 14A AT RS.22,45,649/ - AND MADE THE ADDITION OF RS. 19,97,207/- AFTER DEDUCTING THE AMOUNT DISALLOWED BY THE ASSESSEE ON THIS ACCOUNT OF RS. 2,48,442/-. 5. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE HAS SUBMITTED THAT ASSESSING OFFICER HAS N OT BROUGHT ON RECORD ANY EXPENDITURE WHICH WAS INCURRE D BY THE ASSESSEE TO EARN EXEMPT INCOME AND HAS APPLI ED RULE 8D OF THE IT RULES IN A MECHANICAL MANNER. TH E ASSESSEE ALSO RELIED UPON DECISION OF HON'BLE PUNJA B & HARYANA HIGH COURT IN THE CASE OF DEEPAK MITTAL 361 ITR 131. 3 6. THE LD. CIT(APPEALS) CONSIDERED THE ISSUE IN THE LIGHT OF PROVISIONS OF SECTION 14A OF THE ACT AND N OTED THAT AS PER PROVISIONS OF SECTION 14A(2), THE ASSES SING OFFICER HAS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME AS PER THE ME THOD PRESCRIBED UNDER RULE 8D OF THE IT RULES. THE LD. CIT(APPEALS) NOTED THAT IF ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF ASSESSEE THAT NO EXPEND ITURE HAD BEEN INCURRED OR ABOUT THE CORRECTNESS OF CLAIM OF EXPENDITURE, IT IS MANDATORY FOR HIM TO COMPUTE THE EXPENDITURE RELATING TO THE EXEMPT INCOME AS PER RU LE 8D. THE ASSESSEE DISALLOWED SALARY OF RS. 2,48,442 /- FOR EARNING EXEMPT INCOME WHICH IS NOT CORRECT. TH E LD. CIT(APPEALS) ALSO NOTED THAT IN THIS CASE, ASSESSEE HAD NOT FILED ANY EVIDENCE BEFORE THE ASSESSING OFFICER WITH REGARD TO CLAIM THAT NO BUSINESS ASSETS OR FUNDS OU T OF BUSINESS WERE UTILIZED OR NO ADMINISTRATIVE EXPENSE S WERE INCURRED IN EARNING THE DIVIDEND INCOME. THE ASSESSEE HAD NOT EXPLAINED BEFORE ASSESSING OFFICER OR BEFORE HIM AS TO WHICH FUNDS HAVE BEEN USED FOR ALL THE PURPOSES. THE LD. CIT(APPEALS) FOUND THAT THERE IS COMMONALITY OF FUNDS AND MANAGEMENT IN RELATION TO BUSINESS ACTIVITY AND INVESTMENT ACTIVITY, INCOME F ROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE LD. CIT(APPEALS), ACCORDINGLY, DISMISSED THIS GROUND OF APPEAL OF THE ASSESSEE. 4 7. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED THAT ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING EXEMPT INCOME AND THAT NO INTEREST BEARING FUNDS HAVE BEEN DIVERTED TO MAKE INVESTMENTS LEADING TO TAX EXEMPT INCOME. SHE HAS REFERRED TO PB-41 WHICH IS BALANCE SHEET AS ON 31.03.2010 AND SUBMITTED THAT RESERVES AND SURPLUS OF ASSESSEE WERE IN A SUM OF RS. 11032.21 LACS, WHEREA S THE INVESTMENTS (PB-45) ARE IN A SUM OF RS. 5771.51 LACS WHICH INCLUDES INVESTMENTS MADE IN EARLIER YEA RS AS WELL. SHE HAS, THEREFORE, SUBMITTED THAT ASSESS EE HAS SUFFICIENT FUNDS, THEREFORE, NO DISALLOWANCE CO ULD BE MADE ON THIS ISSUE AND SHE ALSO RELIED UPON ORDER O F ITAT CHANDIGARH BENCH IN THE CASE OF M/S HERO CYCLE S LTD. VS ADDL. CIT ETC. IN ITA 314/2013 DATED 16.02.2016. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW. 8. WE HAVE CONSIDERED RIVAL SUBMISSIONS. THE ASSESSEE SUBMITTED BEFORE ASSESSING OFFICER THAT EN TIRE EXEMPTED INCOME PERTAINS TO DIVIDEND RECEIVED FROM INVESTMENTS MADE IN CERTAIN DEBIT BASED MUTUAL FUND S. MAKING AN INVESTMENT IN THE PRESCRIBED DEBT BASED MUTUAL FUND IS LIKE CHOOSING FIXED DEPOSIT WITH VAR IOUS AVAILABLE OPTIONS WHICH DO NOT INCLUDE ANY EXPENDIT URE. NOW, JUST BECAUSE THE INCOME FROM DIVIDEND IS A TAX FREE INCOME AS PER THE ACT, DOES NOT MEAN THAT THE EXPEN SES 5 HAVE NECESSARILY TO BE APPORTIONED TO EARN SUCH INC OME. THE ASSESSEE SUBMITTED BEFORE LD. CIT(APPEALS) THAT ASSESSING OFFICER HAS NOT BROUGHT ANY EVIDENCE ON RECORD THAT ANY EXPENDITURE WAS INCURRED BY ASSESSE E TO EARN EXEMPT INCOME. 9. THE ASSESSEE, FOR THE FIRST TIME SUBMITTED BEFOR E US THAT ASSESSEE HAS SUFFICIENT RESERVES AND SURPLU S WHICH WERE MORE THAN THE INVESTMENTS MADE TO EARN EXEMPT INCOME. IT IS ALSO FIRST TIME ARGUED BEFORE US THAT NO INTEREST BEARING FUNDS HAVE BEEN DIVERTED T O MAKE INVESTMENTS TO EARN EXEMPTED INCOME. HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS ABHISHEK INDUSTRIES LTD. 380 ITR 652 HELD AS UNDER : SECTION 14A OF THE INCOME-TAX ACT, 1961, EMPOWERS AN ASSESSING OFFICER TO DISALLOW EXPENDITURE IN RELATION TO EXEMPTED INCOME FROM SHARES IF INTEREST BEARING FUND S HAVE BEEN USED BY THE ASSESSEE. SECTION 14A MAY ONL Y BE INVOKED IF THE ASSESSEE HAS MADE INVESTMENTS IN PURCHASE OF SHARES OUT OF BORROWED FUNDS. AS A CONSEQUENCE, IF THE ASSESSEE HAS INVESTED HIS OWN M ONEY IN PURCHASE OF SHARES, THERE IS NO QUESTION OF DISALLOWANCE UNDER SECTION 14A. SECTION 14A REQUIRES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT INTERES T BEARING FUNDS HAVE BEEN USED TO EARN TAX-FREE INCOM E. THE SATISFACTION TO BE RECORDED MUST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE. THE ONUS, THEREFORE , TO PROVE THAT INTEREST BEARING FUNDS WERE USED, LIES S QUARELY ON THE SHOULDERS OF THE REVENUE. THUS, IF THE ASSESSI NG OFFICER IS ABLE TO REFER TO RELEVANT MATERIAL WHILE RECORDING SATISFACTION THAT BORROWED FUNDS WERE USED TO EARN INTEREST-FREE INCOME AS OPPOSED TO THE ASSESSEE'S OW N 6 FUNDS, THE ASSESSING OFFICER MAY LEGITIMATELY DISALLO W SUCH A CLAIM. THE ASSESSING OFFICER, HOWEVER, CANNOT , BY RECORDING GENERAL OBSERVATIONS, PARTICULARLY WHERE T HE ASSESSEE HAS DENIED USING INTEREST BEARING FUNDS, PROCEED TO INFER THAT INTEREST BEARING INCOME MUST HA VE BEEN USED TO EARN EXEMPTED INCOME. SECTION 14A, BEING IN THE NATURE OF AN EXCEPTION, WAS TO BE CONSTRUED STRIC TLY AND ONLY WHERE THE ASSESSING OFFICER RECORDS SATISFA CTION, ON THE BASIS OF CLEAR AND COGENT MATERIAL, SHALL AN ORDER BE PASSED UNDER SECTION 14A DISALLOWING SUCH A CLAIM . THE ASSESSEE MADE A CATEGORICAL SUBMISSION OF FA CT BEFORE THE ASSESSING OFFICER THAT NO INTEREST BEARI NG FUNDS HAD BEEN DIVERTED TO MAKE INVESTMENTS LEADING TO TAX EXEMPT INCOME THE ASSESSING OFFICER, UNDER SECTION 14 A READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962, DISALLOWED EXPENDITURE IN RESPECT OF THE DIVIDEND EA RNED BY THE ASSESSEE HOLDING THAT INTEREST BEARING FUNDS HAD BEEN USED TO EARN TAX-FREE DIVIDEND. THE COMMISSIONER (APPEALS) HELD THAT THE REVENUE HAD NOT BEEN ABLE T O PROVE THAT INTEREST BEARING FUNDS WERE USED. THIS WA S CONFIRMED BY THE TRIBUNAL HOLDING THAT AS THE ASSESS ING OFFICER HAD FAILED TO PROVE THAT INTEREST BEARING FUN DS WERE USED, IT WOULD NOT INVITE DISALLOWANCE UNDER SEC TION 14A. ON APPEAL: HELD, DISMISSING THE APPEAL, THAT AS THERE WAS NO TANGIBLE MATERIAL ON RECORD THAT COULD HAVE ENABLED THE ASSESSING OFFICER TO RECORD SATISFACTION IN TERMS OF SECTION 14A THE FINDINGS RECORDED BY THE COMMISSIONER (APPE ALS) AND THE TRIBUNAL THAT THE ASSESSING OFFICER HAD FAIL ED TO DISCHARGE THIS ONUS WERE NEITHER PERVERSE NOR ARBITRAR Y AND, THEREFORE, DID NOT CALL FOR INTERFERENCE. 9(I) SAME VIEWS TAKEN BY HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS KAPSONS ASSOCIATES IN ITA 354 OF 2013 DATED 04.08.2015. THE ASSESSEE HAS 7 NOW CLEARLY STATED THAT SOME INVESTMENTS WERE OLD A ND THAT TOTAL INVESTMENTS HAVE BEEN MADE OUT OF RESERV ES AND SURPLUS AND THAT NO EXPENDITURE HAVE BEEN INCUR RED FOR EARNING THE DIVIDEND INCOME. THEREFORE, THESE MATTERS REQUIRE CONSIDERATION AT THE LEVEL OF ASSES SING OFFICER BECAUSE THE AUTHORITIES BELOW HAVE NOT GIVE N ANY FINDING ON THE SAME PARTICULARLY WHEN THIS POINT IS RAISED FOR THE FIRST TIME. IT ALSO APPEARS THAT AS SESSING OFFICER HAS NOT RECORDED ANY SATISFACTION IN THE ASSESSMENT ORDER IN TERMS OF SECTION 14A OF THE INC OME TAX ACT. THEREFORE, THE FACTUAL FINDING OF FACT IS REQUIRED TO BE RECORDED BY THE AUTHORITIES BELOW IN THE LIGHT OF ABOVE JUDGEMENTS OF HON'BLE PUNJAB & HARYA NA HIGH COURT. 9(II) IN THIS VIEW OF THE MATTER, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND RESTORE MATTER IN ISSUE TO THE FILE OF ASSESSING OFFICER WITH DIRECTION TO RE-DECI DE THIS ISSUE IN THE LIGHT OF SUBMISSIONS OF THE ASSESSEE A ND IN THE LIGHT OF DECISION OF HON'BLE PUNJAB & HARYANA H IGH COURT REFERRED TO ABOVE AND IN THE LIGHT OF DECISIO N OF ITAT CHANDIGARH BENCH IN THE CASE OF HERO CYCLES (SUPRA). THE ASSESSING OFFICER SHALL GIVE REASONAB LE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA 154/2015 FOR ASSESSMENT YEAR 2010-11 IS ALLOWED FOR STATISTICAL PURPOSES. 8 11. IN ASSESSMENT YEAR 2011-12 IN ITA 155/2015, THE ORDERS OF AUTHORITIES BELOW ARE SET ASIDE IN TERMS OF ORDER PASSED IN ITA 154/2015 AND SIMILAR ISSUE IS RESTORED TO THE FILE OF ASSESSING OFFICER WITH DIRE CTION TO RE-DECIDE THE MATTER AFRESH BY GIVING REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTIC AL PURPOSES. 12. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (ANNAPURNA GUPTA) (BHAVNESH SA INI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 5 TH MAY, 2016. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR, ITAT/CHD