The DCIT, Cochin V. M/s.Popular Vehicles & Services Ltd, Cochin

ITA 254/COCH/2017

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9239 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 17-12-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 25-05-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A S BINDHU
• Assessee Lawyers: P M VEERAMANI
• Keywords: Business expenditure; Proportionate interest; Rule 8D; Set aside
• Section: 43B; 14A; 11

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFOR E S/ SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., J M ITA NO. 254 /COCH/201 7 ASSESSMENT YEAR : 2011 - 12 THE DEPUTY COMMISSIONER OF INCOME - TAX, CORPORATE CIRCLE - 2(1), KOCHI VS. M/S. POPULAR VEHICLES AND SERVICES LTD. , 32/2571 - H, 2 ND FLOOR, KUTTUKARAN CENTRE, MAMANGALAM, PALARIVATTOM, KOCHI - 682 025. [PAN:AABCP 3805G] (REVENUE - APPELLANT) ( ASSESSEE - RESPONDENT) REVENUE BY SMT. A.S. BINDHU, SR. DR ASSESSEE BY SHRI P.M. VEERAMANI, CA D ATE OF HEARING 1 7 / 1 2 /2018 DATE OF PRONOUNCEMENT 17 / 12 /2018 O R D E R PER CHANDRA POOJARI, AM : THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A) - I, KOCHI DATED 08/03/2017 AND PER TAINS TO THE ASSESSMENT YEAR 2011 - 12. 2. THE FACTS OF THE CASE ARE THAT THE AS SESSEE HA D MADE PROVISI ON FOR LEAVE ENCASHMENT OF RS. 40,10,673/ - FOR THE RELEVANT PREVIOUS YEAR. VIDE LETTER DATED 03.03.2014, ASSESSEE STATED THAT: 'THE COMPANY HAS A SCHEME OF LEAVE ENCASHMENT FOR EMPLOYEES WHEREBY T HE EMPLOYEE CAN ENCASH THE EARNED LEAVE ON SUPERANNUATION. THE PROVISION IS REWORKED AT THE END OF EVERY YEAR AFTER CONSIDERING THE LEAVE AVAILED AND ONLY I.T.A. NO . 254 /COCH/201 7 2 THE INCREMENTAL PROVISION REQUIRED IS MODE EVERY YEAR. THE J URISD ICTIONAL KERALA HIGH COURT IN THE CASE OF C IT VS. HINDUSTAN LATEX LTD . R ENDERED ON 07.06.2012, HAD HELD THAT SECTION 43B(F) WAS ARBITRARY AND UNCONSTITUTIONAL.' ACCORDING TO THE ASSESSING OFFICER, THE FACTS IN THE CASE QUOTED BY THE ASSESSEE IS DISTINGUISHABLE, IN THAT CASE , THE ASSESSEE MADE AN ARRANGEMENT WITH L I C FOR PAYMENT OF LEAVE ENCASHMEN T UNDER THE GROUP LEAVE ENCASHMENT SCHEME AND THE PREMIUM PAID TOWARDS THE SCHEME WAS CLAIMED AS BUSINESS EXPENDITURE. AFTER PAYING THE PREMIUM, PAYMENT NEED TO BE MADE. BUT HERE, IN THIS CASE , ACCORDING TO THE ASSESSING OFFICER, ASSESSEE WAS MAKING ONLY A PROVISION AND NO PREMIUM WAS PAID. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSES SEE'S ACTUAL LIABILITY WILL DEPEND UPON THE NUMBER O F LEAVE TAKEN BY THE EMPLOYEE AND HENCE IT IS OF CONTINGENT IN NATURE AND IS NOT ALLOWABLE. THEREFORE, THE PROVISIO N F OR LEAVE ENCASHMENT OF R S.40, 10 , 673/ - CLAIMED FOR THE RELEVANT PREVIOUS YEAR WAS BY DISALLOWED UNDER SECTION 43B (F) OF I T ACT, 1961 AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 3. ON APPEAL, THE CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSE SSEE. 4. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US RAISING THE GROUND THAT DISALLOWANCE WAS MADE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 43B OF THE I . T. ACT. I.T.A. NO . 254 /COCH/201 7 3 5. THE LD. AR SUBMITTED THAT THE CIT(A) HAD ALLOWED THE CLAIM OF THE ASSESSEE BASED ON THE ORDER OF THE SUPREME COURT IN THE CASE OF EXIDE INDUSTRIES LTD WHERE IN IT WAS HELD THAT PENDING THE DISPOSAL OF THE APPEAL , THE ASSESSE WOULD BE ENTITLED TO MAKE THE CLAIM IN ITS RETURNS. THE LD. AR RELIED ON THE ORDER OF CO - ORDINATE B ENCH IN THE CASE OF MUTHOOT VEHICLES AND ASSET FINANCE LTD VS. ACIT IN ITA NO.623 /COCH/ 2013 DATED 6.12.2013 WHERE THE ISSUE WAS RESTORED TO THE ASSESSING OFFICER TO EXAMINE THE ISSUE BASED ON THE SUPREME COURT DECISION. 6 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT A SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE MUTHOOT VEHICLES AND ASSET FINANCE LTD VS. ACIT IN ITA NO.623 /COCH/ 2013 DATED 6.12.2013 WHEREIN IT WAS HELD AS UNDER: 3. WE HAVE HEARD THE RIVAL CONTENTIONS ON TH IS ISSUE. WE NOTICE THAT THIS BENCH OF TRIBUNAL HAS CONSIDERED AN IDENTICAL ISSUE IN THE CASE OF M/S KERALA FEEDS LTD (ITA NO. 179 & 180/COCH/2013) AND THE TRIBUNAL, VIDE ITS ORDER DATED 27 - 09 - 2013, HAS SET ASIDE THIS ISSUE TO THE FILE OF THE AO WITH THE FOLLOWING OBSERVATIONS: - 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. WITH REGARD TO THE CLAIM OF PROVISION FOR LEAVE ENCASHMENT, THE LD COUNSEL PLACED RELIANCE ON THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF HINDUSTAN LA TEX LTD (SUPRA) AND ALSO ON THE DECISION RENDERED BY HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. RAJ. STATE BRIDE AND CONSTRUCTION CORPORATION LTD (2012)(346 ITR 53). WE NOTICE THAT THE RAJASTHAN HIGH COURT, IN THE ABOVE CITED CASE, HAS CONSIDERED THE CLAIM OF DEDUCTION OF PROVISION FOR LEAVE ENCASHMENT FOR ASSESSMENT YEAR 2000 - 01. HOWEVER, THE PROVISIONS OF SEC. 43B(F) WAS INSERTED INTO THE ACT BY FINANCE ACT,2001 W.E.F. 1.4.2002, WHICH COULD NOT HAVE BEEN CONSIDERED BY HONBLE RAJASTHAN HIGH C OURT. HENCE, RELIANCE PLACED BY THE ASSESSEE ON THE SAID DECISION MAY NOT BE USEFUL FOR THE YEAR UNDER CONSIDERATION. I.T.A. NO . 254 /COCH/201 7 4 8. WE HAVE ALSO CAREFULLY GONE THROUGH THE DECISION RENDERED BY THE JURISDICTIONAL KERALA HIGH COURT IN THE CASE OF HINDUSTAN LATEX LTD (SUPRA) AND NOTICE THAT THE HIGH COURT HAS ALLOWED THE CLAIM OF THE ASSESSEE ON TWO GROUNDS VIZ., (A) THE HONBLE KERALA HIGH COURT, IN PARA 5 OF ITS ORDER, HAS CONCURRED WITH THE VIEW EXPRESSED BY THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF EXIDE I NDUSTRIES LTD (SUPRA) THAT CLAUSE (F) OF SECTION 43B IS UNCONSTITUTIONAL. (B) THE DECISION RENDERED BY THE HONBLE CALCUTTA HIGH COURT HAS NOT BEEN CHALLENGED BEFORE THE SUPREME COURT. (PARA 5 AND 8). ACCORDINGLY, THE HONBLE KERALA HIGH COURT, BY FOLL OWING THE DECISION RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF BERGER PAINTS LTD VS. CIT (266 ITR 99), HAS FURTHER HELD THAT THE REVENUE HAVING NOT CHALLENGED THE CORRECTNESS OF THE LAW LAID DOWN BY THE CALCUTTA HIGH COURT, IT IS NOT OPEN TO THE R EVENUE TO CHALLENGE ITS CORRECTNESS IN THE CASE OF ANOTHER ASSESSEE. 9. HOWEVER, WE NOTICE THAT THE DEPARTMENT HAS CHALLENGED THE DECISION RENDERED BY THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD, BY FILING APPEAL BEFORE HONBLE S UPREME COURT AND THE HONBLE APEX COURT HAS STAYED THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT. IN FACT, THE HONBLE APEX COURT HAS PASSED TWO INTERIM ORDERS IN THIS REGARD, WHICH ARE DETAILED BELOW: - (A) THE FIRST ORDER WAS PASSED ON 08 - 09 - 2008 IN THE PETITION FOR SPECIAL LEAVE TO APPEAL (CIVIL) CC 12060/2008 IN THE CASE OF CIT VS. EXIDE INDUSTRIES LTD (FROM THE JUDGMENT AND ORDER DATED 27 - 6 - 2007 IN APO NO.301/2005 OF THE HIGH COURT OF CALCUTTA). THE ORDER READS AS UNDER: - UPON HEARING COUNSEL THE COURT MADE THE FOLLOWING ORDER ISSUE NOTICE. IN THE MEANTIME, THERE SHALL BE STAY OF THE IMPUGNED JUDGMENT, UNTIL FURTHER ORDERS. (B) THE SECOND ORDER WAS PASSED ON 08 - 05 - 2009 IN THE PETITION FOR SPECIAL LEAVE TO APPEAL (CIVIL) NO(S) 22889/2008 ( FROM THE VERY SAME JUDGMENT OF THE HIGH COURT OF CALCUTTA). THE ORDER READS AS UNDER: - I.T.A. NO . 254 /COCH/201 7 5 PENDING HEARING AND FINAL DISPOSAL OF THE CIVIL APPEAL, DEPARTMENT IS RESTRAINED FROM RECOVERING PENALTY AND INTEREST WHICH HAS ACCRUED TILL DATE. IT IS MADE CLEAR T HAT AS FAR AS THE OUTSTANDING INTEREST DEMAND AS OF DATE IS CONCERNED, IT WOULD BE OPEN TO THE DEPARTMENT TO RECOVER THAT AMOUNT IN CASE CIVIL APPEAL OF THE DEPARTMENT IS ALLOWED. WE FURTHER MAKE IT CLEAR THAT THE ASSESSEE WOULD, DURING THE PENDENCY OF TH IS CIVIL APPEAL, PAY TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK BUT AT THE SAME TIME IT WOULD BE ENTITLED TO MAKE A CLAIM IN ITS RETURNS. THUS, IT IS NOTICED THAT THE HONBLE APEX COURT HAS NOT ONLY STAYED THE OPERATION OF THE HONBLE CALCUTTA HIG H COURT IN THE CASE OF EXIDE INDUSTRIES LTD (SUPRA), BUT ALSO OBSERVED THAT THE ASSESSEE WOULD, DURING THE PENDENCY OF THIS CIVIL APPEAL, PAY TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK. THOUGH THE INTERIM ORDERS WERE PASSED BY THE HONBLE APEX COURT IN THE YEARS 2008/2009, IT WAS NOT BROUGHT TO THE NOTICE OF HONBLE JURISDICTIONAL HIGH COURT. WE FURTHER NOTICE THAT THE HONBLE SUPREME COURT HAS MODIFIED THE DECISION RENDERED IN THE CASE OF BERGER PAINTS (SUPRA) IN ITS SUBSEQUENT DECISION IN THE CASE OF GANGADHARAN (304 ITR 61). THE OPERATIVE PART OF THE SAID DECISION READS AS UNDER: - IN ANSWERING THE REFERENCE, WE HOLD THAT MERELY BECAUSE IN SOME CASES THE REVENUE HAS NOT PREFERRED APPEAL THAT DOES NOT OPERATE AS A BAR FOR THE REVENUE TO PREFER AN APPEAL IN ANOTHER CASE WHERE THERE IS JUST CAUSE FOR DOING SO OR IT IS IN PUBLIC INTEREST TO DO SO OR FOR A PRONOUNCEMENT BY THE HIGHER COURT WHEN DIVERGENT VIEWS ARE EXPRESSED BY THE TRIBUNALS OR THE HIGH COURTS. 10. WE ALSO NOTICE THAT THE CALCUTT A BENCH OF TRIBUNAL HAS CONSIDERED AN IDENTICAL ISSUE IN THE CASE OF S.R BATLIBOY & CO. IN ITA NO.1598/KOL/2011 AND THE TRIBUNAL, VIDE ITS DECISION DATED 13 - 03 - 2012, HAS SET ASIDE THE MATTER TO THE FILE OF THE AO WITH THE DIRECTION TO CONSIDER THE ISSUE AF RESH AS PER THE DECISION OF HONBLE APEX COURT IN THE CASE OF EXIDE INDUSTRIES LTD (SUPRA). ACCORDINGLY, WE SET ASIDE THE ORDERS OF LD CIT(A) ON THIS ISSUE IN BOTH THE YEARS UNDER CONSIDERATION AND RESTORE THEM TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THE ISSUE AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA. I.T.A. NO . 254 /COCH/201 7 6 4. CONSISTENT WITH THE VIEW TAKEN IN THE CASE OF KERALA FEEDS LTD (SUPRA), WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH IN ACCORDANCE WITH THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF M/S EXIDE INDUSTRIES LTD (SUPRA). 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL P URPOSES. 6.1 I N VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE REMIT THIS ISSUE TO THE FILE OF THE AO WITH SIMILAR DIRECTION. ACCORDINGLY, THIS GROUND OF APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 7 . THE NEXT GROUND IS WITH REGARD TO DELETION OF ADDITION MADE U/S. 14A OF THE ACT. 8 . THE FACTS OF THE CASE ARE THAT ASSESSEE HAD MADE INVESTMENT OF RS.3,52,74,906/ - IN COMPANIES/PARTNERSHIP FIRM UNDER THE SAME MANAGEMENT (SCHEDULE - 7 OF BALANCE SHEET) AND RECEIVED A SUM OF RS.26,83,031/ - AS SHARE OF PROFIT FROM PARTNERSHIP FIRM, WHICH WAS EXEMPTED. OUT OF TOTAL INVESTMENTS OF RS.3,52,74,906/ - , RS.2,02,74,906/ - WAS IN THE PARTNERSHIP FIRM AND BALANCE WAS IN EQUITIES OF VARIOUS COMPANIES. SINCE THE INCOME ARISING FROM THESE I NVESTMENTS WERE EXEMPTED FROM TAXATION, THE ASSESSING OFFICER DISALLOWED THE EXPENSES INCURRED FOR MAKING THIS INVESTMENT. SINCE THE ASSESSEE HAD NOT MADE ANY DISALLOWANCE U/S. 14A, THE ASSESSING OFFICER DISALLOWED THE EXPENSES UNDER RULE 8D OF INCOME TAX RULES, 1962. THE ASSESSING OFFICER REJECTED THE I.T.A. NO . 254 /COCH/201 7 7 ARGUMENT OF TH E ASSESSEE THAT THE INVESTMENTS WERE MADE DURING THE EARLIER YEARS FOR EARNING TAX FREE INCOME FOR THE REASON THAT THE ASSESSEE HAD EMPLOYED A CONSIDERABLE AMOUNT OUT OF HIS CAPITAL IN INSTRUM ENTS WHICH DID NOT YIELD ANY TAXABLE INCOME. THE ASSESSEE HAD TAKEN LOANS FOR HIS GENUINE BUSINESS NEEDS AND CLAIMED INTEREST ON EXPENDITURE WHICH MADE IT CLEAR THAT THERE WAS A COST TO THIS INVESTMENT MADE BY THE ASSESSEE IN INSTRUMENTS WHICH GENERATED T AX FREE INCOME. FURTHER, THE ASSESSING OFFICER REJECTED THE ARGUMENT OF THE ASSESSEE THAT INTEREST EXPENSES ON TERM LOANS AND DEFERRED PAYMENT CREDIT LOAN WHICH ARE TAKEN FOR ACQUISITION OF FIXED ASSETS CANNOT BE CONSIDERED WHILE MAKING DISALLOWANCE FOR T HE REASON THE INVESTMENT IN THE INSTRUMENTS WHICH GENERATED EXEMPTED INCOME INCREASED THE INTEREST ON THESE LOANS. HENCE, THE ASSESSING OFFICER PROPOSED TO MAKE DISALLOWANCE UNDER RULE 8D OF THE ACT AS FOLLOWS: I) THE AMOUNT OF EXPENDITURE DIRECTLY R ELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME 0 II) A AMOUNT OF EXPENDITURE BY WAY OF INTEREST RS.16,66,06,809/ - B AVERAGE VALUE OF INVESTMENT RS.4,20,33,391/ - C AVERAGE VALUE OF TOTAL ASSETS APPEARING IN THE BALANCE SHEET RS.243,95,02,569/ - AXB RS. 28,70,687/ - C III) AN AMOUNT EQUAL TO AVERAGE VALUE OF INVESTMENT RS. 2,10,167/ - ADDITION: RS.30,80,854/ - I.T.A. NO . 254 /COCH/201 7 8 9. ON A PPEAL, THE CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 10. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. THE LD. DR SUBMITTED THAT ASSESSEE HAD MADE INVESTMENTS IN EXEMPTED INCOME YIELDING INVESTMENTS OUT OF BORROWED FUNDS. HENCE, IT WAS P RAYED TO CANCEL THE ORDER OF THE CIT(A). 11. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD FURNISHED DETAILED STATEMENT SHOWING OWN FUNDS IN THE FORM SHARE CAPITAL AND RESERVES, PROFIT FOR THE YEAR AND THE INVESTMENTS SINCE 1995 AND ESTABLISHED THAT THE IN VESTMENTS WERE OUT OF OWN FUNDS ONLY. IT WAS SUBMITTED THAT T HERE WAS NO FRESH INVESTMENT DURING THE YEAR AND THE INVESTMENT IN EACH YEAR WAS LESS THAN THE PROFIT FOR THAT YEAR. ACCORDING TO THE LD. AR, D ISALLOWANCE U/S 14A WAS NOT ATTRACTED WHEN THE ASSE SSEE HAD ESTABLISHED THAT THE INVESTMENTS IN ASSOCIATE CONCERNS WERE OUT OF OWN FUNDS AND NOT OF BORROWED FUNDS. ACCORDING TO THE LD. AR, THE ASSESSEE HAD SUFFICIENT OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES REPRES ENTING RETAINED PROFITS. THE LD. AR RELIED ON THE DECISION OF THE SUPR EME COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED [394 ITR 449 (SC)]. THE LD. AR ALSO RELIED ON THE FOLLOWING JUDGMENTS OF THE HIGH COURTS. 1. PRINCIPAL CIT VS SINTEX INDUSTRIES LTD (82 TAXMA N.COM 171 GUJ ) WHEREIN SUPREME COURT HA D REJECTED THE SLP FILED BY THE DEPARTMENT AGAINST THE DECISION AND THE SAME WAS REPORTED IN 93 TAXMAN.COM 24 2. HDFC BANK VS DCIT (366 ITR 505 ( MUMBAI) I.T.A. NO . 254 /COCH/201 7 9 3. CIT VS MICROLABS LTD(383 ITR 490 ( KARNATAKA) 4. H.T.ME DIA LTD VS PRINCIPAL CIT ( 399 ITR 576 ( DELHI) 5. GEOJIT FINANCIAL SERVICES LTD VS DCIT 67 SOT 37 ITAT COCHIN HENCE, IT WAS SUBMITTED THAT THE ORDER OF THE C IT(A) DELETING THE DISALLOWANCE U/S 14A IS IN ACCORDANCE WITH LAW AND SHOULD NOT BE DISTURBED. 11.1 IT WAS SUBMITTED THAT D ISALLOWANCE OF INTEREST WAS NOT ATTRACTED UNDER SECTION 14A READ WITH RULE 8D(II) WHEN THE LOANS WERE TAKEN FOR SPECIFIC PURPOSES LIKE PURCHASE OF ASSETS. IN THE CASE OF THE ASSESSEE, IT WAS SUBMITTED THAT THE TERM LOANS AND DE FERRED PAYMENT CREDITS LOANS WERE TAKEN FOR ACQUISITION OF FIXED ASSETS. TRADE ADVANCE WAS FOR THE PURCHASE OF STOCK IN TRADE AND I NTEREST ON DELAYED DELIVERY OF VEHICLES WAS NOT ON ACCOUNT OF BORROWINGS. ACCORDING TO THE LD. AR, THE CORRECT APPLICATION OF FORMULA SET OUT IN RULE WOULD BE THAT INTEREST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOM E ARE REQUIRED TO BE CONSIDERED . IT WAS SUBMITTED THAT THE AO HA D NOT ESTABLISHED THAT THERE WAS PAYMENT OF INTEREST ON ANY BORROWING WHICH WAS USED FOR THE I NVESTMENT. IT WAS FURTHER SUBMITTED THAT D ISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(IIIJ WAS NOT ATTRACTED, WHEN THE ASSESSING OFFICER HA D NOT RECORDED HIS SATISFACTION THAT THE ASSESSEE HAD INCURRED EXPENDITURE FOR EARNING TAX FREE INCOME AND WHEN T HE ASSESSEE HAD OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AND THE INVESTMENT WAS MUCH LESSER THAN OWN FUNDS. IN VIEW OF THE ABOVE ARGUMENTS, IT WAS PRAYED TO DISMISS THE DEPARTMENT APPEAL ON THIS GROUND . I.T.A. NO . 254 /COCH/201 7 10 12. WE HAVE HEARD THE RIVAL SUBMISSION S AND PERUSED THE RECORD. REGARDING RECORDING OF SATISFACTION FOR INVOKING THE PROVISIONS OF SECTION 14A, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD MADE INVESTMENT OF RS.3,52,74,906/ - IN COMPANIES/PARTNERSHIP FIRM UNDER THE SAME MANAGEMENT (SCHEDUL E - 7 OF BALANCE SHEET) AND RECEIVED A SUM OF RS.26,83,031/ - AS SHARE OF PROFIT FROM PARTNERSHIP FIRM, WHICH WAS EXEMPTED. IT CANNOT BE SAID THAT THE ASSESSING OFFICER WAS MECHANICALLY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. HENCE, IT CANNOT BE SAID THAT THERE WAS NO RECORDING OF SATISFACTION BY THE ASSESSING OFFICER. THIS ARGUMENT OF THE ASSESSEE IS REJECTED. 12.1 COMING TO THE APPLICATION OF SECTION 14A READ WITH RULE 8D, IT IS THE DUTY OF THE ASSESSEE TO ESTABLISH THAT THE INTEREST FREE F UNDS WAS AVAILABLE TO THE ASSESSEE TO MAKE INVESTMENTS IN EXEMPTED INCOME YIELDING INVESTMENTS. HOWEVER, IN THE PRESENT CASE, THE ASSESSEE FAILED TO ESTABLISH THE SAME, HENCE, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT. WITHOU T EXAMINING THE ACTUAL AVAILABILITY OF INTEREST FREE FUNDS TO MAKE THE SAID INVESTMENTS, THE CIT(A) DELETED THE ADDITION WHICH IS NOT CORRECT. BEING SO, WE REMIT THE ENTIRE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO RE - EXAMINE THE ISSUE REGARDING AVAIL ABILITY OF INTEREST FREE FUNDS WITH THE ASSESSEE. RELIANCE IS ALSO PLACED ON THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. POPULAR VEHICLES & SERVICES LTD. (325 ITR 523) WHEREIN IT WAS HELD AS UNDER: I.T.A. NO . 254 /COCH/201 7 11 SECTION 14A(1) EXPRESSLY BARS ALLOWANCE OF ANY EXPENDITURE FOR EARNING INCOME WHICH DO NOT CONSTITUTE PART OF THE TOTAL INCOME OF THE ASSESSEE. THE INTEREST FREE LOAN WAS ADVANCED BY THE ASSESSEE ONLY TO FIRMS OF WHICH IT WAS A PARTNER AND IT DID NOT RECEIVE ANY INTEREST FROM THE AMOU NTS AND THE ONLY BENEFIT WAS RECEIPT OF SHARE INCOME FROM SUCH FIRMS WHICH DID NOT CONSTITUTE INCOME OF THE ASSESSEE UNDER SECTION 10(2A) OF THE ACT. THEREFORE, THE DISALLOWANCE OF PROPORTIONATE INTEREST ON BORROWED FUNDS DIVERTED AS INTEREST - FREE LOANS T O FIRMS OF WHICH THE ASSESSEE WAS A PARTNER WAS RIGHTLY MADE BY THE ASSESSING OFFICER. 12.2 THUS, THIS GROUND OF APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE S . 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DECEMBER, 201 8 . SD/ - SD/ - ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 17 TH DECEMBE R, 2018 GJ COPY TO: 1 . M/S. POPULAR VEHICLES AND SERVICES LTD., 32/2571 - H, 2 ND FLOOR, KUTTUKARAN CENTRE, MAMANGALAM, PALARIVATTOM, KOCHI - 682 025. 2. THE DEPUTY COMMISSIONER OF INCOME - TAX, CORPORATE CIRCLE - 2(1), KOCHI. 3. THE COMMISSIONER OF INCOM E - TAX (AP P EALS) - I , KOCHI. 4. THE PR. COMMISSIONER OF INCOME - TAX, KOCHI. 5. D. R., I.T.A.T., COCHIN BENCH, COCHIN. 6 . GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN I.T.A. NO . 254 /COCH/201 7 12