Appeal details
Counselvise Citation
40421114 RSA 2013
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 10 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
20-02-2015
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
06-01-2015
Assessment Year
2009-2010
Appeal Filed On
27-03-2013
Judgement Text
IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER ITA NO.404(BANG) 2013 (ASSESSMENT YEAR : 2009-10) AND C.O.NO.89(BANG)/2013 (ASSESSMENT YEAR 2009-10) (BY ASSESSEE) THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-12(3), BANGALORE APPELLANT VS M/S SUBRAMANYA CONSTRUCTIONS & DEVELOPMENT CO.LTD., 4/1, TUMKUR ROAD, YESHWANTPUR, BANGALORE-560 022 RESPONDENT ASSESSEE BY : SHRI V. CHANDRASEKHAR, ADVOCATE REVENUE BY : DR. P.K.SRIHARI, ADDL. CIT DATE OF HEARING : 06-01-2015 DATE OF PRONOUNCEMENT : 20-02-2015 O R D E R PER SHRI ABRAHAM P GEORGE, AM: THIS APPEAL AND CROSS OBJECTION ARE DIRECTED AGAI NST AN ORDER DATED 21-12-2012 OF CIT(A)II, BANGALORE. GROUNDS RAISED B Y THE REVENUE IN ITS APPEAL IS ON THE DELETION OF DISALLOWANCE MADE BY T HE AO UNDER RULE- 8D(2)(II) OF THE INCOME TAX RULES 1962 READ ALONG WITH SECTION 14A OF THE ITA NO.404(B)/13 & C.O.NO.89(B)/13 2 INCOME-TAX ACT, 1961.( IN SHORT THE ACT). AS PER THE REVENUE, A DISALLOWANCE U/S 14A COULD BE MADE ONLY BY RESORTIN G TO RULE-8D AND NOT OTHERWISE. 2. AS AGAINST THIS, ASSESSEE IN ITS CROSS OBJECTI ON, IS OBJECTING TO THE DISALLOWANCE MADE BY THE AO UNDER RULE-8D(2)(III) W HICH WAS SUSTAINED BY THE CIT(A). 3. FACTS APROPOS ARE THAT ASSESSEE A BUILDER HAD F ILED ITS RETURN DECLARING INCOME OF RS.4,06,68,720/-. IT HAD EARN ED A DIVIDEND INCOME OF RS.33,600/- WHICH WAS CLAIMED EXEMPT. AO FOUND THA T ASSESSEE HAD INVESTMENTS TOTALING TO RS.63,49,38,874/- IN EQUITY SHARES AT THE YEAR END. THE AO FURTHER NOTED ASSESSEE HAD CHARGED IN ITS P& L ACCOUNT INTEREST OF RS.33,93,15,003/-. A PROPOSAL WAS MADE TO DISALLOW THE EXPENDITURE ATTRIBUTABLE TO THE INVESTMENTS. IN REPLY ASSESSE E STATED THAT NONE OF THE INVESTMENTS WERE MADE OUT OF ANY LOANS. AS PER THE ASSESSEE IT HAD GENERAL RESERVES OF RS.5.15 CRORES AND INTEREST FRE E DEPOSITS FROM TENANTS RS.49.13 CRORES, APART FROM ITS CAPITAL. AS PER THE ASSESSEE THEREFORE, THERE WAS NO QUESTION OF DISALLOWANCE U/S 14A OF THE ACT. AO WAS OF THE OPINION THAT REPLY WAS SUPERFICIAL AND THE ASSESSEE HAD NOT ADDUCED ANYTHING TO SHOW THAT THE INVESTMENTS WAS MADE FROM NON INTERES T BEARING FUNDS. AS PER THE AO ASSESSEE DID NOT PRODUCE THE FUND FLOW S TATEMENT WITHOUT WHICH IT WAS NOT POSSIBLE TO VERIFY ITS CLAIM. FU RTHER, AS PER THE AO WHETHER THE DIVIDEND WAS DECLARED BY VARIOUS PRIVAT E COMPANIES IN WHICH ITA NO.404(B)/13 & C.O.NO.89(B)/13 3 ASSESSEE HAD INVESTED WAS IRRELEVANT SINCE NON-DECL ARATION OF DIVIDEND WERE ONLY TO AVOID DIVIDEND DISTRIBUTION TAX. HE T HEREFORE, APPLIED RULE 8D(2)(II) ON THE INTEREST CLAIM OF RS.33,93,15,003/ -AND COMPUTED A DISALLOWANCE OF RS.4,64,15,708/-. FOR THE DISALLOWA NCE UNDER RULE 8D(2)(III), AO APPLIED 0.5% OF AVERAGE VALUE OF IN VESTMENTS AND ARRIVED AT A FIGURE OF RS.31,74,299/-. THE TOTAL DISALLOWANCE MA DE U/S 14A CAME TO RS.4,95,90,007/-. 4. AGGRIEVED ASSESSEE MOVED IN APPEAL BEFORE THE C IT(A). ARGUMENT OF THE ASSESSEE WAS THAT THE INVESTMENTS WERE MADE OUT OF THE FUNDS INTERNALLY GENERATED AND NO PORTION OF THE BANK LOA NS WERE UTILIZED. AS PER THE ASSESSEE THERE WAS NO NEXUS BETWEEN BANK LO ANS AND THE INVESTMENTS. ASSESSEE POINTED OUT THAT THE EXEMPT I NCOME EARNED CAME TO RS.33,600/- ONLY AND IT HAD NOT EXPENDED ANY AMOUN T FOR EARNING SUCH INCOME. FURTHER, AS PER THE ASSESSEE, AO HAD NOT E FFECTIVELY REBUTTED ITS CLAIM OF NO EXPENDITURE FOR EARNING EXEMPT INCOME. RELIANCE WAS PLACED ON THE DECISION OF HONBLE P&H HIGH COURT IN THE CA SE OF CIT VS HERO CYCLES LTD.,323 ITR 518 AND THAT OF CHENNAI BENCH O F THE TRIBUNAL IN THE CASE OF SIVA INDUSTRIES & HOLDINGS LTD., VS ACIT 59 DTR 182. ASSESSEE ALSO POINTED TO THE CIT(A) THAT INVESTMENTS WERE AL L MADE PRIOR TO THE RELEVANT PREVIOUS YEAR. ITA NO.404(B)/13 & C.O.NO.89(B)/13 4 5. LEARNED CIT(A) AFTER CONSIDERING SUBMISSIONS AN D DETAILS FILED BY THE ASSESSEE HELD THAT ASSESSEE HAD INTEREST FREE F UNDS WHICH SATISFIED THE REQUIREMENT OF THE INVESTMENTS MADE BY IT. AS PER THE CIT(A) MAJOR PORTIONS OF THE INVESTMENTS WERE MADE DURING FY: 20 05-06. HE THEREFORE, HELD THAT DISALLOWANCE UNDER RULE 8D(2)(II) WAS NOT CALLED FOR. HOWEVER, VIS-A-VIS DISALLOWANCE MADE UNDER RULE 8D(2)(III), LEARNED CIT(A) WAS OF THE OPINION, THAT NO INVESTMENT COULD STAND TOGETHER FO R YEARS WITHOUT ANY EXPENDITURE. AS PER THE LEARNED CIT(A), DISALLOWAN CE UNDER RULE 8D SHOULD BE LIMITED TO WHAT WAS MANDATED UNDER SUB-CL AUSE(III) THEREOF. HE THEREFORE, DELETED THE DISALLOWANCE MADE UNDER RULE 8D(II) WHILE CONFIRMING THE DISALLOWANCE MADE UNDER RULE 8D(2)(I II) OF THE ACT. 6. NOW BEFORE US, LEARNED DR STRONGLY ASSAILING TH E ORDER OF THE CIT(A) IN SO FAR AS THE DISALLOWANCE UNDER RULE 8D( II) WAS DELETED SUBMITTED THAT ASSESSEE WAS UNABLE TO BRING ON REC ORD ANY EVIDENCE TO SHOW THAT ONLY OWN FUNDS WERE UTILIZED FOR MAKING THE INVESTMENTS. AS PER THE LEARNED DR, AO HAD RECORDED HIS SATISFACTIO N THAT THE CLAIM OF THE ASSESSEE WAS INCORRECT IN THIS REGARD. ASSESSEE HA D FAILED TO PRODUCE A CASH FLOW STATEMENT TO SHOW THAT ONLY NON-INTEREST BEARING FUNDS WERE USED FOR MAKING THE INVESTMENTS. FURTHER, ACCORDIN G TO THE LEARNED DR, EARNING OF INCOME FROM INVESTMENTS WAS NOT NECESSAR Y PRE-REQUISITE FOR INVOKING SEC14A OF THE ACT. ONCE THE SAID SECTION WAS INVOKED AO WAS DUTY BOUND TO MAKE A DISALLOWANCE UNDER EVERY CLAUS E OF RULE 8D AND ITA NO.404(B)/13 & C.O.NO.89(B)/13 5 COULD NOT LIMIT HIMSELF TO CLAUSE(III) THEREOF, T HUS, ACCORDING TO LEARNED DR, THE CIT(A) ERRED IN DELETING THE DISALLOWANCE M ADE UNDER RULE 8D(2)(II). 7. PER CONTRA, AND IN SUPPORT OF THE CROSS OBJECTI ON LEARNED AR SUBMITTED THAT ASSESSEE HAD TOTAL INVESTMENTS WORKI NG OUT TO RS.63,49,8,874/- OF WHICH THE INTEREST FROM DIVIDEN D OF RS.33,600/- CAME FROM INVESTMENTS IN SHARES WORTH RS.2,30,400/- OF M /S INDIAN OVERSEAS BANK (IOB). THE MAJOR INVESTMENTS WERE IN SHARES O F DRIVE-IN ENTERPRISES LIMITED, M/S PRAKRUTHI INFRASTRUCTURE AND DEVELOPME NT CO.,LTD., AND CHAMUNDI PLASTO SACKS PVT.LTD AND THESE HAD NOT YIE LDED ANY DIVIDEND. THE SHARE CAPITAL AND RESERVES OF THE ASSESSEE AS O N 31-03-2009 CAME TO RS.52,64,52,854/- APART FROM THE INTEREST FREE ADV ANCE RECEIVED FROM ITS LESSEES. AS PER THE LEARNED AR THE INCREASE IN IN VESTMENTS DURING RELEVANT PREVIOUS YEAR WAS NEGLIGIBLE. MAJOR PART OF THE IN VESTMENTS PERTAINED TO THE PRECEDING YEARS. LEARNED AR SUBMITTED THAT WH EN THE FUNDS HAD GONE OUT OF A MIXED POOL THE PRESUMPTION WAS THAT INVEST MENTS IN TAX FREE INSTRUMENTS HAD GONE OUT OF INTEREST FREE FUNDS. F URTHER, AS PER THE LEARNED AR ASSESSEE HAD NOT INCURRED ANY INDIRECT E XPENDITURE AND SUSTENANCE OF THE DISALLOWANCE UNDER RULE 8D(2)(III ) WAS INCORRECT. ACCORDING TO HIM, COMPUTATION OF DISALLOWANCE UNDER RULE 8D WAS NOT AUTOMATIC. LEARNED AR SUBMITTED THAT DISALLOWANCE UNDER RULE 8D(2)(III) WAS NOT WARRANTED SINCE THE INVESTMENTS WHICH HAD Y IELDED THE DIVIDEND INCOME WERE HELD WITHOUT ANY CHANGE AND NO EXPENDIT URE WHATSOEVER WAS ITA NO.404(B)/13 & C.O.NO.89(B)/13 6 INCURRED BY THE ASSESSEE FOR GETTING THE TAX FREE DIVIDEND OF RS.33,600/-. IN ANY CASE, AS PER THE LEARNED AR, THE AO HAD NOT RECORDED THE NECESSARY SATISFACTION FOR DISCOUNTING THE CLAIM OF THE ASSES SEE OF HAVING INCURRED NO EXPENDITURE VIS--VIS THE TAX FREE INVESTMENTS. THU S, ACCORDING TO HIM, THERE WAS NO CASE OF DISALLOWANCE U/S 14A OF THE AC T. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS CAREFULLY. A LOOK AT THE BALANCE SHEET OF THE ASSE SSEE WOULD SHOW ITS SHARE CAPITAL AND RESERVES AS ON 31-03-2008 AND AS ON 31 -03-2009 AS UNDER; SHARE HOLDERS FUND: AS AT 31-03-2009 AS AT 31-03-2008 A) SHARE CAPITAL 174,001,100 174,001,100 B) RESERVES & SURPLUS 352,451 ,754 346,701,344 52 6,452,854 520,702,444 APART FROM THIS, ASSESSEE HAD RENTAL DEPOSITS FROM ITS TENANTS, WHICH AS PER SCHEDULE-IV OF ITS BALANCE SHEET DATED 31-03-20 09. A) PAYABLE TO IBM INDIA FOR RENT DEPOSIT FOR SA 73,471,321 73,471,321 B) PAYABLE TO EMC FOR RENT DEPOSIT 40,9 86,000 35,640,000 C) PAYABLE TO IBM INDIA FOR RENT DEPOSIT FOR BLOCK A 69,129,574 69,129,574 D) PAYABLE TO IBM INDIA FOR RENT DEPOSIT FOR BLOCK C 110,643,679 110,643,679 E) PAYABLE TO CISCO FOR RENT DEPOSIT FOR BLOCK D 156,315,852 156,315,852 F) IBM TOWER KEB REFUNDABLE DEPOSIT 14,493,848 14,493,848 G) CISCO KEB REFUNDABLE DEPOSIT 7,437,845 7,437,845 472,478119 467,132,119 AS AGAINST THIS, THE TOTAL INVESTMENT OF THE ASSESS EE AS ON 31-03- 2008 STOOD AT RS.63,47,80,874/- AND AS ON 31-03-200 9 RS.63,49,38,875/- ITA NO.404(B)/13 & C.O.NO.89(B)/13 7 REVENUE HAS NOT REBUTTED THE CONTENTION OF THE ASSE SSEE THAT RENTAL DEPOSITS CARRIED NO INTEREST. THUS, WITHOUT DOUBT, INTEREST FREE FUNDS WERE AVAILABLE WITH ASSESSEE WHICH WAS SUBSTANTIALLY HIG HER THAN THE INVESTMENTS MADE BY IT. IN OUR OPINION, IT IS NO T NECESSARY TO DRAW A ONE TO ONE NEXUS BETWEEN INVESTMENTS AND INTEREST FREE FUNDS. WHEN THE FUNDS HAD GONE OUT OF A COMMON POOL AND THE ASSESSE E HAD INTEREST FREE FUNDS IN EXCESS OF THE INVESTMENTS, IT COULD TAKE A VALID PLEA THAT SUCH INVESTMENTS WERE MADE OUT OF INTEREST FREE FUNDS. IN TAKING THIS VIEW WE ARE FORTIFIED BY THE JUDGMENT OF HONBLE GUJARAT HI GH COURT IN THE CASE OF CIT VS GUJARAT INDUSTRIAL DEVELOPMENT CORPORATION LTD (2013) 218 TAXMANN GUJ.142, WHICH VIEW WAS TAKEN ALSO BY HONB LE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS DEEPAK MET AL (2014)361 ITR 131. RELEVANT PARTS OF THE FORMER JUDGMENT ARE REP RODUCED HEREUNDER; 4.1 AT THE OUTSET, IT IS NEEDED TO BE MENTIONED THA T SECTION 14A WAS INCORPORATED IN RELATION TO THE INCOME NOT INCLUDIB LE IN TOTAL INCOME. THE ASSESSEE OBTAINED UNSECURED GOVERNMENT LOANS OF HUGE AMOUNT OF RS.384.95 CRORES AND PAID INTEREST TO THE TUNE O F RS.6.62 CRORES (ROUNDED OFF). IT ALSO INVESTED IN DIFFERENT KINDS OF EQUITY SHARES, A LARGE AMOUNT TO THE TUNE OF RS.295.78 CRORES (ROUND ED OFF) AND AS PER THE PROVISION OF SECTION 10(34), THE PROSPECTIV E DIVIDEND INCOME RECEIVED FROM SUCH INVESTMENT IS EXEMPTED FROM TAX. THIS WAS ITA NO.404(B)/13 & C.O.NO.89(B)/13 8 PERCEIVED TO BE A DIVERSION OF BUSINESS FUND AS THE INVESTMENT IN EQUITY SHARES BEARING TAX FREE RETURNS WAS HELD NOT PERMISSIBLE BY THE ASSESSING OFFICER UNDER SECTION 14A FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDER THIS CHAPTER. NO DEDUCTION IS PE RMISSIBLE IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOM E UNDER THE ACT. THE TRIBUNAL ON CONSIDERING THE CASE OF MARUTI UDYOG LTD V/S. DCIT (SUPRA) DID SUSTAIN THE PROPOSED DISALLOWANCE UNDE R SECTION 14A OF THE ACT. THE TRIBUNAL RIGHTLY HELD THAT THE NEX US BETWEEN THE BORROWED FUND AND THE INVESTMENT CAN BE SAID TO BE ESTABLISHED ONLY WHEN THE INTEREST FREE FUNDS ARE NOT AVAILABLE WITH THE ASSESSEE. IT FURTHER HELD THAT NO NEXUS OF SUCH KIND WAS PROVED BEFORE THE ASSESSING OFFICER. THUS, WHEN THERE WAS SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND WHEN THE DEPARTMENT FAILED TO ESTABLISH THE LINK BETWEEN THE BORROWED FUND AND TH E INVESTMENT MADE BY THE ASSESSEE IN THE EQUITY SHARES, ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF RS.6,62,50,000/- BY ASSESSING OF FICER HAS BEEN RIGHTLY DELETED BY BOTH THE CIT(A) AND THE TRIBUNAL . 5. IT WOULD BE APT TO REFER TO THE DECISION OF THIS COURT RENDERED IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RAGHUVIR SYNTHETICS LTD. IN TAX APPEAL NO.829 OF 2007 WHERE THE QUESTION WA S OF ASSESSEE HAVING GIVEN INTEREST FREE LOANS TO THE AS SOCIATES CONCERNS WHEN IT WAS OTHERWISE PAYING THE INTEREST ON CERTAI N FUNDS IT HAD BORROWED. FACTUALLY, WHEN IT WAS FOUND THAT HUGE FU NDS WERE AVAILABLE WITHOUT ANY INTEREST LIABILITY WITH THE A SSESSEE AND WITH NO EVIDENCE TO INDICATE THAT THE BORROWED MONEY WAS UT ILIZED FOR THE PURPOSE OF ADVANCEMENT OF THE SISTER CONCERNS, THE ASSESSEE WAS HELD ELIGIBLE FOR ALLOWANCE OF THE INTEREST. 6. REFERENCE IS NEEDED HERE TO THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. KRIBHCO REPORTED IN (2012) 349 ITR 618 (DELHI), WHEREIN ALSO SIMILAR QUESTION WAS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ITA NO.404(B)/13 & C.O.NO.89(B)/13 9 7. IN VIEW OF THE DISCUSSION MADE HEREINABOVE, IT I S TO BE STATED THAT IT IS EXPECTED OF THE DEPARTMENT TO ESTABLISH A NEX US BETWEEN THE INTEREST BEARING FUNDS BORROWED AND THOSE INVESTED BY THE ASSESSEE RESPONDENT. ONLY WHEN IT IS SHOWN THAT THE INTEREST FREE FUNDS ARE NOT AVAILABLE WITH THE ASSESSEE, THE QUESTION WOULD ARI SE OF FASTENING THE TAX LIABILITY ON THE ASSESSEE. IN THE INSTANT CASE, THE RESPONDENT ASSESSEE HAD NOT USED BORROWED FUNDS, FOR THE PURPO SE OF INVESTMENT IN EQUITY SHARES. FOR THE DEDUCTION CLAIMED UNDER S ECTION 80M, ON THE DIVIDEND INCOME OF THESE SHARES, BOTH THE CIT (APPE ALS) AND THE TRIBUNAL HAVE RIGHTLY ALLOWED THE INTEREST FREE EXP ENSES INCURRED FOR EARNING THE DIVIDEND AND ALLOWED THE DEDUCTION UNDE R SECTION 80M ON THE NET INCOME RECEIVED. AND, THE REVENUE HAVING FA ILED TO ESTABLISH THAT THE RESPONDENT ASSESSEE HAD INCURRED ANY EXPEN SES FOR EARNING DIVIDEND INCOME FROM THE AMOUNT BORROWED, THEY HAVE RIGHTLY NOT ADDED SUM OF RS.6.62 CRORES INVOKING PROVISIONS OF SECTION 14A WHICH DOES NOT PERMIT DEDUCTION OF EXPENDITURE INCU RRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME IN THE CASE OF CIT VS DEEPAK METAL OBSERVATIONS OF THE HONBLE PUNJAB & HAYANA HIGH COURT WERE AS UNDER; SOLE GROUND TAKEN BY THE REVENUE IN THESE APPEALS I S THAT THE DIVIDEND INCOME RETURNED BY THE ASSESSEE COULD NOT HAVE BEEN EARNED BY HIM WITHOUT MAKING DIRECT OR INDIRECT EXP ENSES. CONTENTION OF THE REVENUE IS THAT SECTION 14-A OF THE ACT IS A SPECIAL PROVISION AND IN ORDER TO ESCAPE APPLICABILITY OF THIS PROVIS ION, ONUS WAS UPON THE ASSESSEE TO PROVE THAT NO EXPENDITURE WAS INCUR RED BY HIM FOR EARNING THIS EXEMPTED INCOME. IT IS FURTHER URGED B Y THE REVENUE THAT THE TRIBUNAL COMPLETELY OVERLOOKED THE SCOPE OF RUL E 8-D OF THE RULES IN RELATION TO PROVISION OF SECTION 14-A OF THE ACT . 6. THE REVENUE HAS REFERRED TO SUB-SECTION 3 OF SEC TION 14-A OF THE ACT, WHEREAS THE ASSESSEE HAS POINTEDLY MENTIONED A BOUT SWEEP OF ITA NO.404(B)/13 & C.O.NO.89(B)/13 10 SUB-SECTION 2 OF SECTION 14-A OF THE ACT TO WHICH S UB-SECTION 3, RELIED UPON BY THE REVENUE, ALSO MAKES REFERENCE. 7. FOR BETTER EVALUATION, PROVISION OF SECTION 14-A OF THE ACT IS REPRODUCED AS BELOW: '1 4A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REG ARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTN ESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PA RT OF THE TOTAL INCOME UNDER THIS ACT. PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION1 47 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING ARE FUND ALREA DY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001.' 8. PERUSAL OF THE AFORESAID SECTION LEAVES NO MANNE R OF DOUBT THAT PLEA OF THE REVENUE THAT ONUS WAS UPON THE ASSESSEE TO PROVE QUANTUM OF EXPENDITURE INCURRED ON EARNING OF TAX F REE INCOME OF DIVIDEND, IS CORRECT. ITA NO.404(B)/13 & C.O.NO.89(B)/13 11 9. WHEN CONSISTENT CASE OF THE ASSESSEE, DESPITE NO TICE GIVEN BY THE ASSESSING OFFICER TO GIVE DETAILS OF THE EXPENDITUR E MADE ON EARNING OF EXEMPTED INCOME IN THE NATURE OF DIVIDEND, VERSI ON OF THE ASSESSEE WAS THAT HE HAD NOT MADE ANY EXPENDITURE ON EARNING SUCH INCOME, THE ASSESSING OFFICER IN TERMS OF SUB-SECTION 2 OF SECTION 14-A OF THE ACT WAS TO PROCEED FURTHER TO COLLECT SUCH MATERIAL OR EVIDENCE TO DETERMINE EXPENDITURE, IF ANY, INCURRED BY THE ASSE SSEE BUT THE ASSESSING OFFICER INSTEAD RELYING ON RULE 8-D OF TH E RULES APPLIED AS A FORMULA, APPLICABLE TO AN ASSESSEE WHO HAS INCURRED EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WHICH IS NOT THE CASE OF THE PRES ENT ASSESSEE, WHICH WAS CLEARLY A WRONG APPLICATION INTRODUCED AS A SUB STITUTE FOR SUB- SECTION 2 OF SECTION 14-A OF THE ACT AND THUS WAS N OT PERMISSIBLE IN LAW. 10. AT THIS STAGE, REFERENCE TO THE IMPUGNED JUDGME NT OF THE TRIBUNAL IS NECESSARY. IN PARA 14 OF ITS JUDGMENT, THE TRIBU NAL HAS OBSERVED AS UNDER: 'BEFORE ANY DISALLOWANCE IS MADE, ESSENTIALLY THERE HAS TO BE CERTAIN EXPENDITURE WHICH MUST HAVE BEEN INCURRED BY THE AS SESSEE, WHICH IN THE PRESENT CASE IS MISSING. THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY EXPENSE HAVING BEEN INCURRED BY THE ASSE SSEE TO EARN THE NON-EXEMPT INCOME OR THE EXEMPT INCOME. IN THE ABSE NCE OF THE SAME, IT CANNOT BE SAID THAT THE ASSESSEE HAD ACTUA LLY INCURRED ANY EXPENDITURE. THEREFORE, WHETHER BEFORE INSERTION OF RULE 8-D OR THEREAFTER THIS FACT HAS TO BE BROUGHT ON RECORD BY THE AUTHORITIES BELOW WHICH IN THE PRESENT CASE HAS NOT BEEN DONE.' 'HAVING NOT INCURRED ANY EXPENDITURE WHICH CAN BE D ISALLOWED OR ANY SUCH EXPENSES HAVING NOT BEEN BROUGHT ON RECORD, TH ERE CANNOT BE ANY DISALLOWANCE OF ANY EXPENDITURE UNDER RULE 8-D OR OTHERWISE AGAINST THE EXEMPT INCOME. OUR VIEW FINDS SUPPORT F ROM THE DECISION IN THE CASE OF HERO CYCLES LIMITED AND WALFORT SHAR E & STOCK BROKERS (P) LTD. (SUPRA). IN THE CIRCUMSTANCES AND FACTS OF THE CASE, WE FIND ITA NO.404(B)/13 & C.O.NO.89(B)/13 12 NO INFIRMITY IN THE FINDINGS OF LD. CIT(A). THUS, G ROUND NO.2 OF REVENUE IS DISMISSED.' 11. AT THIS STAGE, REFERENCE MAY BE MADE TO DECISIO N OF THIS COURT DATED 4.11.2009 IN ITA NO.331 OF 2009 COMMISSIONER OF INCOME TAX- II VERSUS M/S HERO CYCLES LIMITED WHEREIN THIS CONT ROVERSY HAS BEEN SET AT REST. PARAS 3 AND 4 OF THE SAID JUDGMENT FOR READY REFERENCE ARE GIVEN AS BELOW: '3. LEARNED COUNSEL FOR THE APPELLANT RELIES UPON S ECTION14A (2) AND RULE 8D (1) (B) TO SUBMIT THAT EVEN WHERE THE ASSES SEE CLAIMED THAT NO EXPENDITURE HAD BEEN INCURRED, THE CORRECTNESS O F SUCH CLAIM COULD BE GONE INTO BY THE ASSESSING OFFICER AND IN THE PR ESENT CASE, THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE WAS INCUR RED WAS FOUND TO BE NOT ACCEPTABLE BY THE ASSESSING OFFICER AND THUS DISALLOWANCE WAS JUSTIFIED. WE ARE UNABLE TO ACCEPT THE SUBMISSION. 4. IN VIEW OF FINDING REPRODUCED ABOVE, IT IS CLEAR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INT EREST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF THE D IVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECT LY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER S ECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALL OWED TO BE SETOFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE M ANDATE OF SECTION 14A , CANNOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOU ND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, D ISALLOWANCE UNDER SECTION 14A CANNOT STAND. IN THE PRESENT CASE FINDING ON THIS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN TO BE PER VERSE. CONSEQUENTLY, DISALLOWANCE IS NOT PERMISSIBLE. WE H AVE TAKEN THIS VIEW EARLIER ALSO IN ITA NO.504 OF 2008 ( COMMISSIONER OF INCOME TAX CHANDIGARH II VS. M/S WINSOME TEXTILE INDUSTRIE S LIMITED, ITA NO.404(B)/13 & C.O.NO.89(B)/13 13 CHANDIGARH) ,DECIDED ON 25.8.2009, WHEREIN IT WAS OBSERVED AS UNDER:- '6. CONTENTION RAISED ON BEHALF OF THE REVENUE IS T HAT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF ITS O WN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KIT TY, AS HELD BY THIS COURT IN CIT V. ABHISHEK INDUSTRIES LIMITED, (2006) 286 ITR 1AND THEREFORE, DISALLOWANCE UNDER SECTION 14A WAS JUSTIFIED.' IN VIEW OF LAW LAID DOWN BY JUDGMENT OF THIS COURT WHICH IS FULLY APPLICABLE TO THE FACTS OF THIS CASE, NOTHING REMAI NS TO BE ADJUDICATED AFRESH. 12. IN VIEW OF THE DISCUSSION MADE EARLIER, WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION THIS BEING THE CASE, QUESTION OF DISALLOWANCE OF IN TEREST U/S 14A OF THE ACT, DO NOT ARISE AT ALL. 9. VIS--VIS THE DISALLOWANCE MADE UNDER RULE 8D(2) (III), A LOOK AT THE ASSESSMENT ORDER CLEARLY SHOW THAT ASSESSEE, THOUGH IT DID NOT TAKE SPECIFIC PLEA IT HAD STATED THAT THERE WAS NOTHING WHICH CALLED FOR A DISALLOWANCE UNDER SECTION 14A INVESTMENT PORTFOLIO . REPLY OF THE ASSESSEE ON THE PROPOSED DISALLOWANCE UNDER SECTION 14A OF T HE ACT GIVEN BEFORE THE AO READ AS UNDER; THE QUESTION OF DISALLOWANCE U/S 14A R.W. RULES 8 D WILL NOT ARISE SINCE THE COMPANY HAS NOT MADE INVES TMENTS OUT OF THE LOANS TAKEN FROM VARIOUS BANKS. ALL THE SE INVESTMENTS HAVE BEEN MADE OUT OF ITS INTERNAL GENE RATION ITA NO.404(B)/13 & C.O.NO.89(B)/13 14 AND THE RENT DEPOSITS FROM VARIOUS TENANTS ON WHICH NO INTEREST IS PAYABLE. MAJOR PORTION OF INVESTMENTS WERE MADE DURING THE FINANCIAL YEAR 2005-06 IN WHICH YEAR THE GENERAL RESERVE WAS RS.5.15 CRORES AND THE DEPOSITS RECEIVE D FROM THE TENANTS WAS RS.49.13 CRORES. HENCE NO PORTION O F THE LOANS FROM BANKS WAS USED FOR THE PURPOSE OF INVEST MENTS. WITH REGARD TO INVESTMENT IN DRIVE IN ENTERPRISES, THE SAID AMOUNT IS ON ACCOUNT OF REVALUATION OF LEASE HOLD R IGHT AND HENCE NO CASH HAS BEEN PAID. THOUGH, NOTHING SPECIFIC HAS BEEN MENTIONED ABOUT N ON-INCURRING OF ANY INDIRECT EXPENDITURE, IT IS CLEAR THAT MAJOR PART O F THE INVESTMENTS WERE DONE IN FY: 2005-06. INCREMENTAL INVESTMENT WAS ON LY 4.80 LAKHS. THE INVESTMENT WHICH YIELDED THE DIVIDEND INCOME OF RS. 33,600/- CLAIMED AS EXEMPT, CAME FROM SHARES WORTH RS.2,30,400/- HELD I N M/S INDIAN OVERSEAS BANK, WHICH HOLDING WAS THE SAME ALL THOUG H, BROUGHT FORWARD FROM EARLIER YEAR. UNDER SECTION 14A OF THE ACT, O NCE ASSESSEE HAS TAKEN A STAND THAT IT HAD NOT INCURRED ANY EXPENDITURE UNDE R SECTION 14A, THEN IN OUR OPINION, THE AO IS NOT JUSTIFIED IN INVOKING RU LE 8D(2)(III) FOR A DISALLOWANCE OF INDIRECT EXPENDITURE UNLESS HE RECO RDED HIS DIS-SATISFACTION OF CLAIM. IT IS ESSENTIAL SUCH NON-SATISFACTION HA S TO BE GIVEN WITH COGENT REASONS BEFORE INVOKING SECTION 14A. DOCTRINE OF SA TISFACTION NO DOUBT, DOES NOT MEAN THAT AN AO SHOULD PRESUME WHAT WAS IN THE MIND OF THE ASSESSEE AND EXPRESS HIS APPROVAL OR DISAPPROVAL TH EREON. HOWEVER, ONCE ASSESSEE SAY THAT IT HAD INCURRED NO EXPENSE COVERE D BY SECTION 14A OF THE ITA NO.404(B)/13 & C.O.NO.89(B)/13 15 ACT FOR ITS INVESTMENT PORTPOLIO, AO HAS TO MAKE A VERIFICATION. ESPECIALLY SO, WHEN INCREMENTAL INVESTMENTS IS NEGLIGIBLE. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT CIT(A) WHILE HE WAS JUSTIFI ED IN DELETING THE DISALLOWANCES MADE UNDER RULE 8D(2)(II) AND OUGHT N OT HAVE SUSTAINED THE DISALLOWANCE MADE UNDER RULE 8D(2)(III). ORDER OF THE LEARNED CIT(A) IS SET ASIDE TO THE EXTENT. DISALLOWANCE UNDER RULE 8D(I II) IS ALSO DELETED. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED WHEREAS THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20-02-2015. SD/- SD/- (RAJPAL YADAV ) JUDICIAL MEMBER ( ABRAHAM P GEORGE) (ACCOUNTANT MEMBER) BANGALORE: D A T E D : 20-02-2015 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE
