M/s Advanced Micro Devices Pvt. Ltd., Ambala Cantt. V. ACIT, Ambala

ITA 737/CHANDI/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9931 (ITAT-CHANDIGARH)
• Duration Of Justice: 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 08-03-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 12-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Keywords: Earning of tax free income; Proportionate interest; Retrospective amendment; Question of law; Tangible material; Revised return
• Section: 143(3); 14A; 37; 154; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH,CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO. 737/CHD/2015 ASSESSMENT YEAR: 2007-08 M/S ADVANCED MICRO DEVICES P.LTD., VS THE ACIT, 21, INDUSTRIAL AREA, AMBALA. AMBALA CANTT. PAN: AABCA0652J (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGAL RESPONDENT BY : SHRI MANJIT SINGH DATE OF HEARING : 27.05.2016 DATE OF PRONOUNCEMENT : 13.06.2016 O R D E R PER BHAVNESH SAINI,JM THIS APPEAL BY ASSESSEE HAS BEEN DIRECTED AGAINST THE ORDER OF LD. CIT(APPEALS) PANCHKULA DATED 29.05.2015 FOR ASSESSMENT YEAR 2007-08 CHALLENGING THE ORDER OF LD. CIT(APPEALS) IN CONFIRMING THE DISALLO WANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT IN THE PROCEEDINGS UNDER SECTION 154 OF THE INCOME TAX ACT . 2. THE BRIEF FACTS OF THE CASE ARE THAT ORIGINAL ASSESSMENT IN THIS CASE WAS COMPLETED UNDER SECTION 143(3) OF THE ACT ON 22.12.2009 AT AN INCOME OF 2 RS. 18.64 CR WHICH WAS ALSO RETURNED INCOME AS PER REVISED RETURN FILED BY THE ASSESSEE. THE ASSESSIN G OFFICER ISSUED NOTICE UNDER SECTION 154 OF THE ACT FOR RECTIFICATION FOR DISALLOWING INTEREST TO RS.3,06,0 35/- AND RS. 3,09,566/- UNDER SECTION 14A AND 36(1)(III) OF THE ACT RESPECTIVELY. THE ASSESSEE OBJECTED TO THE PROPOSED RECTIFICATION AS THERE WAS NO MISTAKE APPA RENT FROM RECORD AND BOTH THE ISSUES ARE DEBATABLE. THE ASSESSING OFFICER, HOWEVER, PROCEEDED UNDER SECTION 154 OF THE ACT FOR RECTIFICATION AND DISALLOWED BOTH TH E AMOUNTS OF INTEREST UNDER SECTION 14A IN A SUM OF R S. 3,06,035/- AND UNDER SECTION 36(1)(III) OF THE ACT AT RS. 3,09,566/-. 3. THE ASSESSEE CHALLENGED THE ORDER UNDER SECTION 154 OF THE ACT BEFORE LD. CIT(APPEALS) WHEREBY BOTH THE ABOVE ADDITIONS WERE MADE. THE LD. CIT(APPEALS), CONSIDERING EXPLANATION OF THE ASSESSEE, DELETED ADDITION OF RS.3,09,566/-UNDER SECTION 36(1)(III) O F THE ACT OF THE ACT. 4. THE ISSUE IN THE PRESENT APPEAL IS, THEREFORE, DISALLOWANCE OF RS. 3,06,035/- UNDER SECTION 14A OF THE ACT. 5. DURING THE RECTIFICATION PROCEEDINGS, THE AO NOT ED THAT THE ASSESSEE HAD MADE INVESTMENT OF RS.8,45,95,172/- IN SHARES AND IN A PARTNERSHIP FIR M NAMELY M/S MICRO INSTRUMENTS CO. DIVIDEND INCOME 3 FROM SUCH SHARES AND SHARE OF PROFIT FROM THE PARTNERSHIP FIRM IS EXEMPT FROM TAX. THE ASSESSEE H AD CLAIMED INTEREST EXPENSES AMOUNTING TO RS.6,15,601/ -. THE AO APPLIED THE PROVISION OF SECTION 14A OF THE ACT THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . THE AO CONSIDERING THE MISTAKE APPARENT FROM THE RECORD ISSUED NOTICE PROPOSING THE RECTIFICATION. T HE ASSESSEE REPLIED THAT DISALLOWANCE U/S 14A AS PER R ULE 8D IS NOT APPROPRIATE AS THE SPECIFIED RULE WAS EFF ECTIVE FROM A.Y. 2008-09. FURTHER, THE ASSESSEE HAD EARNED INTEREST ON CAPITAL FROM THE FIRM AS WELL AS SHARE OF PROFIT. THE INTEREST ON CAPITAL IS TAXABLE ON WHICH THE TAX WAS PAID. HOWEVER, AFTER CONSIDERING THE ASSESS EE'S REPLY THE AO OBSERVED THAT SECTION 14A WAS INSERTED BY FINANCE ACT, 2001 AND THEREFORE, MADE A DISALLOWANC E OF RS.3,06,035/- ON ACCOUNT OF INTEREST U/S 14A OF THE ACT. 6. DURING APPELLATE PROCEEDINGS, THE COUNSEL FOR TH E APPELLANT SUBMITTED THAT DISALLOWANCE OF RS.3,06,03 5/- BY INVOKING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D IS NOT CORRECT AS THE RULE SPECIFIED CAME INTO F ORCE W.E.F. A.Y. 2008-09. HENCE, DISALLOWANCE WITH REGAR D TO A.Y. 2007-08 BY APPLYING RULE 8D IS LEGALLY NOT TEN ABLE. FURTHER, AFTER REFERRING TO THE PROVISIONS OF SECTI ON 14A READ WITH RULE 8D AND KEY FINANCIAL PARAMETERS AS O N 31.03.2006 AND 31.03.2007, THE APPELLANT SUBMITTED 4 THAT THE COMPANY HAD MADE INVESTMENTS FROM ITS OWN INTEREST FREE RESOURCES COUPLED WITH THE FACT THAT NO DIRECT OR INDIRECT EXPENSES WERE INCURRED TO EARN T AX FREE INCOME. THE APPELLANT RELIED ON THE DECISION O F DELHI BENCH OF ITAT IN THE CASE OF ACIT VS. MOHAN EXPORT PVT. LTD. 151 TTJ 667 THAT WHERE INVESTMENT IN SHARES HAVE BEEN MADE OUT OF INTEREST FREE FUND AND WHERE THERE WAS NOTHING ON RECORD TO SHOW THAT INVESTMENT WAS MADE FROM BORROWED FUND NO DISALLOWANCE CAN BE MADE UNDER RULE 8D(2)(II) OF TH E I.T. RULES. 6(I) THE APPELLANT FURTHER RELIED ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCEE MANUFACTURING VS. DCIT 328 ITR 81 THAT RULE 8D CANNOT HAVE RETROSPECTIVE APPLICATION AND THE SAME CAN BE APPLIED ONLY FOR A.Y. 2008-09. THE APPELLANT FUR THER SUBMITTED THAT AS PER SUB SECTION 2 & 3 IN SECTION 14A EFFECTING FROM 01.04.2007, THE AO SHALL FOLLOW THE PRESCRIBED METHOD ONLY IF AFTER HAVING REGARD TO TH E ACCOUNTS OF THE ASSESSEE HE IS NOT SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME. ON THIS THE APPELLANT HAD SUBMITTED THAT THE AO HAS NOT POINTED OUT ANY SPECI FIC DEFECT REGARDING THE CORRECTNESS OF THE CLAIM OF TH E ASSESSEE IN RESPECT OF EXPENDITURE IN RELATION TO I NCOME WHICH DOES NOT FROM PART OF THE TOTAL INCOME. THE 5 EXPENDITURE ACTUALLY INCURRED SHOULD BE CONSIDERED FOR DISALLOWANCE TO EARNED TAX FREE INCOME AND THEREFOR E, THE DISALLOWANCE BY THE AO IS NOT IN ACCORDANCE WIT H SECTION 14A OF THE ACT. 6(II) THE APPELLANT FURTHER RELIED ON THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD. 323 ITR 518 THAT FOR THE PURPO SE OF DISALLOWANCE U/S 14A OF THE ACT, THE EXPENSES MUST HAVE BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMP T INCOME. MERE FACT THAT SOME INTEREST EXPENSES WERE INCURRED CANNOT BE THE REASON FOR DISALLOWANCE UNLE SS THE NEXUS BETWEEN THE EXPENSE AND THE EXEMPT INCOME IS ESTABLISHED. THE APPELLANT CONCLUDED THAT I) THE ASSESSEE HAD NOT INCURRED ANY DIRECT OR INDIRECT EXPENSES TO EARN TO EARN TAX FREE INCOME; II) THERE IS NO FINDING BY LD. AO THAT ANY EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME; III) LD. AO HAS NOT POINTED OUT ANY SPECIFIC DEFECT REGA RDING CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE IN RELATION TO INCOME, WHICH DOES NOT F ORM PART OF THE TOTAL INCOME AND IV) RULE 8D CAME INTO FORCE WITH EFFECT FROM A.Y. 2008-09. HENCE DISALLOWANCE W ITH REGARD TO A.Y. 2007-08 BY APPLYING RULE 8D IS LEGAL LY NOT CORRECT. 7. THE LD. CIT(APPEALS) CONFIRMED THE ADDITION. HI S FINDINGS IN PARA 5.2 TO 5.5 OF THE IMPUGNED ORD ER ARE 6 REPRODUCED AS UNDER : 5.2 I HAVE GONE THROUGH THE FACTS OF THE CASE A ND WRITTEN SUBMISSION FILED BY THE APPELLANT IT IS NOTED THAT THE APPELLANT HAD MADE INVESTMENT IN THE SHARES AND IN A PARTNERSHIP FIRM. THE DIVIDEND INCOME FROM SUCH SHARES AND SHARE OF PROFI T FROM THE PARTNERSHIP FIRM IS EXEMPT FROM TAX AND INTEREST EX PENDITURE HAVE ALSO BEEN CLAIMED. THEREFORE, THE AO APPLIED THE PR OVISIONS OF SECTION 14A AND DISALLOWED PROPORTIONATE INTEREST U /S 14A OF THE ACT. ON THE OTHER HAND THE APPELLANT HAS SUBMITTED THAT DISALLOWANCE AS PER RULE 8D IS NOT EFFECTIVE FOR TH E A.Y. 2007-08 I.E. THE YEAR UNDER CONSIDERATION. ALTHOUGH, THE TA XABILITY OF INTEREST ON CAPITAL FROM PARTNERSHIP FIRM WAS EXPLA INED BUT NO SUBMISSION WAS MADE ON INCOME FROM SHARES AND SHARE OF PROFIT FROM PARTNERSHIP FIRM WHICH ARE EXEMPT INCOME. HOWE VER, DURING APPELLATE PROCEEDINGS, THE APPELLANT HAS MADE FURTH ER SUBMISSION THAT THE APPELLANT HAD ITS OWN FUND TO MAKE FRESH I NVESTMENT TO EARN EXEMPT INCOME, THERE WERE NO DIRECT OR INDIRECT EXP ENSES INCURRED TO EARN SUCH INCOME AND THE AO HAS NOT DISCUSSED RE GARDING THE CORRECTNESS OF THE CLAIM OF THE APPELLANT. 5.3 AFTER CONSIDERING THE FACTS AND SUBMISSION, I F IND THAT THE PROVISIONS OF SECTION 14A WERE INSERTED BY FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM A.Y. 1962-63. THE OBJECT OF THE SECTION IS TO DISALLOW EXPENDITURE THAT HAVE BEEN INCURRED IN RELATION TO INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME U NDER THE ACT. SO, THE APPORTIONMENT OF EXPENDITURE WAS APPLICABLE EVEN DURING THE A.Y. 2007-08. HOWEVER, DUE TO AMBIGUITY IN SUCH APPORTIONMENT AND TO PROVIDE A PROPER METHOD RULE 8D WAS MADE APP LICABLE FROM A.Y. 2008-09. THE AO IN ITS ORDER HAS NOWHERE MENTI ONED THAT THE PROPORTIONATE INTEREST HAS BEEN DISALLOWED BY APPLY ING RULE 8D OF THE I.T. RULES. IT WAS OPEN TO THE AO TO MAKE A REA SONABLE APPORTIONMENT OF EXPENDITURE INCURRED FOR EARNING E XEMPT INCOME EVEN IN THE ABSENCE OF SPECIFIED RULE 8D. THEREFORE , THE APPLICABILITY OF PROVISIONS OF SECTION 14A IN THE A BSENCE OF RULE 8D DURING THE YEAR UNDER CONSIDERATION CANNOT BE CHALL ENGED. HOWEVER, THE SECTION 14A REFERS TO EXPENDITURE INCU RRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME. IN THE 7 INSTANT CASE, ON PERUSAL OF BALANCE SHEET, IT IS NO TICED THAT THE APPELLANT HAS MADE INVESTMENT DURING THE YEAR AS TH E TOTAL INVESTMENT HAVE INCREASED FROM RS.148.68 LACS AS ON 31.03.2006 TO RS.845.95 LACS AS ON 31.03.2007. THE INVESTMENTS ARE IN THE CAPITA L OF PARTNERSHIP FIRM, MICRO INSTRUMENTS COMPANY, EQUITY SHARES OF L UXMI UDYOG MANDIR PVT. LTD. AND IN PNB AND UNITS OF MUTUAL FUN DS. THE APPELLANT HAS EARNED EXEMPT INCOME AS DIVIDEND INCOME OF RSL9 ,430/- AND ALSO SHARE OF PROFIT AND INTEREST ON CAPITAL WITH PARTNE RSHIP FIRM OF RS.10.27 LACS AND RS.20.37 LACS RESPECTIVELY. SCHEDULE - N TO BALANCE SHEET SHOWS INTEREST & COMMISSION TO BANK OF RS.1,10,380/ -, INTEREST ON IDS OF RS.53/-, INTEREST ON SBI FDR OF RS.30,935/-, INT EREST AGAINST LOAN UBI FDR OF RS.3,54,877/- AND INTEREST ON LOAN OF RS .L,19,356/-. THE AO HAS ADOPTED TOTAL OF BANK INTEREST & COMMISS ION AND INTEREST ON LOAN AMOUNTING TO RS.6,15,601/- WHEREAS THE APPE LLANT HAS CONSIDERED INTEREST ON OVERDRAFT AGAINST FDR AND IN TEREST ON LOAN AMOUNTING TO RS.5,05,168/-EXCLUDING RS.53/- AS INTE REST ON TDS. FOR THE PURPOSE OF COMPUTATION OF PROPORTIONATE INTERES T U/S 14A, THE TOTAL INTEREST EXPENDITURE TO BE CONSIDERED IS TAKEN AT R S.5,05,221/- EXCLUDING THE BANK COMMISSION. ON PERUSAL OF COMPUT ATION OF INCOME, IT IS FOUND THAT THE APPELLANT HAS NEITHER COMPUTED NOR DEDUCTED THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME A S PER PROVISIONS OF SECTION 14A OF THE ACT. 5.4 SECTION 14A INSERTED W.R.E.F. A.Y. 1962-6 3 PROVIDES THAT NO DEDUCTION SHALL BE MADE IN RESPECT OF EXPENDITURE I NCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THE SECTION IS APPLICABLE WHE RE THE ASSESSEE GENERATES AN INCOME WHICH IS EXEMPT FROM TAX, EXPEN DITURE HAS BEEN INCURRED FOR EARNING SUCH INCOME AND THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH IS INCURRED IN RELATION TO THE-INCOME EXEMPT FROM TAX. IN SUCH SITUATION, THE AO WILL DETERMINE THE QUANTUM OF SUC H EXPENDITURE IN ACCORDANCE WITH THE H / V .PROVISIONS OF SECTION 14A OF THE ACT. IN THE INSTANT CASE, THE APPELLANT HAS EXEMPT INCOME I N THE FORM OF DIVIDEND FROM INVESTMENTS AND SHARE ON PROFIT FROM THE PARTN ERSHIP FIRM. FURTHER, THERE WERE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. THE APPELLANT HAD COMMON FUND TO EARN TAXABLE AS WELL A S NON TAXABLE INCOME WHICH WERE MANAGED TOGETHER FROM THE COMMON ESTABLI SHMENT OF THE 8 APPELLANT COMPANY. SO, THERE WERE COMPONENTS OF EXP ENSES IN EARNING THE EXEMPT INCOME. HERE, I REFER TO THE DECISION OF HON 'BLE SUPREME COURT IN THE CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS P VT. LTD. [2010] 326 ITR 1 WHERE THE HON'BLE SUPREME COURT RECORDED THAT THE THEORY OF APPORTIONMENT OF AMOUNT OF EXPENSES BETWEEN TAXABLE AND NON TAXABLE INCOME STOOD WIDENED BY INCORPORATION OF SECTION 14 A. THE HON'BLE COURT FURTHER OBSERVED THAT IT IS CLEAR THAT THE WO RDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXPENDITURE ON R ENT, TAXES, SALARIES, /, INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PR OVIDED FOR UNDER SECTIONS 30 TO 37 OF THE ACT. THIS WAS FURTHER APPR OVED BY HON'BLE P&H HIGH COURT IN THE CASE OF CIT VS. PUNJAB STATE INDU STRIAL DEVELOPMENT CORP. LTD. [2002] 255 ITR 351. IN VIEW OF THE OBSER VATIONS OF HON'BLE COURT AND THE FACTS OF INSTANT CASE, IT IS CLEAR TH AT THE APPELLANT HAS NOT COMPUTED THE CORRECT DISALLOWANCE AS PER PROVISIONS OF SECTION 14A OF THE ACT FOR EXCLUSION FROM ITS COMPUTATION OF INCOM E. THE AO ON FINDING THAT THERE WAS INCOME EXEMPT FROM TAX AND T HE APPELLANT HAD CLAIMED INTEREST EXPENSES; HE PROCEEDED WITH THE CO MPUTATION OF DISALLOWANCE AS PER PROVISIONS OF SECTION 14A OF TH E ACT THIS OBSERVATION OF AO AMOUNTS TO THE OBJECTIVE SATISFAC TION DRAWN BY HIM ABOUT THE CORRECTNESS OF CLAIM OF EXPENDITURE MADE BY THE APPELLANT. THEREFORE, APPELLANT SUBMISSION ON OBJECTIVE SATISF ACTION OF AO IS DEVOID OF MERIT. 5.5 REGARDING THE APPELLANT'S RELIANCE ON THE DE CISION IN THE CASE OF MOHAN EXPORT PVT. LTD. (SUPRA) AS WELL AS THE DE CISION IN THE CASE OF HERO CYCLES LTD. (SUPRA), IT IS NOTICED THA T THE HON'BLE TRIBUNAL AND COURT FOUND THAT NO DISALLOWANCE CAN B E MADE UNDER RULE 8D(2)(II) ON CATEGORICAL FINDING OF THE FACT T HAT INVESTMENTS WERE MADE OUT OF NON INTEREST BEARING FUND. IN THE APPELLANT'S CASE, NO SUCH FINDING HAS BEEN RECORDED NOR THE APPELLANT HAS BEEN ABLE TO SUBSTANTIATE THAT INVESTMENT WERE OUT OF NON INT EREST BEARING FUNDS. THEREFORE, THE DECISIONS ARE DISTINGUISHABLE FROM T HE FACTS OF THE INSTANT CASE, WHEREAS, I REFER THE DECISION OF THE HON'BLE TRIBUNAL CHANDIGARH BENCH IN THE CASE OF CHADHA SUPER CARS VS. ACIT [IT A NO. 1241/CHD/2011 DATED 11.11.2011], WHERE THE HON'BLE TRIBUNAL FOLLOWING THE DECISION OF HON'BLE HIGH COURT OF P&H IN THE CASE OF CIT VS. PUNJAB STATE INDUSTRIAL DEVELOPMENT CORP. L TD. [2002] 255 9 ITR 351 HELD THAT DISALLOWANCE U/S 14A WAS MAINTAIN ABLE. IN THE INSTANT CASE, COMMON FUND HAS BEEN UTILIZED FOR TAX ABLE AS WELL AS NON TAXABLE INCOME AND THEREFORE, THE APPORTIONMENT OF THE EXPENSES RELATED TO TAX FREE INCOME IS LIABLE TO BE MADE. SI NCE, RULE 8D IS NOT APPLICABLE IN THE YEAR UNDER CONSIDERATION; THEREFO RE, IN THE ABSENCE OF ANY PRESCRIBED METHOD, THE AO HAS TO COMPUTE THE EXPENSES ATTRIBUTABLE TO GENERATION OF TAX FREE INCOME. IN T HE ASSESSMENT ORDER, THE AO HAS CONSIDERED THE INTEREST EXPENDITURE OF R S.6,50,601/- ARID MADE DISALLOWANCE OF RS.3,06,035/- U/S 14A OF THE A CT. THE AO HAS NOT GIVEN THE COMPUTATION TO ARRIVE AT THE AMOUNT OF TH E DISALLOWANCE. IT IS FOUND THAT THE INTEREST EXPENDITURE IS OF RS.5,05,2 21/- INSTEAD OF RS.6,50,601/-. SINCE, THE APPELLANT HAS INCURRED DI RECT OR\ INDIRECT EXPENSES TO EARN TAX FREE INCOME, THE AO IS DIRECTE D TO RE-COMPUTE THE APPORTIONMENT OF EXPENDITURE INCURRED FOR EARNING T HE TAX FREE INCOME AS PER PROVISIONS OF SECTION 14A OF THE ACT ON VERI FICATION OF INFORMATION AVAILABLE ON RECORD. THIS GROUND OF APP EAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 8. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW. HE HAS SUBMITTED THAT IN ORDER TO HAVE A MISTAKE TO BE APPARENT FROM RECORD, IT HAS TO BE ON RECORD AND SA ME MUST HAVE BEEN DISCUSSED IN THE ASSESSMENT PROCEEDINGS, INSTEAD OF BEING A MISTAKE WHICH TAKES LONG DRAWN PROCESS OF REASONING TO ESTABLISH. THE RECORD MEANS THE RECORD OF THE CASE COMPRISING TH E ENTIRE PROCEEDINGS INCLUDING DOCUMENTS AND MATERIAL PRODUCED BY THE PARTIES AND TAKEN ON RECORD BY THE AUTHORITIES WHICH WERE AVAILABLE AT THE TIME OF PAS SING OF THE ORDER WHICH IS THE SUBJECT MATTER OF THE PROCEEDINGS FOR RECTIFICATION. IN THE CASE OF THE ASSESSEE, NEITHER ANY QUESTION REGARDING DISALLOWAN CE 10 OF EXPENDITURE UNDER SECTION 14A OF THE ACT WAS RAI SED NOR WAS THE RELATION OF EXPENDITURE WITH EARNING OF THE EXEMPT INCOME ESTABLISHED. THE ASSESSING OFFICER D ID NOT ISSUE ANY QUESTIONNAIRE TO THE ASSESSEE IN THIS REGARD, COPIES OF WHICH ARE FILED AT PAGES 18 TO 26 OF THE PAPER BOOK. SINCE THE ISSUE OF SECTION 14A OF THE ACT WAS NOT BEFORE THE AUTHORITIES BELOW, THERE IS NO QUESTION OF MISTAKE APPARENT FROM RECORD. 8(I) THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMI TTED THAT THE ISSUE UNDER SECTION 14A IS HIGHLY DEBATABL E AND THE ASSESSING OFFICER HAS, AFTER LONG DRAWN PRO CESS OF REASONING AND RE-APPRECIATION OF THE FACTS MADE DISALLOWANCE WHICH IS NOT PERMISSIBLE IN LAW AND RE LIED UPON DECISION OF HON'BLE SUPREME COURT IN THE CASE OF T.S.BALARAM, ITO VS VOLKART BROTHERS & ORS. 82 ITR 50 WHEREIN IT HAS BEEN HELD, THAT THE MISTAKE FROM RECORD, IN SECTION 154 MUST BE AN OBVIOUS AND PATENT MIST AKE AND NOT SOMETHING WHICH CAN BE ESTABLISHED BY A LON G DRAWN PROCESS OF REASONING ON POINT ON WHICH THERE MAY BE CONCEIVABLY TWO OPINIONS. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ADDITION MADE BY ASSESSING OFFICER IS NOT TENABLE BECAUSE NO INTEREST BEARING FUNDS HAVE BEEN USED. THE PERUSAL OF THE BALANCE SHEET WOULD INDICATE THAT ASSESSEE DID NOT HAVE ANY INTER EST BEARING FUNDS OUTSTANDING AT THE END OF THE RELEVAN T ASSESSMENT YEAR. THE INTEREST INCOME ON FDR WAS RS . 2.60 CR. THE INTEREST EXPENDITURE OF RS . 11 3,85,812/- IS ON ACCOUNT OF LOAN AGAINST FDR AND IT CAN ALSO BE SEEN THAT INTEREST INCOME ON THE FDR HAVE B EEN DULY RECOGNIZED BY THE ASSESSEE IN THE PROFIT & LOS S ACCOUNT AND IT IS VERY MUCH HIGHER THAN THE INTERES T EXPENDITURE LEAVING NO NET INTEREST EXPENDITURE. THEREFORE, THE VERY BASIS OF DISALLOWANCE UNDER SEC TION 14A IS UNJUSTIFIED. HE HAS FURTHER SUBMITTED THAT ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION IN ORDERS FOR MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT. 9. PB-1 IS BALANCE SHEET OF ASSESSMENT YEAR UNDER APPEAL SHOWING ASSESSEE HAS RS. 58.95 CR AS RESERVE AND SURPLUS. PB-3 SHOWS ASSESSEE HAS PROFIT BEFORE TAXATION IN A SUM OF RS. 17.83 CR. THEREFORE, THE INVESTMENT OF RS. 8.45 CR IS OUT OF HIS RESERVES AN D SURPLUS WHICH IS MORE. SINCE NO INTEREST BEARING F UNDS HAVE BEEN USED THEREFORE, ADDITION IS WHOLLY UNJUSTIFIED. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT ASSESSEE MERELY CHALLENGED ADDITION ON MERIT WITHOU T CHALLENGING THE PROCEEDINGS UNDER SECTION 154 OF TH E ACT. 10. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERI AL AVAILABLE ON RECORD. IT IS ADMITTED FACT THAT ASSE SSEE DISCLOSED ALL THE FACTS IN THE TRADING AND PROFIT & LOSS ACCOUNT AND BALANCE SHEET ALONGWITH ANNEXURES AND 12 SCHEDULES. THE ASSESSING OFFICER, IN THE ORIGINAL ASSESSMENT PROCEEDINGS UNDER SECTION 143(3) DID NOT RAISE THE ISSUE OF DISALLOWANCE UNDER SECTION 14A A ND DID NOT DISCUSS ANYTHING IN THE ASSESSMENT ORDER. THE ASSESSING OFFICER IN THE RECTIFICATION PROCEEDINGS UNDER SECTION 154 RAISED THE ISSUE OF DISALLOWANCE UNDER SECTION 14A AND CONSIDERED THE DETAILS FROM THE PRO FIT & LOSS ACCOUNT AND BALANCE SHEET FILED ON RECORD PROPOSING TO DISALLOW INTEREST UNDER SECTION 14A OF THE INCOME TAX ACT. HON'BLE SUPREME COURT IN THE CASE OF VOLCART BROTHERS (SUPRA) HELD THAT, THE MISTAKE MUST BE APPARENT FROM RECORD AND MUST BE A OBVIOUS AND PATENT MISTAKE AND NOT SOMETHING WHICH CAN BE ESTABLISHED BY A LONG DRAWN PROCESS OF REASONING ON POINT ON WHICH THERE MAY BE CONCEIVABLY TWO OPINION S. THE WAY THE ORDER UNDER SECTION 154 HAVE BEEN PASSE D, WOULD CLEARLY ESTABLISH THAT IT WAS NOT AN OBVIOUS OR PATENT MISTAKE FOR DISALLOWING INTEREST UNDER SECTI ON 14A. THE ASSESSING OFFICER HAS GONE ON RECORD IN D ETAIL AND AFTER LONG DRAWN PROCESS OF REASONING, MADE DISALLOWANCE UNDER SECTION 14A IN THE RECTIFICATION PROCEEDINGS UNDER SECTION 154 OF THE ACT. FURTHER, THE MATERIAL ON RECORD REFERRED TO BY LD. COUNSEL FOR T HE ASSESSEE CLEARLY SHOWS THAT ASSESSEE HAS OWN RESERV E AND SURPLUS OF RS. 58.95 CR AS WELL AS PROFIT IN THE YE AR UNDER CONSIDERATION OF RS. 17.83 CR WHICH WAS MUCH MORE T HAN THE INVESTMENTS MADE BY THE ASSESSEE. THEREFORE, ASSESSEE HAS NOT USED ANY INTEREST BEARING FUNDS FO R 13 THE PURPOSE OF MAKING INVESTMENTS FOR EARNING EXEMP T INCOME. HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS WINSOME TEXTILE INDUSTRIES LTD. 319 ITR 204 HELD AS UNDER : THE ASSESSEE WAS ENGAGED IN MANUFACTURE AND SALE O F COTTON YARN. IT MADE INVESTMENT IN SHARES IN THE ASSESSMEN T YEAR 1994- 95 USING ITS OWN FUNDS. THE ASSESSING OFFICER DISAL LOWED THE INTEREST ON THE AMOUNT OF INVESTMENT IN SHARES ON T HE GROUND THAT THE DIVIDEND INCOME WAS EXEMPT FROM TAX AND APPLIED SECTION 14A. THE COMMISSIONER (APPEALS) HELD THAT NO INTERE ST EXPENDITURE WAS INCURRED IN THE ASSESSMENT YEAR WHI CH COULD BE DISALLOWED UNDER SECTION 14A. THIS WAS CONFIRMED BY THE TRIBUNAL. ON APPEAL : HELD, DISMISSING THE APPEAL, TH AT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. THEREFORE, SECTION 14A COULD H AVE NO APPLICATION. 11. 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 A N ASSESSING OFFICER TO DISALLOW EXPENDITURE IN RELATION TO EXEMPTED INCOME FROM SHARES IF INTEREST BEARING FUN DS HAVE BEEN USED BY THE ASSESSEE. SECTION 14A MAY ONL Y BE INVOKED IF THE ASSESSEE HAS MADE INVESTMENTS IN PUR CHASE OF SHARES OUT OF BORROWED FUNDS. AS A CONSEQUENCE, IF THE ASSESSEE HAS INVESTED HIS OWN MONEY IN PURCHASE OF SHARES, THERE IS NO QUESTION OF DISALLOWANCE UNDER SECTION 14A. SECTION 14A REQUIRES THE ASSESSING OFF ICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX-FREE INCOME. THE SATISFACTION TO BE RECORDED MUST BE BASED UPON CREDIBLE AND RELEVANT 14 EVIDENCE. THE ONUS, THEREFORE, TO PROVE THAT INTERE ST BEARING FUNDS WERE USED, LIES SQUARELY ON THE SHOUL DERS OF THE REVENUE. THUS, IF THE ASSESSING OFFICER IS A BLE TO REFER TO RELEVANT MATERIAL WHILE RECORDING SATISFAC TION THAT BORROWED FUNDS WERE USED TO EARN INTEREST-FREE INCOME AS OPPOSED TO THE ASSESSEE'S OWN FUNDS, THE ASSESSING OFFICER MAY LEGITIMATELY DISALLOW SUCH A CLAIM. THE ASSESSING OFFICER, HOWEVER, CANNOT, BY RECORDIN G GENERAL OBSERVATIONS, PARTICULARLY WHERE THE ASSESS EE HAS DENIED USING INTEREST BEARING FUNDS, PROCEED TO INFER THAT INTEREST BEARING INCOME MUST HAVE BEEN USED TO EARN EXEMPTED INCOME. SECTION 14A, BEING IN THE NATURE O F AN EXCEPTION, WAS TO BE CONSTRUED STRICTLY AND ONLY WH ERE THE ASSESSING OFFICER RECORDS SATISFACTION, 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 FACT 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 SECT ION 14A READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 , DISALLOWED EXPENDITURE IN RESPECT OF THE DIVIDEND E ARNED BY THE ASSESSEE HOLDING THAT INTEREST BEARING FUNDS HAD BEEN USED TO EARN TAX-FREE DIVIDEND. THE COMMISSION ER (APPEALS) HELD THAT THE REVENUE HAD NOT BEEN ABLE T O PROVE THAT INTEREST BEARING FUNDS WERE USED. THIS W AS CONFIRMED BY THE TRIBUNAL HOLDING THAT AS THE ASSES SING OFFICER HAD FAILED TO PROVE THAT INTEREST BEARING F UNDS WERE USED, IT WOULD NOT INVITE DISALLOWANCE UNDER S ECTION 14A. ON APPEAL: HELD, DISMISSING THE APPEAL, THAT AS THE RE WAS NO TANGIBLE MATERIAL ON RECORD THAT COULD HAVE ENABLED THE ASSESSING OFFICER TO RECORD SATISFACTION IN TERMS O F SECTION 14A THE FINDINGS RECORDED BY THE COMMISSION ER (APPEALS) AND THE TRIBUNAL THAT THE ASSESSING OFFIC ER HAD 15 FAILED TO DISCHARGE THIS ONUS WERE NEITHER PERVERSE NOR ARBITRARY AND, THEREFORE, DID NOT CALL FOR INTERFER ENCE. 12. THE SUBMISSIONS OF THE ASSESSEE AND MATERIAL O N RECORD CLEARLY INDICATED THAT NO INTEREST BEARING F UNDS HAVE BEEN DIVERTED TO MAKE INVESTMENTS LEADING TO T AX EXEMPT INCOME. THE ASSESSEE FURTHER CLAIMED THAT N O EXPENSES DIRECTLY OR INDIRECTLY HAVE BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME. THE ASSESSIN G OFFICER HAS NOT RECORDED ANY SATISFACTION EITHER IN THE ORDER UNDER SECTION 143(3) OR IN ORDER UNDER SECTIO N 154 OF THE ACT TO PROVE THAT HOW THE INTEREST BEARI NG FUNDS HAVE BEEN USED OR EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FOR PURPOSE OF MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE ASSESSEE FURTHER EXPLAINED EVEN THE BORROWED FUNDS HAVE NO CONNECTIO N WITH THE EARNING OF EXEMPT INCOME. THESE FACTS CLE ARLY INDICATED THAT EVEN ON MERIT, DISALLOWANCE UNDER SECTION 14A WAS WHOLLY UNJUSTIFIED. THEREFORE, THE ISSUE IS HIGHLY DEBATABLE AND ASSESSING OFFICER HAS GONE ON A WRONG PREMISE FOR MAKING DISALLOWANCE UND ER SECTION 14A OF THE ACT. THE DISALLOWANCE UNDER SEC TION 14A IN THE PRESENT CASE IS AGAINST THE JUDGEMENTS O F HON'BLE PUNJAB & HARYANA HIGH COURT REFERRED TO ABO VE. THEREFORE, PROCEEDINGS UNDER SECTION 154 WERE CLEAR LY ABUSE OF THE PROCESS OF LAW IN THE PRESENT CASE. E VEN IF ASSESSEE HAS NOT CHALLENGED THE LEGALITY OF THE PROCEEDINGS UNDER SECTION 154 OF INCOME TAX ACT BEF ORE AUTHORITIES BELOW BUT IT BEING LEGAL ISSUES ARISING FROM 16 THE RECORD, THE TRIBUNAL IS HAVING JURISDICTION TO DECIDE THE QUESTION OF LAW. HON'BLE SUPREME COURT IN THE CASE OF KAPOOR CHAND 131 ITR 451 HELD THAT, APPELLATE AUTHORITY HAS JURISDICTION AND DUTY TO CORRECT ALL ERRORS IN THE PROCEEDINGS UNDER APPEAL. 13. CONSIDERING THE ABOVE DISCUSSION, WE ARE OF THE VIEW PROCEEDINGS UNDER SECTION 154 OF THE ACT IN TH E PRESENT CASE ARE WHOLLY UNJUSTIFIED AND ADDITION ON MERIT WAS ALSO WHOLLY UNJUSTIFIED. 14. IN VIEW OF THE ABOVE DISCUSSION, WE SET ASIDE T HE ORDERS OF AUTHORITIES BELOW, QUASH THE ORDER UNDER SECTION 154 OF THE ACT AND DELETE THE ADDITION. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. SD/- SD/- (ANNAPURNA GUPTA) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 13 TH JUNE, 2016. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR, ITAT/CHD