Nahar Poly Films Ltd., Ludhiana V. ACIT, Ludhiana

ITA 76/CHANDI/2017

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8967 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 10 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2013-2014
• Appeal Filed On: 09-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCHB, CHANDIGARH BEFORE SHRI. SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.76/CHD/2017 ASSESSMENT YEAR: 2013-14 M/S NAHAR POLY FILMS LTD. VS. ASST. CIT REGD. OFFICE: 376, CIRCLE-7, LUDHIANA INDUSTRIAL AREA-A LUDHIANA PAN NO. AAACN5708K (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI. NAVDEEP SHARMA REVENUE BY : SHRI. MANJIT SINGH DATE OF HEARING : 12/09/2018 DATE OF PRONOUNCEMENT : 07/12/2018 ORDER PER ANNAPURNA GUPTA, A.M. THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD.COMMISSIONER OF INCOME TAX (APPEALS) -4, LUD HIANA,(IN SHORT REFERRED TO AS CIT(A), DT. 03/10/2016 ,PASSED U/S 250(6) OF THE INCOME TAX ACT,1961 (HEREINAFTER REFERRED TO AS ACT). 2. GROUND NO. 1,2 AND 3 RAISED BY THE ASSESSEE ARE IN RELATION TO THE SAME ISSUE OF DISALLOWANCE OF EXPENSES INCURRED IN RELAT ION TO EARNING EXEMPT INCOME AS PER THE PROVISIONS OF SECTION 14A OF THE ACT RE AD WITH RULE 8D OF THE INCOME TAX RULES,1962 (HEREINAFTER REFERRED TO AS RULES) . THE SAID GROUNDS READ AS UNDER: 1. THAT THE WORTHY CIT(A)-4, LUDHIANA, ERRED IN LAW AND ON FACTS IN NOT DELETING THE DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE I NCOME TAX ACT AT RS. 21,65,655/-. DIRECTIONS MAY BE GIVEN TO RESTRICT THE DISALLOWANC E U/S 14A AS COMPUTED ON PROPORTION BASIS BY THE APPELLANT COMPANY AND CLAIM ED DURING THE ASSESSMENT PROCEEDINGS, IN VIEW OF THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. V/S DCIT WHEREIN THE METHOD OF P ROPORTION HAS BEEN HELD TO BE A RECOGNIZED METHOD FOR DISALLOWANCE U/S 14A OF THE ACT. DIRECTIONS MAY BE GIVEN NOT TO APPLY RULE 8D WHICH COMPUTING DISALLOW ANCE UNDER SECTION 14A OF THE ACT. 2. THAT THE WORTHY CIT(A)-4, LUDHIANA, ERRED IN-LAW AND ON FACTS IN NOT DIRECTING THE LD. ASSESSING OFFICER, NOT TO APPLY R ULE 8D, IN VIEW OF THE FACT THAT NO RECORDING OF SATISFACTION WITH COGENT REASONS WAS M ADE IN THE ORDER REGARDING THE CORRECTNESS OF THE CLAIM OF EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT 2 FORM PART OF TOTAL INCOME. DIRECTIONS BE GIVEN NOT TO APPLY RULE 8D AS THE PROVISIONS OF SECTION 14A (2) ARE NOT APPLICABLE IN THE CASE HEREIN. 3. THE WORTHY CIT(A)-4, LUDHIANA ERRED IN LAW AND O N FACTS BY NOT DIRECTING THE LD. ASSESSING OFFICER TO ADOPT THE FIGURE OF IN VESTMENT ON WHICH EXEMPT INCOME WAS RECEIVED, INSTEAD OF AVERAGE TOTAL INVES TMENTS AS TAKEN BY THE LD. ASSESSING OFFICER, FOR COMPUTING DISALLOWANCE U/S 1 4A READ WITH RULE 8D. DIRECTIONS BE GIVEN TO COMPUTE DISALLOWANCE ONLY BY TAKING THE ACTUAL INVESTMENT FROM WHERE EXEMPTED DIVIDEND INCOME WAS RECEI VED. 3. BRIEF FACTS RELEVANT TO THE ISSUE ARE THAT DURIN G ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD S UO MOTO MADE DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE ACT WHILE COMP UTING ITS BUSINESS INCOME ,BY CALCULATING THE SAME ON A PROPORTIONATE BASIS, WHICH AMOUNTED TO RS. 26,25,032/-. AT THE SAME TIME THE ASSESSING OFFICER ALSO NOTED THAT THE DISALLOWANCE HAD NOT BEEN MADE AS PER THE PROVISION S OF RULE 8D OF THE RULES. ACCORDINGLY ,SHOW CAUSE NOTICE WAS ISSUED TO THE AS SESSEE WHO FILED NECESSARY REPLY AFTER CONSIDERING WHICH THE ASSESSING OFFICER COMPUTED THE DISALLOWANCE AS PER THE PROVISIONS OF RULE 8D AND DISALLOWED ADM INISTRATIVE EXPENSES BY APPLYING THE FORMULA STIPULATED IN RULE 8D(2)(III), THUS WORKING OUT THE DISALLOWANCE AT RS. 47,90,687/-. SINCE THE ASSESEEE HAD ALREADY DISALLOWED RS. 26,25,032/- ,THE ASSESSING OFFICER MADE THE DISALLO WANCE OF THE BALANCE SUM OF RS. 21,65,655/-. 4. THE MATTER WAS UNSUCCESSFULLY CONTESTED BEFORE T HE LD. CIT(A) WHERE THE ASSESSEE HAD ARGUED THAT IN THE ABSENCE OF ANY REAS ONS RECORDED BY THE ASSESSING OFFICER FOR REJECTING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE VIS A VIS THE QUANTUM OF DISALLOWANCE MADE, THE ASSESSING OFFICER COULD NOT HAVE MADE ANY DISALLOWANCE UNDER SECTION 14A AND FURTHER THAT IN ANY CASE THE DISALLOWANCE WAS TO BE WORKED OUT ONLY IN RELATION TO THOSE INVESTMENTS WHICH HAD YIELDED EXEMPT INCOME. LD. CIT(A) UPHELD THE OR DER OF THE ASSESSING OFFICER STATING THAT SINCE THE ASSESSEE HAD HIMSELF SUO MOT U MADE DISALLOWANCE, THE PROVISIONS OF SECTION 14A HAD BEEN RIGHTLY APPLIED BY THE ASSESSING OFFICER AND MOREOVER AS PER THE CBDT CIRCULAR NO. 5/2014, THERE WAS NO REASON TO WORK OUT THE DISALLOWANCE ONLY WITH RESPECT TO THOSE INVESTM ENTS WHICH HAD EARNED EXEMPT INCOME. THE RELEVANT FINDINGS OF THE LD. CIT (A) UPHOLDING THE ORDER OF THE ASSESSING OFFICER IN THIS REGARD, AT PARA 5.2 A ND 5.3 OF HIS ORDER IS AS UNDER: 5.2 I HAVE CONSIDERED THE OBSERVATIONS OF THE ASSES SING OFFICER AS MADE BY HER IN THE ASSESSMENT ORDER WHILE MAKING IMPUGNED ADDITION /DISALLOWANCE. I HAVE ALSO CONSIDERED WRITTEN SUBMISSIONS MADE BY THE ASSESSEE COMPANY DURING ASSESSMENT PROCEEDINGS. I HAVE FURTHER CONSIDERED V ARIOUS JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE COMPANY AS WELL AS OTHER MATERIAL PLACED BY IT ON RECORD. ON CAREFUL CONSIDERATION OF THE RIVAL CONTENTIONS, I AM OF 3 THE OPINION THAT AS THE ASSESSEE COMPANY HAS ITSELF MADE DISALLOWANCE UNDER SECTION 14A OF THE ACT (ALTHOUGH NOT TO THE EXTENT DISALLOWED BY THE ASSESSING OFFICER) THERE REMAINS NO DOUBT THAT THE PROVISIONS OF SECTION 14A OF THE ACT ARE ABSOLUTELY APPLICABLE IN THE CASE OF THE ASSESSEE C OMPANY. I AM ALSO OF THE OPINION THAT THE SUBMISSIONS MADE BY THE ASSESSEE C OMPANY DURING ASSESSMENT PROCEEDINGS HAVE RIGHTLY BEEN REJECTED BY THE ASSES SING OFFICER WITH JUSTIFIABLE REASONING. I AM FURTHER OF THE OPINION THAT THE PRO VISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 WIL L ALSO BE APPLICABLE ON THOSE INVESTMENTS FROM WHICH THE ASSESSEE COMPANY HAS NOT RECEIVED ANY EXEMPT INCOME IN VIEW OF CLARIFICATION ISSUED BY THE CBDT, NEW DELHI VIDE CIRCULAR NO. 5 OF 2014 WHEREIN THE LEGISLATIVE INTENTION OF THE PA RLIAMENT FOR BRINGING SECTION 14A OF THE ACT TO THE STATUTE HAS BEEN DISCUSSED IN DET AIL. MOREOVER, I HAVE NOT COME ACROSS ANY DECISION WHICH HAS BEEN DELIVERED AFTER CONSIDERING CIRCULAR NO. 5 OF 2014 ISSUED BY THE CBDT, NEW DELHI. IN VIEW OF THES E FACTS, I ALSO DO NOT FIND ANY FORCE IN THE ARGUMENTS OF THE ASSESSEE COMPANY WHIC H WERE MADE DURING ASSESSMENT PROCEEDINGS. I AM AGAIN OF THE OPINION T HAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT HAS TO BE WORKED OUT IN A WA Y AS WORKED OUT BY THE ASSESSING OFFICER AND NOT IN A WAY WORKED OUT BY TH E ASSESSEE COMPANY. I ALSO DO NOT CONSIDER THAT ANY DECISION RELIED UPON BY TH E ASSESSEE COMPANY WILL SUPPORT ITS CASE MORE SPECIFICALLY WHEN THE ASSESSE E COMPANY HAS ITSELF MADE DISALLOWANCE UNDER SECTION I 4-A OF THE ACT ALTHOUG H PARTLY. UNDER SUCH CIRCUMSTANCES, THE ACTION OF THE ASSESSING OFFICER IN MAKING AN ADDITION OF RS.21,65,655/- IN THIS CASE (IN ADDITION TO THE DIS ALLOWANCE MADE BY THE ASSESSEE COMPANY ITSELF) ON ACCOUNT OF DISALLOWANCE OF EXPEN SES BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT CANNOT BE SAID TO BE UNJUSTI FIED. 5.3 IN VIEW OF THE ABOVE STATED FACTS AND IN THE CI RCUMSTANCES OF THE CASE, I AM OF THE OPINION THAT THE ASSESSING OFFICER IS FULLY JUSTIFIED IN MAKING AN ADDITION OF RS.21,65,655/- IN THIS CASE (IN ADDITION TO THE DIS ALLOWANCE MADE BY THE ASSESSEE COMPANY ITSELF) ON ACCOUNT OF DISALLOWANCE OF EXPEN SES BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT. THE ADDITION OF RS.21,65,65 5/- MADE BY THE ASSESSING OFFICER IN THIS CASE IS, THEREFORE, UPHELD. IN THE RESULT, GROUNDS NO. 1,2 AND 3 OF APPEAL TAKEN BY THE ASSESEE COMPANY ARE DISMISSED. 5. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE HAS C HALLENGED THE ACTION OF THE LD. CIT(A) IN UPHOLDING THE DISALLOWANCE UNDER SECTION 14A BY RAISING TWO FOLD CONTENTIONS: (I) THAT THERE WAS NO RECORDING OF SATISFACTION BY THE ASSESSING OFFICER, WITH COGENT REASONS, REGARDING THE CORRECTNESS OF CLAIM OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME AND ALTERNATIVELY, (II) THAT THE DISALLOWANCE WAS TO BE WORKED OUT ON LY ON THE INVESTMENT WHICH HAD EARNED EXEMPT INCOME DURING THE IMPUGNED YEAR. 6. WITH RESPECT TO THE SECOND CONTENTION RAISED, LD . COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE SPECIAL BENCH OF ITAT IN THE CASE OF ACIT VS VIREET INVESTMENTS PVT. LTD. ITA NO.502/DEL/2012 & CO 68/D EL/2014 DATED 16/06/17 , THE DECISION OF HONBLE DELHI HIGH COURT IN THE CAS E OF ACB INDIA LIMITED VS. ACIT IN ITA NO. 615/2014 DATED 24/03/15 AND ON THE DECISION OF ITAT CHANDIGARH BENCH IN THE CASE OF SH. RAMTECH SOFTWAR E SOLUTIONS PVT. LTD. VS. ACIT IN ITA NO. 477/CHD/2015. 4 7. LD. DR ON THE OTHER HAND RELIED ON THE ORDER OF THE AUTHORITIES BELOW. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, PERUSE D THE ORDERS OF THE AUTHORITIES BELOW AND HAVE ALSO GONE THROUGH THE CA SE LAWS REFERRED TO BEFORE US. 9. THE ISSUE BEFORE US RELATES TO DISALLOWANCE MADE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEMPT INCOME, AS PER THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. THE FACTS W HICH ARE NOT IN DISPUTE, IS THAT THE ASSESSEE DURING THE IMPUGNED YEAR HAD EARNED EX EMPT INCOME COMPRISING OF DIVIDEND INCOME OF RS. 99,74,498/- AND LONG TERM CAPITAL GAIN ON WHICH SECURITY TRANSACTION TAX (STT) WAS PAID AMOUNTING T O RS. 27,83,768/- .THUS THE ASSESSEE HAD EARNED EXEMPT INCOME AMOUNTING TO RS. 1,27,58,266/-. FURTHER IT IS AN ADMITTED FACT THAT THE ASSESSEE HAD SUOMOTO MADE DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE ACT AMOUNTING TO RS. 26,25,032/-. 10. TAKING UP THE FIRST CONTENTION OF THE LD. COUNS EL FOR THE ASSESSEE THAT SINCE NO COGENT REASONS HAD BEEN RECORDED BY THE ASSESSIN G OFFICER FOR REJECTING THE CORRECTNESS OF THE CLAIM OF EXPENDITURE AS COMPUTED BY THE ASSESSEE FOR THE PURPOSE OF MAKING DISALLOWANCE UNDER SECTION 14A TH E DISALLOWANCE COULD NOT HAVE BEEN MADE, WE DO NOT FIND ANY MERIT IN THIS CO NTENTION. WE HAVE GONE THROUGH THE ORDER OF THE ASSESSING OFFICER AND ON P ERUSING THE SAME WE FIND THAT THE ASSESSING OFFICER HAD RECORDED DUE SATISFA CTION WITH REGARD TO THE INCORRECTNESS OF CLAIM OF DISALLOWABLE EXPENSES MAD E BY THE ASSESSEE, BEFORE PROCEEDING TO WORK OUT THE DISALLOWANCE AS PER RUL E 8D HIMSELF. WE FIND THAT THE ASSESSING OFFICER HAD RECORDED HIS SATISFACTION AT PARA 2.3 OF HIS ORDER AS UNDER: 2.3 IN VIEW OF THE OBSERVATIONS ABOVE AND HAVING RE GARD TO THE ACCOUNTS OF THE ASSESSEE I AM NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR THE PREVIOUS YEAR. THE MET HOD ADOPTED BY ASSESSEE CANNOT BE ACCEPTED BECAUSE IT HAS BEEN WORKED UPON ADMINISTRATIVE EXPENSES ONLY ON PROPORTIONATE BASIS AND A PART OF INTEREST PAID ONLY. HOWEVER, THE EXPRESSION OF EXPENDITURE INCURRED IN SECTION 14A OF THE I.T. ACT REFERS TO OTHER EXPENDITURE ALSO INCLUDING RENT, TAXES, SALARIES IN TEREST ETC. WHICH CANNOT BE APPORTIONED UNLESS RULE 8D IS APPLIED. HENCE THE AM OUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IS REQUIRED TO BE DETERMINE D IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE 2 OF RULE 8D OF THE I.T. RUL ES. 11. IT IS EVIDENT FROM THE ABOVE THAT THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE CORRECTNESS OF THE AMOUNT WORKED OUT BY TH E ASSESSEE SINCE HE HAD NOTED THEREIN THAT THE ASSESSEE HAD NOT APPORTIONED EXPENDITURE OF THE NATURE OF RENT, TAXES, SALARY ETC. WHILE WORKING OUT HIS E STIMATE OF THE EXPENDITURE TO BE 5 DISALLOWED, WHICH HE HAS STATED NEEDED TO BE INCLUD ED FOR THE PURPOSES OF APPORTIONMENT U/S 14A OF THE ACT. THE LD. COUNSEL F OR THE ASSESSEE HAS BEEN UNABLE TO CONTROVERT THIS CONTENTION OF THE ASSESSI NG OFFICER. IN VIEW OF THE ABOVE, THERE IS NO DOUBT ABOUT THE FACT THAT THE AS SESSING OFFICER HAD DULY RECORDED WHY HE FOUND THE DISALLOWANCE MADE BY THE ASSESSEE INCORRECT. WE THEREFORE CANNOT AGREE WITH THE ASSESSEE THAT NO CO GENT REASONS HAD BEEN RECORDED BY THE ASSESSING OFFICER WHILE REJECTING T HE DISALLOWANCE WORKED OUT BY THE ASSESSEE. IN THE LIGHT OF THE SAME, THE ACT OF THE ASSESSING OFFICER IN APPLYING RULE 8D FOR THE PURPOSE OF WORKING OUT THE DISALLOWANCE UNDER SECTION 14A WE HOLD HAS BEEN RIGHTLY UPHELD BY THE LD. CIT( A),AS BEING IN ACCORDANCE WITH LAW. THE CONTENTION RAISED BY THE LD. COUNSEL FOR THE ASSESSEE IN THIS REGARD IS THEREFORE DISMISSED. 11.1 AS FOR THE ALTERNATE CONTENTION OF THE LD. COU NSEL FOR THE ASSESSEE, THAT THE DISALLOWANCE CALCULATED AS PER RULE 8D(2)(III) WAS TO BE RESTRICTED TO THOSE INVESTMENTS ONLY ON WHICH EXEMPT INCOME HAD BEEN EA RNED, WE FIND MERIT IN THE SAME. WE HAVE GONE THROUGH THE CASE LAWS REFERR ED TO BY THE LD. COUNSEL FOR THE ASSESSEE IN SUPPORT OF THIS PREPOSITION AND WE FIND THAT BOTH THE SPECIAL BENCH OF THE ITAT IN THE CASE OF VIREET INVESTMENT S (SUPRA)AND THE HONBLE DELHI HIGH COURT IN THE CASE OF ACB INDIA LTD. (SUPRA) HA VE LAID DOWN THE PREPOSITION THAT FOR THE PURPOSE OF CALCULATING THE DISALLOWANC E U/S 14A READ WITH RULE 8D, ONLY THOSE INVESTMENTS WHICH HAVE EARNED EXEMPT IN COME HAVE TO BE CONSIDERED. THE RELEVANT FINDINGS OF THE HONBLE DE LHI HIGH COURT IN THE CASE OF ACB INDIA LTD. IN THIS REGARD ARE AS UNDER: FACTS AS DISCLOSED BY THE AO, WHO EXPRESSED HIS OPI NION THAT THE CLAIM OF THE ASSESSEE FOR NO DISALLOWANCE WAS WARRANTED SINCE NO EXPENDITURE WAS INCURRED, HAD TO BE REJECTED. THEREFORE, THE FIRST CONDITION FOR APPLICATION OF SECTION 14A IN THIS CASE WAS FULFILLED. IN SUCH EVE NTUALITY THE AO IS REQUIRED BY THE MANDATE OF RULE 8D TO FOLLOW RULE 8D(2). CLAUSES 1, 2 AND 3 DETAIL THE METHODOLOGY TO BE ADOPTED. CLAUSES ARE OF IMPORTANC E, THEY READ AS FOLLOWS : METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN REL ATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 8D. (1) WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A)THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B)THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITU RE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOU NT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY : (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTR IBUTABLE TO ANY PARTICULAR 6 INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY : A B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTERES T OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM 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 Y EAR; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE AS SESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREA SE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. 4. THE AO, INSTEAD OF ADOPTING THE AVERAGE VALUE OF INVESTMENT OF WHICH INCOME IS NOT PART OF THE TOTAL INCOME I.E. THE VALUE OF T AX EXEMPT INVESTMENT, CHOSE TO FACTOR IN THE TOTAL INVESTMENT ITSELF. EVEN THOUGH THE CIT(APPEALS) NOTICED THE EXACT VALUE OF THE INVESTMENT WHICH YIELDED TAXABLE INCOME, HE DID NOT CORRECT THE ERROR BUT CHOSE TO APPLY HIS OWN EQUITY. GIVEN THE RECORD THAT HAD TO BE DONE SO TO SUBSTITUTE THE FIGURE OF `38,61,09,287/- WITH THE FIGURE OF `3,53,26,800/- AND THEREAFTER ARRIVE AT THE EXACT DISALLOWANCE OF .05%. 5. IN VIEW OF THE ABOVE REASONING, THE FINDINGS OF THE ITAT AND THE LOWER AUTHORITIES ARE HEREBY SET ASIDE. THE SPECIAL BENCH OF ITAT IN THE CASE OF VIREET INV ESTMENTS(SUPRA) HAS ALSO LAID DOWN THIS PROPOSITION. 12. IN VIEW OF THE ABOVE WE HOLD THAT THE DISALLOWA NCE UNDER SECTION 14A READ WITH RULE 8D(2)(III) IS TO BE CALCULATED BY TA KING INTO CONSIDERATION ONLY THOSE INVESTMENT WHICH HAVE EARNED EXEMPT INCOME DU RING THE YEAR. THE ASSESSING OFFICER IS DIRECTED THEREFORE TO RECOMPUT E THE DISALLOWANCE IN ACCORDANCE WITH AFORESAID PROPOSITION LAID DOWN BY THE COURTS. IN VIEW OF THE ABOVE GROUND NO. 1 AND 2 RAISED BY THE ASSESSEE ARE DISMISSED WHILE GROUND NO. 3 IS ALLOWED. 13. GROUND NO. 4 RAISED BY THE ASSESSEE RELATES TO DISALLOWANCE OF INTEREST EXPENSES UNDER SECTION 36(1)(III) OF THE ACT READS AS UNDER: 4. THAT THE WORTHY CIT(A)-4, LUDHIANA ERRED IN LAW AND ON FACTS IN NOT FULLY DELETING THE DISALLOWANCE OF RS. 64,485/- OUT OF IN TEREST PAID ON WORKING CAPITAL LIMIT TOWARDS ADDITION OF BUILDING, BUT INSTEAD RES TRICTED IT TO RS. 30,308/- BY APPLYING DEBT EQUITY RATIO. DIRECTIONS BE GIVEN TO DELETE THE BALANCE ADDITION OF RS. 30,308/- MADE OUT OF INTEREST PAID TO BANK ON CC ACCOUNT. 14. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER HAD DISALLOWED INTEREST EXPENSES TO THE TUNE OF RS. 64 ,485/- HOLDING THAT THE SAME RELATED TO BORROWED FUNDS USED FOR THE CONSTRUCTION OF BUILDING WHICH HAD NOT BEEN TO USE BY THE ASSESSEE COMPANY FOR ITS BUSINES S PURPOSES. 7 15. IN APPEAL, THE LD. CIT(A) HELD THAT SINCE MIXE D FUNDS WERE BEING USED IN THE ASSESSEE COMPANY THE DISALLOWANCE WAS TO BE WOR KED OUT ON THE BASIS OF THE DEBT EQUITY RATIO OF THE ASSESSEE COMPANY AND O N NOTING THAT THE SAME WAS IN THE RATIO OF 47:53 THE CIT(A) HELD THAT THE ASSE SSEE COMPANY HAD UTILIZED 47% OF ITS INTEREST BEARING FUNDS FOR THE PURPOSE OF CONSTRUCTION OF BUILDING AND THUS RESTRICTED THE DISALLOWANCE TO 47% OF THE INTEREST DISALLOWED BY THE ASSESSING OFFICER I.E; 64,485/-, WHICH CAME TO RS. 30,308/-. AGAINST THIS DISALLOWANCE THE ASSESEE HAS COME UP IN APPEAL BEFORE US. 16. THE SOLE CONTENTION RAISED BY THE LD. COUNSEL F OR THE ASSESSEE WAS THAT SINCE IT HAD ENOUGH OWN FUNDS AVAILABLE NO DISALLOW ANCE UNDER SECTION 36(1)(III) WAS WARRANTED. RELIANCE WAS PLACED ON THE DECISION OF THE CO-ORDINATE BENCH OF ITAT CHANDIGARH, IN THE CASE OF MONTE CARLO FASH IONS LTD. VS. ASST. CIT IN ITA NO. 1341/CHD/2016 DT. 12/10/2017 .COPY OF THE SAID ORDER WAS PLACED BEFORE US AND IT WAS POINTED OUT THEREFROM THAT RELYING UPON THE DECISION OF VARIOUS COURTS IN THE CASE OF HERO CYCLES(P) LTD. VS. CIT, LUDHIANA IN C.A. NO. 514 OF 2008 DT. 05/11/2015 AND BRIGHT ENTERPRISES PVT. LTD. VS. CIT, JALANDHAR (2016) 381 ITR 107 (P&H),IT WAS HELD THAT IF SUFFICIENT FUNDS ARE AVAILABLE NO DISALLOWANCE U/S 36(1)(III) IS CALLED FOR.OUR ATTENTION WAS DRAWN TO THE RELEVANT FINDINGS AT PARA 12 OF THE ORDER AS UNDER: 11. IT IS ALSO TO BE NOTED THAT THE FINANCE ACT 200 3 HAS AMENDED SECTION 36(1)(III) BY INSERTING A PROVISO TO THE EX ISTING PROVISION W.E.F 01.04.2004 RELEVANT TO ASSESSMENT YEAR 2004-05. THE PROVISO INSERTED TO THE EXISTING PROVISION OF SECTION 36(1)(III) IS REPRODUCED AS UNDER: PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EX TENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZED IN THE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET T ILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. THE JUDGMENT OF VARIOUS COURTS IN THE CASE OF HERO CYCLES (P) LTD. VS. CIT, LUDHIANA C.A. NO. 514 OF 2008 DT. 05/11/20 15, BRIGHT ENTERPRISES PVT. LTD. VS. CIT, JALANDHAR (2016) 381 ITR 107 (P&H) HELD THAT NO DISALLOWANCE OF INTEREST IS CALLED FOR WHER E THE ASSESSEE HAS GOT SUFFICIENT OWN FUNDS. THE ASSESSING OFFICER IS DIRECTED TO GO THROUGH THE FUND POSITION NAMELY CAPITAL AND INTERE ST FREE ADVANCES, RESERVES AND SURPLUS TO DETERMINE WHETHER ANY BORROWED FUNDS HAVE BEEN UTILIZED MORE THAN AVAILABLE OWN FU NDS AND TAKE A DECISION KEEPING IN VIEW THE DECISIONS RENDERED ABO VE. IF SUFFICIENT OWN FUNDS ARE AVAILABLE, NO DISALLOWANCE IS CALLED FOR. THIS GROUND MAY BE TREATED AS SET ASIDE TO THE FILE OF ASSESSIN G OFFICER. 12. IN THE RESULT THIS GROUND OF APPEAL IS ALLOWED. 17. OUR ATTENTION WAS ALSO DRAWN TO THE FINANCIAL S TATEMENT OF THE ASSESSEE COMPANY FOR THE IMPUGNED YEAR POINTING OUT THERE FR OM THAT IT HAD SUFFICIENT 8 SHARE CAPITAL AND RESERVES AMOUNTING TO RS. 144 CRO RES WHILE THE ADDITION MADE TO BUILDING IN THE IMPUGNED YEAR WAS ONLY RS. 52,46 ,711/-. 18. LD. DR ON THE OTHER HAND RELIED ON THE ORDER OF THE CIT(A). 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDER OF THE AUTHORITIES BELOW. WE FIND MERIT IN THE CONTENTION OF THE LD.COUNSEL FOR THE ASSESSEE. VARIOUS COURTS, INCLUDING THE JURISDICTIO NAL HIGH COURT CITED BY THE LD.COUNSEL FOR THE ASSESSEE , HAVE HELD THAT NO DI SALLOWANCE U/S 36(1)(III) IS WARRANTED WHERE AVAILABILITY OF SUFFICIENT OWN INTE REST FREE FUNDS IS DEMONSTRATED BY THE ASSESSEE. THE LD. DR HAS FAILED TO POINT OUT ANY CONTRARY DECISION EITHER OF THE JURISDICTIONAL HIGH COURT OR THE APEX COURT. THEREFORE THERE REMAINS NO DISPUTE WITH REGARD TO THE SAID PROPOSITION OF LAW. FURTHER THE AUDITED FINANCIAL STATEMENTS OF THE ASSESSEE SHOW SUFFICIENT OWN FUND S IN THE FORM OF SHARE CAPITAL AND RESERVES TO THE TUNE OF RS. 144 CR. ,WHILE THE AMOUNT INVESTED IN BUILDING IN RELATION TO WHICH THE IMPUGNED DISALLOWANCE HAS BEE N WORKED OUT IS RS.52,46,711/-THE LD. DR HAS NOT CONTROVERTED THE S AID FACTS BEFORE US. THEREFORE ,IN THE LIGHT OF THE FACT THAT SUFFICIENT OWN FUNDS WERE AVAILABLE WITH THE ASSESSEE, FOLLOWING THE PROPOSITION LAID DOWN BY VA RIOUS COURTS ,NO DISALLOWANCE U/S 36(1) (III) WAS WARRANTED IN THE PRESENT CASE. WE THEREFORE SET ASIDE THE ORDER OF THE LD.CIT(A) IN THIS REGARD. 20. GROUND OF APPEAL NO.4 THEREFORE STANDS ALLOWED. 21. IN EFFECT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 07/12/2018 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR