Gulshan Chemicals Ltd., New Delhi V. DCIT, New Delhi

ITA 948/DEL/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65537 (ITAT-DELHI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 05-03-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 27-02-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGHDR
• Assessee Lawyers: P N MEHTAAR
• Keywords: Earning of tax free income
• Section: 14A; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI C BENC H BEFORE SHRI A.N. PAHUJA, AM & SHRI C.M. GARG, JM ITA NO.948/DEL/2012 ASSESSMENT YEAR: 2005-06 GULSHAN CHEMICALS LTD. 305, 307, 3 RD FLOOR, 27, SARASWATI HOUSE, NEHRU PLACE, NEW DELHI V/S . DCIT,CIRCLE-12(1), NEW DELHI [PAN : AAACG 4002 N] (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI P.N. MEHTA,AR REVENUE BY SHRI SATPAL SINGH,DR DATE OF HEARING 12-09-2012 DATE OF PRONOUNCEMENT 28-09-2012 O R D E R A.N.PAHUJA:- THIS APPEAL FILED ON 27.02.2012 BY THE ASSESSEE AGA INST AN ORDER DATED 30.12.2011 OF THE LD. CIT(A)-X, NEW DELHI, RA ISES THE FOLLOWING GROUNDS:- 1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) HAS ERRED IN DISALLOWING A SUM OF ` ` 7,84,641/- U/S 14(A) READ WITH RULE 8E[ACTUALLY 8D] OF THE INCOME TAX RULES. 2 THAT THE LEARNED CIT(A) HAS ERRED IN INVOKING THE PROVISIONS OF SECTION 14(A) READ WITH RULE 8E[ACTUA LLY 8D] AS THE SAID RULES CAME INTO FORCE FROM MARCH 2008 AND ARE PROSPECTIVE IN NATURE AND NOT RETROSPECTIVE. 3 THAT THE CIT(A) IS WRONG ENHANCING THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER U/S 14(A) FROM ` ` 84,406/- TO ` ` 7,84,641/-. ITA N O.948 /DEL./2012 2 4 THE CIT(A) IS WRONG IN TAKING INTO ACCOUNT THE IN TEREST COST OF ` `7,74,508/- ON ACCOUNT OF INVESTMENT IN THE TAX FREE SECURITIES. 5 THE ADDITION MADE BY THE CIT(A) U/S 14(A) IS AGAI NST THE LAW AND FACTS OF THE CASE. 2. FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THA T RETURN DECLARING INCOME OF ` ` 2,16,14,900/- FILED ON 24.10.2005 AND REVISED ON 30 TH JUNE, 2006 DECLARING INCOME OF ` ` 1,91,74,000/- BY THE ASSESSEE, ENGAGED IN BUSINESS OF MANUFACTURING, TRADING, EXPORT AND IMPORT OF CHEMIC ALS, WAS TAKEN UP FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE INCO ME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) ISSUED ON 31.07.2006. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (A.O. IN SHORT), NOTICED THAT THE ASSESSEE CLAIMED DIVIDEND INCOME OF ` ` 3,37,624/- EXEMPT IN TERMS OF PROVISIONS OF THE ACT . TO A QUERY BY THE AO, SEEKING DETAILS OF EXPENSES I NCURRED FOR EARNING DIVIDEND INCOME, THE ASSESSEE REPLIED THAT NO EXPENDITURE HA D BEEN INCURRED FOR EARNING DIVIDEND INCOME AND THE PROVISIONS OF SEC. 14A OF THE ACT WERE NOT APPLICABLE IN THEIR CASE. HOWEVER, THE AO DID NOT ACCEPT THE SUB MISSIONS OF THE ASSESSEE WHILE OBSERVING THAT VARIOUS ADMINISTRATIVE EXPENSE S INVOLVED IN TAKING THE DECISION RELATING TO PURCHASE AND SALE OF INVESTMEN T LIKE DMAT FEE, COLLECTION EXPENSES, TELEPHONE EXPENSES, ETC AND OTHER ADMINIS TRATIVE EXPENSES AS ALSO PERSONNEL COST WERE INCURRED IN MAINTAINING AND SUP ERVISING THE INVESTMENTS BESIDES INTEREST COST. SINCE THE ASSESSEE DID NOT FURNISH DETAILS OF THESE EXPENSES, ACCORDINGLY, THE AO ESTIMATED 25% OF THE DIVIDEND INCOME BY WAY OF EXPENDITURE INCURRED IN EARNING DIVIDEND INCOME AND DISALLOWED AN AMOUNT OF ` `84,406/- IN TERMS OF PROVISIONS U/S 14A OF THE ACT . 3. ON APPEAL, THE LD. CIT(A) WHILE RELYING UPON DE CISIONS IN CIT VS. SMT. SUSHMA KAPOOR 319 ITR 299 (DELHI) ;DHANUKA & S ONS VS. CIT (2011) 339 ITR 319 (CAL.); CIT VS. LEENA RAMCHANDRAN (2011) 33 9 ITR 296 (KERALA); GODREJ & BOYCE MFG. CO. LTD. VS. DCIT (2010) 328 IT R 81 (BOM.) AND CIT VS. ITA N O.948 /DEL./2012 3 WALFORT STOCK BROKERS PVT. LTD. (2010) 326 ITR 1 (S C), ENHANCED THE DISALLOWANCE TO ` `7,84,641/- IN THE FOLLOWING TERMS:- 4.3. I HAVE DULY CONSIDERED THE AFORESAID SUBMISSI ONS OF THE LD. AR. I HAVE ALSO CALLED FOR CERTAIN DOCUMENTS SINCE A PERUSAL OF THE AUDITED BALANCE SHEET SHOWED THAT THERE HAS BEEN AN INCREASE IN THE TERM LOAN ACCOUNT WITH IDBI BY A SUM OF RS.4.63 CRORES DURING THE YEAR. SINCE THE DIVIDEND HAD BEEN EARNED OUT OF INVESTMENTS IN MUTUAL FUNDS I.E. HSBC FLOATING RATE FUND, THE INVE STMENT ACCOUNT STATEMENT WAS ALSO CALLED FOR. AFTER EXAMIN ING THE RELEVANT DOCUMENTS, THE FOLLOWING UNDISPUTED FACTS HAVE EMER GED: (I) THE APPELLANT COMPANY HAS PURCHASED UNITS OF HS BC FLOATING RATE FUND AMOUNTING TO RS.3.30 CRORES ON 1 0- 01-2005 AND A FURTHER AMOUNT OF RS.1.20 CRORES WAS INVESTED ON 02-02-2005 IN THE SAME FUND. THERE HAVE BEEN A FEW REDEMPTIONS IN THE MONTH OF MARCH, 2005 AND A DIVIDEND INCOME OF RS.3,37,764/- HAS BEEN EARNED FROM THE ABOVE INVESTMENTS. AT THE CLOSE OF THE YEA R, THERE WAS STILL AN OUTSTANDING INVESTMENT OF RS.2.5 CRORES IN THIS FUND. (II) SO FAR AS THE SOURCE OF THESE INVESTMENTS IS C ONCERNED, THE CHEQUES FOR THESE INVESTMENTS HAVE BEEN ISSUED OUT OF THE 'CASH CREDIT' ACCOUNT BEARING NO.01600070091 IN SBI COMMERCIAL BRANCH, NEHRU PLACE, NEW DELHI. WHIL E A CHEQUE FOR RS.3.30 CRORES WAS ISSUED ON 06-01-200 5, THE CHEQUE FOR THE BALANCE AMOUNT OF RS.1.20 CRORES WAS ISSUED ON 02-02-2005. ALL THESE DETAILS, INCLUDING THE DETAILS OF REDEMPTIONS MADE OUT OF THESE INVESTMENT S ARE REPRODUCED IN THE FORM OF A CHART: DETAILS OF INVESTMENTS IN HSBC FLOATING RATE FUND: DATE PARTICULARS VCH. TYPE INVESTMENT[IN ` ] ] REDEMPTION[IN ` ] 6.1.05 CR.-SBI DELHI CH. NO.96805 ISSUED PAYMENT 3,30,00,000 2.2.05 CR.-SBI, DELHI CH. NO.596910 ISSUED PAYMENT 1,20,00,000 7.3.05 DR-SBI, DELHI CH.NO.495055 DT.7.3.05/325 RECEIPT 50,00,000 ITA N O.948 /DEL./2012 4 DEPOSITED 14.3.05 DR.-SBI, DELHI CH.NO.495058 DT.14.3.05/325 DEPOSITED RECEIPT 50,00,000 22.3.05 DR.-SBI, DELHI CH.NO.176960 DT.21.3.05 DEPOSITED RECEIPT 1,00,00,000 31.3.05 CR.-DIVIDEND ON MUTUAL FUND BEING AMOUNT OF DIVIDEND RECD. RE- INVESTED JOURNAL 3,37,624 4,53,37,624 2,00,00,000 DR. CLOSING BALANCE 2,53,37,624 (III) THE APPELLANT COMPANY HAS OBTAINED A SUM OF R S.4.63 CRORES AS A TERM LOAN FROM IDBI VIDE LOAN AGREEMENT DATED 08-12-2004. THE RATE OF INTEREST ON THIS LOAN WAS LIBOR + 3.5% I.E. 6.5%. THE LOAN HAS BEEN DISBURSED FOR MEETING ITS LONG TERM WORKING CAPITAL REQUIREMENTS AND THE SAME HAS BEEN FIRST CREDITED TO 'SBI NO-LIEN ACCOUNT'. FROM THERE, RS.2 CRORES AND RS.1 CRORE WA S TRANSFERRED ON 04-01-2005 & 06-01-2005 RESPECTIVELY TO 'CASH CREDIT ACCOUNT'. THE APPELLANT HAS PAID AN AM OUNT OF RS.7,45,536/- TOWARDS INTEREST TO IDBI ON THIS T ERM LOAN. ANOTHER POINT TO BE NOTED HERE IS THAT THE APPELLA NT'S CASH CREDIT ACCOUNT ON WHICH INTEREST OF RS.10,85,768/- HAS BEE N PAID, WAS HAVING A NEGATIVE BALANCE OF (-) RS. 97,78,787/- TI LL 20-12-2004. ON THIS DAY, INTEREST-BEARING LOAN AMOUNT OF RS.2.19 C RORES WAS RECEIVED FROM SBI (FCNRB) LOAN ACCOUNT. ONLY AFTER THIS LOAN OF RS.2.19 CRORES WAS CREDITED TO ITS CASH CREDIT ACC OUNT, SUCH ACCOUNT SHOWED A POSITIVE BALANCE AND AS NOTED EARL IER RS.3 CRORES FROM THE IDBI LOAN ACCOUNT (RS.2 CRORES ON 0 4-01-2005 AND RS.1 CRORE ON 06-01-2005) WAS ALSO RECEIVED IN THIS ACCOUNT THROUGH 'SBI NO-LIEN ACCOUNT'. ONLY OUT OF THESE BO RROWED FUNDS, THE APPELLANT HAS MADE AN INVESTMENT OF RS.3.3 CROR ES ON 06-01- 2005 AND RS.1.2 CRORES ON 02-02-2005 IN UNITS OF MU TUAL FUND ON WHICH TAX-FREE DIVIDEND INCOME HAS BEEN RECEIVED. ITA N O.948 /DEL./2012 5 (V) THE APPELLANT'S CLAIM BEFORE ME THAT NO PART OF LOAN ACCOUNT FROM IDBI OR SBI'S FCNRB LOAN ACCOUNT HAS BEEN UTIL IZED TO MAKE INVESTMENTS IN MUTUAL FUNDS, DOES NOT HOLD GOOD IN THE LIGHT OF THE OVERWHELMING FACTS NARRATED ABOVE. IF ONE SCRATCHES THE SURFACE, THE EVIDENCE CLEARLY SUGGESTS TERM LOAN FROM IDBI ( RS.3 CRORES) & LOAN FROM FCNRB ACCOUNT (RS.2.19 CRORES), WHICH WAS TRANSFERRED TO 'CASH CREDIT ACCOUNT' THROUGH 'SBI NO- LIEN ACCO UNT' HAD BEEN UTILIZED FOR ACQUISITION OF UNITS OF MUTUAL FUNDS. HENCE, THE APPELLANT'S CLAIM THAT THE INVESTMENTS IN MUTUAL FU NDS HAD BEEN MADE OUT OF THE SURPLUS FUNDS AVAILABLE WITH THE CO MPANY FROM ITS OWN GENERATION FROM SALES CANNOT BE ACCEPTED. IT IS NO DOUBT TRUE THAT THE CASH CREDIT ACCOUNT ALSO CONTAINED ENTRIES FOR REGULAR SALE REMITTANCES AND ALSO VARIOUS EXPENSES ON ACCOUNT OF PURCHASE OF RAW MATERIAL AND OTHER OVERHEADS. THE FACT STILL RE MAINS THAT WITHOUT DIVERSION OF LOAN BEARING FUNDS TO THE EXTE NT OF RS.5.19 CRORES (RS.2.19 CRORES FROM SBI FCNRB LOAN ACCOUNT AND RS.3 CRORES FROM IDBI TERM LOAN ACCOUNT), THE INVESTMENT S IN MUTUAL FUNDS AMOUNTING TO RS.4.5 CRORES COULD NOT HAVE BE EN MADE. THE APPELLANT'S PROFITS FOR THE YEAR AS PER IT. RETURN WAS RS.2,16,24,201/- OUT OF WHICH RS.1,20,00,000/- WAS PAID AS 'ADVANCE TAX'. THEREFORE, IN ANY CASE, INVESTMENT I N MUTUAL FUNDS TO THE TUNE OF RS.4.5 CRORES COULD NOT HAVE BEEN MA DE OUT OF OWN EARNINGS, DESPITE CLAIMS TO THE CONTRARY BY LD. AR IN THIS REGARD. THE COMPANY HAS INCURRED TOTAL INTEREST COST OF RS. 18,31,304/- ON THESE TWO LOAN ACCOUNTS - IDBI & SBI ACCOUNT AS UND ER: SI.N0. TYPE OF LOAN AMOUNT OF INTEREST PAID DURING THE YEAR 1 TERM LOAN FROM IDBI RS. 7 45 536/- 2 WORKING CAPITAL LOAN FROM RS. 10 85 768/- . TOTAL RS. 18,31,304/- 4.4. IN THE LIGHT OF THE AFORESAID FACTS, IT WAS PR OPOSED TO DISALLOW RELATABLE INTEREST COST PERTAINING TO INVESTMENT IN MUTUAL FUNDS WHICH HAS GIVEN RISE TO TAX FREE DIVIDEND INCOME U/ S 14A OF THE LT. ACT SINCE THE ASSESSING OFFICER HAD NOT PROPERLY EX AMINED THIS ASPECT AND HAD ONLY MADE AN ESTIMATED DISALLOWANCE. WHILE DOING SO, IT WAS PROPOSED TO APPLY THE PRINCIPLES ENUNCIA TED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SMT . SUSHMA KAPOOR 319 ITR 299 (DEL) AND CALCUTTA HIGH COURT IN THE CASE OF DHANUKA & SONS VS. CIT (2011) 339 ITR 319 (CAL)AND KERALA HIGH COURT IN THE CASE OF CIT VS. LEENA RAMCHANDRAN (201 1) 339 ITR 296 (KER) AND BOMBAY HIGH COURT IN THE CASE OF GODR EJ & BOYCE MFG. CO. LTD VS. DCIT (2010) 328 ITR 81 (BOM) AND T HE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WALFORT STOCK BROKERS PVT. LTD (2010) 326 ITR 1 (SC). ITA N O.948 /DEL./2012 6 4.5. WHILE THE RELEVANT PORTIONS OF THE AFORESAID J UDGMENTS ARE BEING REPRODUCED HEREUNDER, I WOULD LIKE TO DISCUSS THE FACTS OF THE DELHI HIGH COURT'S DECISION IN THE CASE OF CIT VS. SMT SUSHMA KAPOOR 319 ITR 299 (DEL). IN THAT CASE, THE AO HAD MADE A DISALLOWANCE OF RS.10 LACS U/S 14A ON AN AD HOC BAS IS. HOWEVER, THE CIT(A) ON DETAILED EXAMINATION GAVE A FINDING T HAT BORROWED FUNDS HAD BEEN UTILIZED IN PURCHASE OF ZURICH MUTUA L FUND AND ZURICH INDIA TOP-200 FUND AND ACCORDINGLY, REDUCED DISALLOWANCE TO RS.1,07,510/-. WHILE DOING SO, THE CIT(A) MADE D ISALLOWANCE TO THE EXTENT TO WHICH IT COULD BE PROVED THAT INVESTM ENT WAS MADE FROM THE BORROWED FUNDS. THIS FINDING OF THE CIT(A) WAS CONFIRMED BY BOTH THE ITAT, DELHI AND HIGH COURT OF DELHI AND THE DEPARTMENT'S APPEAL AGAINST DELETION OF THE BALANCE ADDITION WAS DISMISSED. THE FACTS OF THE PRESENT CASE ALSO FALL IN THE SAME CATEGORY. IN THE INSTANT CASE, INTEREST BEARING BOR ROWED FUNDS SUCH AS LOAN OF IDBI AND WORKING CAPITAL LOAN FROM SBI ( FCNRB LOAN ACCOUNT) HAVE BEEN UTILIZED FOR INVESTMENT IN HSBC MUTUAL FUNDS. 4.6. NOW, IT WILL BE WORTHWHILE TO DISCUSS THE RATI O OF A FEW IMPORTANT DECISIONS ON THE APPLICABILITY OF S.14A. THE FIRST AND MOST IMPORTANT JUDGMENT ON THE SUBJECT IS THAT OF THE HON'BLE SUPR EME COURT IN THE CASE OF CIT VS. WALFORT STOCK BROKERS PVT LTD (2010 ) 326 ITR 1 (SC). IN THAT JUDGMENT, IT HAS BEEN HELD THAT U/S 1 4A OF THE ACT ALL RELATABLE EXPENSES CLAIMED U/S 30 TO 37 OF THE LT. ACT CAN BE SUBJECTED TO DISALLOWANCE. THE RELEVANT PORTION OF THE SAID JUDGMENT IS REPRODUCED HEREUNDER: (EXTRACT FROM THE CASE OF CIT VS. WALFORT STOCK BRO KERS PVT. LTD (2010) 326 ITR 1 (SC): 'THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME........... THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME I.E. GROSS INC OME MINUS THE EXPENDITURE. ON THE SAME ANALOGY THE EXEMPTION IS A LSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESP ECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPOSE OF SECTION 1 4A'. (PAGE 15- 16) 'THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME HAS, IN PRINCIPLE, BEEN NOW WIDE NED U/S 14A. READING SECTION 14A IN JUXTAPOSITION WITH SECTION 1 5 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECT ION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST E TC IN RESPECT OF ITA N O.948 /DEL./2012 7 WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37)'. (PAGE 17) (EMPHASIS MINE) 4.7. IN A DETAILED JUDGMENT DELIVERED AFTER CONSIDE RING THE AFORESAID JUDGMENT OF HON'BLE SUPREME COURT, THE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE CO. LTD V. CIT 328 ITR 81( BOM.) HAS SIMILARLY HELD THAT EVEN PRIOR TO INTRODUCTION OF S ECTION 14A(2) AND (3) OF THE I.T. ACT, THE AO IS DUTY BOUND TO ENFORC E THE PROVISIONS OF SECTION 14A( 1) AND FOR THAT PURPOSE, HE MUST ADOPT A REASONABLE BASIS CONSISTENT WITH ALL THE RELEVANT FACTS AND CI RCUMSTANCES. THE RELEVANT PORTION OF THE SAID JUDGMENT IS EXTRA CTED AS UNDER: (EXTRACT FROM THE CASE OF GODREJ AND BOYCE CO. LTD V. CIT 328 ITR 81(BOM.) 'EVEN PRIOR TO A Y 2008-09, WHEN RULE 8-D WAS NOT A PPLICABLE, THE AO HAS TO ENFORCE THE PROVISION OF SECTION 14A(1). FOR THAT PURPOSE, THE AO IS DUTY BOUND TO DETERMINE THE EXPE NDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HE MUST ADOPT A REASONABLE BASIS CONSISTENT WITH ALL THE RELEVANT FACTS AND CI RCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE AS SESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD. (PAGE 138)' (EMPHASIS MINE) 4.8. RECENTLY THE CALCUTTA HIGH COURT IN THE CASE O F DHANUKA & SONS VS. CIT (2011) 339 ITR 319 (CAL) HAS ALSO UPHE LD THE DISALLOWANCE OF INTEREST EXPENSE ON PURCHASE OF SHA RES SINCE SUCH SHARES GIVE RISE TO TAX- FREE DIVIDEND INCOME. THE RELEVANT PORTION OF THE SAID JUDGMENT IS REPRODUCED HEREUNDER: (EXTRACT FROM THE CASE OF DHANUKA & SONS VS. CIT (2 011) 339 ITR 319 (CAL.) 'IN OUR OPINION, THE MERE FACT THAT THESE SHARES WE RE OLD ONES AND NOT ACQUIRED RECENTLY IS IMMATERIAL. IT IS FOR THE ASSESSEE TO SHOW THE SOURCE OF ACQUISITION OF THESE SHARES BY PRODUC TION OF MATERIALS THAT THOSE WERE ACQUIRED FROM THE FUNDS A VAILABLE IN THE HANDS OF THE ASSESSEE WITHOUT TAKING THE BENEFIT OF LOAN. IF THOSE SHARES WERE PURCHASED FROM THE AMOUNT TAKEN IN LOAN , EVEN FOR INSTANCE, 5 OR 10 YEARS AGO, IT IS FOR THE ASSESSEE TO SHOW BY THE PRODUCTION OF DOCUMENTARY EVIDENCE THAT SUCH LOANED AMOUNT HAD BEEN ALREADY PAID BACK AND FOR THE RELEVANT ASSESSM ENT YEAR, NO INTEREST IS PAYABLE BY THE ASSESSEE FOR ACQUIRING T HESE OLD SHARES. ITA N O.948 /DEL./2012 8 IN THE ABSENCE OF SUCH MATERIALS PLACED BY THE ASSE SSEE, IN OUR OPINION, THE AUTHORITIES BELOW RIGHTLY HELD THAT PR OPORTIONATE AMOUNT SHOULD BE DISALLOWED HAVING REGARD TO THE TO TAL INCOME AND THE INCOME FROM THE EXEMPT SOURCE. IN THE ABSEN CE OF ANY MATERIAL DISCLOSING THE SOURCE OF ACQUISITION OF SH ARES WHICH IS WITHIN THE SPECIAL KNOWLEDGE OF THE ASSESSEE, THE A SSESSING AUTHORITY TOOK A MOST REASONABLE APPROACH IN THE AS SESSMENT' 4.9. THEREFORE, IT WAS PROPOSED TO WORK OUT THE EXA CT QUANTUM OF INTEREST RELATABLE TO EARNING OF SUCH TAX-FREE DIVI DEND INCOME. IN ORDER TO BE FAIR TO BOTH THE SIDES I.E. THE APPELLA NT AND THE REVENUE, I HAVE COMPUTED THE INTEREST RELATABLE TO SUCH INVE STMENT BY APPLYING THE INTEREST RATE OF 11.50% ON THE FCNRB L OAN A/C AND 6.5% ON IDBI TERM LOAN ACCOUNT AND APPLIED THE SAME TO THE EXACT PERIOD OF HOLDING AS EVIDENT FROM THE MUTUAL FUND STATEMENT. AFTER DOING SO, THE RELATABLE INTEREST COST WORKS O UT TO RS.7,74,508/- ON 'PRODUCT METHOD' AS PER THE CHART REPRODUCED HER EUNDER: PARTICULARS NEW SOLD / CLOSING BA L. DATE OF PERIOD INTEREST INTEREST PURCHASE REDEEMED P URCHASE OF HOLDING RATE AMOU NT (RS.) ( RS.) /SALE (NO.OF DAYS) (%) (RS.) . OUT OF FUND TRANSFERRED FROM SBI FCNRB LOAN UNITS OF HSBC 21900000 - 21900000 06-01 -05 60 11.50 4,14,000 FLOATING RATE FUND SHORT TERM REGULAR OPTION DAILY DIVIDEND REDEMPTION OF - 50,00,000 1,69,00,000 07-03-05 7 11.50 37,273 AFORESAID UNITS REDEMPTION OF - 50,00,000 1,19,00,000 14-0 3-05 8 11.50 29,995 AFORESAID UNITS REDEMPTION OF - 1,00,00,000 19,00,000 22 -03-05 9 11.50 5,388 AFORESAID UNITS CLOSING 10,00,000 31-03-05 BALANCE ITA N O.948 /DEL./2012 9 OUT OF FUND TRANSFERRED FROM IDBI TERM LOAN UNITS OF HSBC 1,11,00,000 - 1,11,00,000 06-01-0 5 84 6.50 1,66,044 FLOATING RATE FUND SHORT TERM REGULAR OPTION DAILY DIVIDEND CLOSING 1,11,00,000 31-03-05 BALANCE OUT OF FUND TRANSFERRED FROM IDBI TERM LOAN UNITS OF HSBC 1,20,00,000 - 1,20,00,000 02-02-05 57 6.50 1,21,808 FLOATING RATE FUND SHORT TERM REGULAR OPTION DAILY DIVIDEND. CLOSING BALANCE 1,20, 00,000 31.03.05 . . TOTAL RE LATABLE INTEREST COST: 7,74,508 4.10. IN ADDITION TO THE INTEREST COST OF RS.7,74, 508/-, THERE WOULD BE SOME OTHER EMPLOYEE COST, DIRECTORS REMUNERATION COST ETC ALSO RELATABLE TO THE EARNING OF THIS TAX-FREE INCOME. E VEN THOUGH THE LD .AR CLAIMED THAT NO TIME AND EFFORT WERE INVOLVED I N INVESTING IN THESE MUTUAL FUND SCHEMES, SUCH BLAND CLAIM CANNOT BE ACCEPTED. OBVIOUSLY, SOME SENIOR PERSONNEL IN THE FINANCE DEP ARTMENT OF THE APPELLANT COMPANY UNDER THE OVERALL SUPERVISION, DI RECTIONS AND CONTROL OF THE BOARDS OF DIRECTORS MUST HAVE TAKEN THESE DECISIONS ON INVESTMENT/REDEMPTION WORTH CRORES IN MUTUAL FUN DS. HENCE, SUCH PERSONNEL AND ADMINISTRATIVE COST IS ESTIMATED AT A REASONABLE COST OF 3% OF THE TAX-FREE INCOME EARNED . THIS WORKS OUT TO AN ADDITIONAL SUM OF RS.10,133/- (3% OF RS.3 ,37,764/- ). HENCE, THE TOTAL DISALLOWANCE U/S 14A OF THE ACT WA S PROPOSED TO BE ENHANCED ACCORDINGLY TO RS.7,84,641/-(RS.7,74,50 8/- TOWARDS INTEREST COST + RS.10,133/- TOWARDS ADMINISTRATIVE & PERSONNEL COST) AND AN OPPORTUNITY WAS GRANTED U/S 251(2) OF THE LT . ACT TO THE A.R. TO FURNISH HIS OBJECTIONS TO. THE PROPOSED ENH ANCEMENT, VIDE ORDER SHEET NOTING DATED 29-11-2011. ALTHOUGH THE A .R. HAS OBJECTED TO THE ENHANCEMENT, HE HAS NOT FURNISHED A NY COGENT EXPLANATION EXCEPT ORALLY REPEATING THE SUBMISSIONS MADE EARLIER, WHICH HAVE ALREADY BEEN SUITABLY DEALT WITH EARLIER . THEREFORE, FOR THE REASONS MENTIONED HEREINABOVE, THE TOTAL DISALL OWANCE U/S 14A ITA N O.948 /DEL./2012 10 IS BEING WORKED OUT AT ` ` 7,84,641/-+ ` `10,133) AS AGAINST ` `84,406/- COMPUTED BY THE ASSESSING OFFICER. ACCORDINGLY, GR OUND NO.3 IS ENHANCED AND THE ASSESSING OFFICER IS DIRECTED TO D ISALLOW A SUM OF ` `7,84,641/- IN LIEU OF ` ` 84,406/-. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. AR ON BEHALF OF THE ASSESSEE WHILE CARRYING US THROUGH THE RELEVANT OVER DRAFT ACCOUNT WITH STAT E BANK OF INDIA CONTENDED THAT THE ASSESSEE RECEIVED AN AMOUNT OF ` 2,19,10,000/- ON 20.12.2004 ON A/C OF FCNB DISBURSAL(PAGE 38 OF THE PAPER BOOK) AND THE D EBIT BALANCE IN THE ACCOUNT ON THAT BEFORE THIS CREDIT WAS ` 97,78,787.94. ON 31 ST DECEMBER,2004,THE ASSESSEE RECEIVED WORKING CAPITAL LOAN OF ` 4,63,37,900/- FROM IDBI BANK @ 6.5% AND DEPOSITED THE SAME IN THE STATE BANK OF INDIA A CCOUNT (PAGE 9 OF THE PB). OUT OF THE SAID LOAN, ` 2 CRORES WAS CREDITED IN THE OVERDRAFT A/C WITH SBI ON 4.1.2005(PAGE 34 OF THE PB) AND ` 1 CRORE ON 6.1.2005( PAGE 33 OF THE PB) AND ` ` 55 LACS ON 12 TH JANUARY,2005 (PAGE 31 OF THE PAPER BOOK). ACCORDIN GLY, THE ASSESSEE INVESTED 3.30 CRORES ON 6.1.2005 (PAGE 32 AND 39 OF THE PB). SINCE THE AMOUNT WAS INVESTED OUT OF FUNDS FROM IDBI @ 6.5%,PA, THE DISALLOWANCE SHOULD BE RESTRICTED TO THAT EXTENT ONLY, THE LD. A R ARGUED. AS REGARDS AMOUNT OF ` `1 .20CRORE INVESTED ON 2.2.2005, THE LD. AR PLEADE D THAT SINCE THE PART OF THE INVESTMENT WAS MADE OUT OF OWN FUNDS GENERATED OUT OF THE PROFIT OF THE YEAR WHILE AN AMOUNT OF ` ` 55 LACS OUT OF BORROWINGS WAS UTILIZED IN THIS INVE STMENT, THEREFORE, THE LD. CIT(A) WAS NOT JUSTIFIED IN DISA LLOWING THE INTEREST @11.5% PER ANNUM. AS REGARDS DISALLOWANCE OF ` ` 84,406/- AND REDUCED TO ` 10,133, THE LEARNED AR DID NOT MAKE ANY SUBMISSIONS BEFORE US. TO A QUERY BY THE BENCH, SEEKING WORKING OF THE ASSESSEE ON ACCOUNT OF INT EREST ON BORROWED FUNDS UTILIZED IN THE AFORESAID INVESTMENTS, THE LD. AR DID NOT SUBMIT THE SAID WORKING UNTIL THE WRITING OF THIS ORDER. ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDER OF THE LD.CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE T HROUGH THE FACTS OF THE CASE. THE ONLY ISSUE RAISED ONLY BEFORE US ON B EHALF OF THE ASSESSEE IS AS TO ITA N O.948 /DEL./2012 11 WHETHER THE WORKING OF DISALLOWANCE OF INTEREST IN TERMS OF PROVISIONS OF SEC. 14A OF THE ACT BY THE LD. CIT(A) IS PROPER. INDISPU TABLY AND AS POINTED OUT BY THE LD. CIT(A),THE ASSESSEE UTILISED BORROWED FUNDS FOR MAKING INVESTMENT IN HSBC FLOATING FUND TO THE EXTENT OF ` 4.50 CRORES. THE ASSESSEE COMPANY OBTAINED WORKING CAPITAL TERM LOAN OF ` .4.63 CRORES FROM IDBI VIDE LOAN AGREEMENT DATED 08-12-2004 @6.5% PA, FOR MEETING ITS LONG TERM WORK ING CAPITAL REQUIREMENTS AND THE SAME WAS CREDITED TO 'SBI NO-LIEN ACCOUNT'. FROM THE SAID ACCOUNT, ` .2 CRORES AND ` .1 CRORE WERE TRANSFERRED ON 04-01-2005 & 06-01-200 5 RESPECTIVELY TO 'CASH CREDIT ACCOUNT'. THE LD. CIT(A) CONCLUDED THAT ONLY OUT OF THE BORROWED FUNDS, THE ASSESSEE MADE AN INVESTMENT OF ` .3.30 CRORES ON 06-01-2005 BESIDES ` .1.2 CRORES ON 02-02-2005 IN UNITS OF MUTUAL FUND . IT WAS OBSERVED THAT WITHOUT DIVERSION OF LOAN BEARING FUNDS TO THE EXTENT OF ` .5.19 CRORES ( ` 2.19 CRORES FROM SBI FCNRB LOAN ACCOUNT AND ` .3 CRORES FROM IDBI TERM LOAN ACCOUNT), THE INVESTMENTS IN MUTUAL FUNDS AMOUNTING TO.4.5 CRORES COULD NOT HAVE BEEN MADE BY THE ASSESSEE WHILE THERE IS NOTHING TO SUGGEST THESE INVESTMENTS WERE MADE OUT OF OWN EARNINGS. THE WORKING OF DISALLOWANCE I N PARA 4.9 OF THE IMPUGNED ORDER REVEALS THAT THE LD. CIT(A) WORKED OUT DISALL OWANCE OF INTEREST ON BORROWED FUNDS, WHICH WERE UTILISED IN THE AFORESAID INVES TMENTS DURING THE YEAR UNDER CONSIDERATION . THE LD. CIT(A ) ADOPTED RATE OF INT EREST OF 11.5% FOR THE INVESTMENT OF ` 2.19 CRORES AND 6.5% PA FOR THE REMAINING INVESTMEN T OF ` 2.31 CRORES. THOUGH THE LD. AR CONTENDED THAT OWN FUNDS WERE UTILIZED IN MAKING THE INVESTMENTS, NO SUCH EVIDENCE HAS BEEN PLACED BEFO RE US. BESIDES, THE LD. CIT(A) DISALLOWED AN AMOUNT OF ` 10,133/- OUT OF PERSONNEL AND ADMINISTRATIVE COST IN MAINTAINING AND SUPERVISING THE AFORESAID I NVESTMENTS . DESPITE SPECIFIC REQUEST DURING THE HEARING OF APPEAL, THE LD. AR DI D NOT PLACE BEFORE US WORKING OF THE ASSESSEE IN RESPECT OF INTEREST ON BORROWED FUNDS UTILIZED FOR MAKING THE AFORESAID INVESTMENTS NOR POINTED OUT ANY INFIRMI TY IN THE WORKING OF THE DISALLOWANCE COMPUTED BY THE LD. CIT(A). IN THESE CIRCUMSTANCES, ESPECIALLY WHEN THE LD. AR DID NOT PLACE ANY MATERIAL BEFORE U S CONTROVERTING THE AFORESAID FINDINGS OF THE LD. CIT(A) SO AS TO ENABLE US TO TA KE DIFFERENT VIEW IN THE MATTER, ITA N O.948 /DEL./2012 12 WE ARE NOT INCLINED TO INTERFERE IN THE WORKING OF THE LD CIT(A) IN PARA 4.9 OF THE IMPUGNED ORDER. THEREFORE, GROUND NOS.1 TO 4 IN TH E APPEAL ARE DISMISSED.. 6.. GROUND NO.5 IN THE APPEAL BEING GENERAL IN NATU RE, DOES NOT REQUIRE ANY SEPARATE ADJUDICATION AND IS, THEREFORE, DISMISSED. 7.. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. 8. IN RESULT, APPEAL IS DISMISSED. SD/- SD/- (C.M. GARG) (A.N. PAHUJA) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NS COPY OF THE ORDER FORWARDED TO :- 1. ASSESSEE 2. DCIT,CIRCLE-12(1), NEW DELHI 3. CIT CONCERNED. 4. CIT(A)-X, NEW DELHI 5. DR, ITAT,C BENCH, NEW DELHI 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI ORDER PRONOUNCED IN OPEN COURT