Income Tax Appeal No.320 of 2013 -1- IN HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income Tax Appeal No.320 of 2013 Date of Order: 27.01.2015 Commissioner of Income Tax-I, Ludhiana ..Appellant Versus M/s Abhishek Inustries Ltd.,Ludhiana ..Respondent CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE B.S.WALIA Present: Mr. Rajesh Katoch, Advocate, for appellant. Ms.Radhika Suri, Sr. Advocate, with Ms. Rinku Dahiya, Advocate, for respondent. RAJIVE BHALLA, J (Oral) revenue is before us challenging order dated 17.04.2013, passed by Income Tax Appellate Tribunal, Chandigarh Bench 'B'. Chandigarh (hereinafter referred to as 'the ITAT'). Before we record our opinion, it would be necessary to briefly refer to facts. assessee filed return of income on 30.09.2008, declaring income of Rs.13,05,01,310/-, followed by revised return, declaring income of Rs.1,04,37,640/-. Assessing Officer completed assessment under Section 143(3) of Income Tax Act, 1961 (hereinafter referred to as 'the Act') by making numerous additions, and disallowing certain exemptions claimed by NARESH KUMAR 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Income Tax Appeal No.320 of 2013 -2- assessee. present appeal relates to Rs.2,37,67,894/-, disallowed by Assessing Officer, under Section 14A of Act read with Rule 8D of Income Tax Rules (hereinafter referred to as 'the Rules'), by holding that interest bearing funds had been used to earn tax free dividend etc. Aggrieved by this order, assessee filed appeal. CIT(A)-I, Ludhiana, deleted addition by holding that revenue has not been able to prove that interest bearing funds were used. revenue filed appeal before ITAT, Chandigarh Bench 'B', Chandigarh, which was dismissed on 17.04.2013, by affirming order passed by CIT(A)-I, Ludhiana. Counsel for revenue submits that ITAT has erred in confirming deletion made by CIT(A). onus to prove that interest bearing funds were not used while making investments that earned dividend in shape of exempted income lay upon assessee. Assessing Officer rightly drew inference against assessee as he failed to discharge onus. CIT(A) has by wrongly placing onus upon revenue and by holding that revenue has failed to discharge its onus, deleted this addition. ITAT has affirmed order passed by CIT(A) without appraising record which reveals that interest bearing funds were used to earn dividend, which was claimed as exempted income. Counsel for revenue has framed following substantial questions of law:- i) Whether on facts and circumstances of case NARESH KUMAR and in law, Hon'ble ITAT is correct in confirming 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Income Tax Appeal No.320 of 2013 -3- order of CIT(A) deleting disallowance of Rs.2,37,67,894/- made under Section 14A read with Rule 8D, on account of interest on loans, on investments earning tax free income in form of dividend. ii) Whether on facts and in circumstances of case and in law Hon'ble Income Tax Appellate Tribunal was justified in relying on decision of jurisdictional High Court in case of M/s Hero Cycles Ltd. for Assessment Year 2004-05 ignoring provision of Rule 8D inserted w.e.f. 24.03.2008 and applicable from assessment year 2008-09. Counsel for assessee submits that perusal of impugned orders reveals that Assessing Officer admitted that it is not possible to refute or rebut assessee's statement that investments were not sourced from interest bearing funds. Assessing Officer having failed to adduce or refer to any evidence that could prove that interest bearing funds were utilised for earning tax free income, CIT(A) rightly deleted these additions. ITAT has rightly affirmed order passed by CIT(A). It is further submitted that questions of law framed by revenue have already been answered against revenue in CIT v. Hero Cycles Ltd. [2006] 323 ITR 518 (P&H), CIT v. Winsome Textile Inustries Ltd. [2009] 319 ITR 204 (P&H) and Commissioner of Income Tax v. Deepak Mittal [2014) 361 ITR 131 (P&H). NARESH KUMAR 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Income Tax Appeal No.320 of 2013 -4- We have heard counsel for parties and perused impugned order. Assessing Officer disallowed dividend earned by assessee by holding that interest bearing funds had been used to earn this income. CIT(A) set aside this finding by holding that Assessing Officer has failed to prove that interest bearing funds were used by assessee. ITAT has affirmed this finding by holding that as Assessing Officer has failed to prove that interest bearing funds were used, it would not invite disallowance under Section 14A of Act. relevant extract from order passed by ITAT reads as follows:- 8. I have considered facts of case and it is seen that appellant has made categorical submission of fact before AO that no interest bearing funds had been diverted to make investments leading to tax exempt income. AO has not established as matter of fact that contention put forwarded by assessee was erroneous or misleading. In fact AO has observed that it was not possible to disprove claim of assessee in this regard. It clearly meant that mandatory requirement as stipulated by Section 14A with regard to satisfaction that certain expenditure had been incurred to earn tax exempt income, has not been fulfilled. Section 14A of Act empowers Assessing Officer to NARESH KUMAR 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Income Tax Appeal No.320 of 2013 -5- disallow, exempted income if interest bearing funds have been used, by assessee. scope and ambit of Section 14A of Act came up for consideration in CIT v. Winsome Textile Inustries Ltd. (supra). After appraisal of Section 14A of Act, Division Bench of this Court held that Section 14A of Act, may only be invoked if assessee has made investments in purchase of shares out of borrowed funds. As consequence if assessee has invested his own money in purchase of shares, there is no question of disallowance under Section 14A of Act. relevant extract from judgment in CIT v. Winsome Textile Inustries Ltd. (supra) reads as follows:- Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H) relates to provisions of Section 36(1) (iii) and Section 14A which has been invoked in this case which stands on different footing. Even if deduction under Section 36(1)(iii) is ordinarily available in respect of borrowed funds utilised for purpose of business. Section 14A carves out exception in so far as any expenditure which is relatable to earning of dividend income not subject to tax is to be disallowed. It would be relevant to point out that Hon'ble Supreme Court in case of Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450 held that in case of indivisible business where part of business income is exempt expenditure cannot be apportioned and part relating to income is exempt cannot be disallowed (judgment dated February 23, 2000). However, Finance Act, 2001, incorporated section 14A with effect from April NARESH KUMAR 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Income Tax Appeal No.320 of 2013 -6- 1, 1962, which provides for disallowance of expenditure relating to income not included in gross total income. Therefore, it is to be ascertained as to whether assessee has made investment in purchase of shares out of borrowed funds or invested its own funds. If assessee has invested its own money in purchase of shares then there is no question of any disallowance in respect of interest on borrowed funds u/s 14A. However, if borrowed funds have been utilised for purchase of shares of M/s Winsome Yarns Limited, disallowance u/s 14A shall have to be calculated even when investment has been made in course of business of assessee and assessee qualifies for deduction u/s 36(1)(iii). So, however, section 14A provides that no deduction shall be allowed in respect of expenditure incurred by assessee in relating to income which does not form part of total income under Act. So, it is, therefore, necessary to find out if any expenditure was incurred by assessee for making investment in shares of Winsome Yarns Limited. During course of assessment proceedings assessee had furnished written submission in which it was claimed, paragraph 5 of letter that investment in shares of Winsome Yarn Limited was made out of assessee's own fund and not out of any borrowed funds. Before Commissioner of Income Tax (Appeals) also, vide letter dated March 15, 2007 assessee had reiterated that investment in purchase of shares of Winsome Yarn Limited in year 1993-94 had no nexus with borrowed funds. Assessing Officer as per NARESH KUMAR 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Income Tax Appeal No.320 of 2013 -7- assessment order has not refuted claim of assessee but has made disallowance on ground that had said invested in shares were available with assessee, assessee would not have been required to raise loans to that extent and incur expenditure on interest on such loans. In our considered view, disallowance has got to be made u/s 14A if any expenditure relating to earning of income which is not chargeable to tax has been debited to accounts by assessee. Since in this case, assessee has not incurred any expenditure for making investment in purchase of shares of Winsome Yarn Limited, no disallowance is warranted u/s 14A. We, therefore, find no justification to interfere with order of Commissioner of Income Tax (Appeals) in having deleted disallowance. ground of appeal raised by revenue in this regard in thus dismissed. Section 14A of Act requires Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. satisfaction to be recorded must be based upon credible and relevant evidence. onus, therefore, to prove that interest bearing funds were used, lies squarely on shoulders of revenue. Thus, if Assessing Officer is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest free income as opposed to assessee's own funds, Assessing Officer may legitimately disallow such claim. Assessing Officer, however, cannot, by recording general observations, particularly where assessee has denied using NARESH KUMAR 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Income Tax Appeal No.320 of 2013 -8- interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of Act, being in nature of exception, has to be construed strictly and only where Assessing Officer records satisfaction, on basis of clear and cogent material, shall order be passed under Section 14A of Act, disallowing such claim. As there is no tangible material on record that could have enabled Assessing Officer to record satisfaction in terms of Section 14A of Act, findings recorded by CIT(A) and ITAT that Assessing Officer has failed to discharge this onus are neither perverse nor arbitrary and, therefore, do not call for interference. Even otherwise, controversy, in our considered opinion, is squarely covered in favour of assessee by judgment in CIT v. Winsome Textile Industries Ltd. (supra). We, therefore, find no reason to interfere with findings recorded by Income Tax Appellate Tribunal, answer questions of law against revenue and dismiss appeal accordingly. (RAJIVE BHALLA) JUDGE January 27, 2015 (B.S.WALIA) nt JUDGE NARESH KUMAR 2015.02.13 11:28 I attest to accuracy and authenticity of this document Chandigarh Commissioner of Income-tax-I, Ludhiana v. M/s Abhishek Inustries Ltd