IN INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM ITA No. 857/JP/14 Assessment Year : 2010-11 M/s APM Industries Ltd. cuke ACIT Circle-2, Alwar Vs. SP 147, RIICO Industrial Area, Bhiwadi, Alwar PAN No. AACCA 5114 G Appellant Respondent Assessee by : Shri S.L. Poddar advocate Revenue by :Shri R.S. Dagur (Addl.CIT) Date of Hearing : 01.08.2016 Date of Pronouncement : 04/10/2016. ORDER PER SHRI VIKRAM SINGH YADAV, A.M. This is appeal filed by assessee against order of Ld. CIT(A), Alwar order dated 01.01.2014 wherein assessee has taken following grounds of appeal: (1) That under facts and circumstances of case, order passed by ld. AO u/s 143(3) is bad in law and void-ab-initio. 2) That under facts and circumstances of case, ld. CIT(A) has erred in confirming addition of Rs. 5,82,777/- u/s 14A of IT Act, 1961 without considering submission of assessee. ITA No. 857/JP/14 M/s APM Industries Ltd. Alwar v. ACIT, Circle-2, Alwar 2. During course of hearing, ld. AR did not press ground No.1. Hence same is dismissed as not pressed. 2.1 In ground no.2, assessee has challenged addition made by AO of Rs. 5,82,777/- u/s 14A of Act. On perusal of assessment order, it is noted that AO after reviewing profit and loss account of assessee noted that assessee has earned dividend income of Rs. 1,03,270/- from SBBJ and Visaka Industries Ltd. AO further noted that no direct expenses were attributable to earning dividend income and since dividend is earned in normal course of business, provisions of Section 14 read with Rule 8D of Act were invoked and disallowance of Rs.5,82,777/- was made. assessee carried matter in appeal before Ld. CIT(A) who has confirmed said addition. 2.2 As per ld. AR, assessee has made total investment of Rs. 1,75,97,416/- and out of that, amount of Rs. 1,69,20,000/- has been invested in year 2007 in M/s VS Lignite Power Pvt. Ltd. As per ld. AR, said investment was made for strategic purposes whereby by virtue of share holding in said company, asessee would be entitled to 6 MW of power at very lower rate than rate prescribed by State Electricity Board. said investment was made for business purposes and not for earning of dividend income and shares of said company are not tradable and further no dividend has been received during year. Ld. AR further submitted that in respect of other investment which were made for dividend purposes, assessee has suo- moto disallowed Rs. 3152/- in its computation of income. During course of appellate proceedings, assessee has also taken plea that investment were made out of interest free funds available with company and there is no satisfaction 2 ITA No. 857/JP/14 M/s APM Industries Ltd. Alwar v. ACIT, Circle-2, Alwar recorded by AO negating said contention, hence no disallowance is called for. 2.3 ld. CIT(A) has negated above said contentions of appellant by examining position of share capital, reserves and surplus and interest bearing funds for year under consideration ended on 31.03.2010. As we have noted above, majority of investment under consideration was made in year 2007 wherein assessee had invested in M/s VS Lignite Power Ltd. Therefore, what is relevant to examine is position of availability of funds and utilisation thereof in year of investment rather than in year under consideration. However, there is no such findings which is returned by AO or by ld. CIT(A). We now refer to provisions of Section 14A of Act which have bearing on subject. Sub section (1) of section 14 clearly stipulates that for purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under said Act. expression expenditure incurred refer to actual expenditure in relation to or in connection with or pertaining to exempt income. Corollary to same is that where no expenditure is incurred in relation to exempt income, no disallowance can be made u/s 14A of Act. As held by Supreme Court in CIT vs. Walfort Share and Stock Brokers Pvt. Ltd. (326 ITR 1), for attracting section 14A, there has to be proximate cause for disallowance which is its relationship with tax exempt income. Thus, in absence of such proximate cause for disallowance, section 14A cannot be invoked. There is no such finding by AO in instant case that assessee has incurred certain expenditure in relation to exempt income and in particular whether assessee has utilized interest bearing borrowed funds for purpose of making 3 ITA No. 857/JP/14 M/s APM Industries Ltd. Alwar v. ACIT, Circle-2, Alwar impunged investment. Further, sub section (2) of Section 14 provides manner in which AO is to determine amount of expenditure incurred in relation to income which does not form part of total income provided AO is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income. Further, sub section (3) of section 14A applies to cases where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under Act. As held by Hon ble Delhi High Court in case of Maxopp Investment ltd. Vs. CIT (347 ITR 272) where it was held as under: requirement of AO embarking upon determination of amount of expenditure incurred in relation to exempt income would be triggered only if AO returns finding that he is not satisfied with correctness of claim of assessee in respect of such expenditure. Therefore, condition precedent for AO entering upon determination of amount of expenditure incurred in relation to exempt income is that AO must record that he is not satisfied with correctness of claim in respect of such expenditure. Sub section (3) is nothing but offshoot of sub section (2) to section 14A and in both cases, AO if not satisfied with correctness of claim of assessee then AO gets jurisdiction to determine amount of expenditure incurred in relation to such income which does not form part of total income in accordance with prescribed method prescribed under Rule 8D of said while rejecting claim of assessee with regard to expenditure or no expenditure, as case maybe in relation to exempt income. AO would have to indicate cogent reasons for same. It is 4 ITA No. 857/JP/14 M/s APM Industries Ltd. Alwar v. ACIT, Circle-2, Alwar therefore clear that determination of amount of expenditure in relation to exempt income under rule 8D would only come into play when AO rejects claim of assessee in this regard. 2.4 In light of provisions of section 14A and above proposition in law, in instance case, AO has not return finding that he is not satisfied with correctness of claim of assesee in respect of expenditure not having been incurred in relation to exempt income. In absence of AO recording his satisfaction with correctness of claim of assessee, we are of view that invocation of Rule 8D simplicator would not be in accordance with provisions of Section14A of Act. In light of these discussions, we set-aside impunged order on this issue and restore matter to file of AO to examine matter fresh and after recording his satisfaction vis-a-vis claim of assessee, recompute disallowance, if any, in accordance with law. In result appeal filed by assessee is allowed for statistical purposes. Order pronounced in open court on 04/10/2016. Sd/- Sd/- (KUL BHARAT) (VIKRAM SINGH YADAV) Judicial Member Accountant Member Jaipur Dated:- 04/10/2016 Pillai 5 ITA No. 857/JP/14 M/s APM Industries Ltd. Alwar v. ACIT, Circle-2, Alwar Copy of order forwarded to: s 1. Appellant- M/s APM Industriees Ltd. Alwar 2. Respondent- ACIT, Circle-2, Alwar 3. CIT Alwar 4. CIT(A)-Alwar 5. DR, ITAT, Jaipur 6. Guard File (ITA No.857/JP/2014) By order, Assistant. Registrar 6 M/s APM Industries Ltd. v. ACIT, Circle-2, Alwar