IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 3516/Del/2013 Assessment Year: 2009-10 M/s. Riviera Home Furnishings Vs. ACIT, Range-15, New Delhi Pvt. Ltd., 501, 5th Floor, Aggarwal Corporate Heights, Netaji Subhash Place, District Centre, Wazirpur, Delhi PAN : AAACR4448J (Appellant) (Respondent) And ITA No. 4112/Del/2013 Assessment Year: 2009-10 DCIT, Circle-15(1), Room No. Vs. M/s. Riviera Home Furnishings 412, C.R. Building, I.P. Estate, Pvt. Ltd., 501, 5th Floor, New Delhi Aggarwal Corporate Heights, Netaji Subhash Place, District Centre, Wazirpur, Delhi PAN : AAACR4448J (Appellant) (Respondent) Assessee by Sh. Ved Jain, Advocate, Sh. Ashish Goel, CA and Sh. Ashish Chadha, CA Department by Sh. F.R. Meena, Sr. DR Date of hearing 22.08.2016 Date of pronouncement 21.10.2016 ORDER PER O.P. KANT, A.M.: These cross appeals by assessee and Revenue respectively are directed against order dated 26/04/2013 of learned 2 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 Commissioner of Income-tax (Appeals)-XVIII, New Delhi for assessment year 2009-10. Since both appeals have emanated from same order, both are heard together and disposed of by this consolidated order. grounds raised in appeal of assessee i.e. ITA No. 3516/Del/2013 are as under: 1. On facts and circumstances of case, order passed by learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad, both in eye of law and on facts. 2. On facts and circumstances of case, learned CIT(A) has erred both on facts and in law in confirming action of AO in making disallowance under Section 14A of Act. 3. On facts and circumstances of case, learned CIT(A) has erred both on facts and in law in rejecting contention of assessee that provisions of Section 14A are not applicable to investment made in EOU covered under provisions of Section 10B of Act. 4(i)On facts and circumstances of case, learned CIT(A) has erred both on facts and in law in rejecting contention of assessee that computation of disallowance under Rule 8D read with Section 14A is bad in law. (ii)On facts and circumstances of case, learned CIT(A) has erred both on facts and in law in rejecting contention of assessee that no disallowance is called for since all investments are in subsidiary companies and there is no change during year (except small change in valuation of mutual funds). (iii)On facts and circumstances of case, learned CIT(A) has erred both on facts and in law in rejecting contention of assessee that interest on borrowed funds on which interest has been paid, have been utilized for specific purpose and there is direct nexus between loan and its utilization. 5(i) On facts and circumstances of case, learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming action of Assessing Officer in computing administrative expenses at rate of 0.5% despite fact that no expenses were required for managing mutual fund. (ii)On facts and circumstances of case, disallowance sustained by learned Commissioner of Income Tax (Appeals) is bad in absence of any linkage or finding about any particular expenditure having been incurred for such investments. 3 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 6. That appellant craves leave to add, amend or alter any of grounds of appeal. 2. grounds raised in appeal of Revenue i.e. ITA No. 4112/Del/2013 are as under: 1. Ld. CIT(A) has erred in law and on facts in deleting addition of Rs. 53,78,318/- made by assessing officer on account of disallowance u/s 14A of Act. 2. Ld. CIT(A) has erred in law and on facts of case in not appreciating fact that assessee debited total amount of Rs. 2.81 core in profit loss account under head of 'interest paid to bank loan' whereas total amount of bank interest shown in PAL account of its 100% EOU unit is Rs. 42.63 lakh only which clearly shows that assessee company has borrowed funds which was used for mixed purposes. 3.The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of grounds of appeal. ITA No. 3516/Del/2013 3. facts in brief of case are that assessee was engaged in business of manufacturing and export of home furnishing items such as rugs and bath mats, blanket etc. For year under consideration, assessee filed return of income on 29/03/2010 declaring income of Rs.10,26,41,949/-. case was selected for scrutiny and notice under section 143(2) of Income Tax Act, 1961 (in short Act ) was issued and served within stipulated period. During scrutiny proceedings, Assessing Officer observed loss of Rs.24,85,249/- from one of unit eligible under section 10B of Act. Assessing Officer further observed that assessee made investment in shares and earned dividend income of Rs.4,49,521/, which was claimed as exempt under section 10(33) of Act. Assessing Officer also observed that assessee made investment in unit eligible under section 10B of Act, income of which was exempt. According to Assessing Officer, disallowance under section 14A of Act was attracted in case of assessee. However, assessee did not disallow any 4 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 expenses relating to investment in terms of section 14A of Act read with Rule 8D of Income Tax Rules, 1962 (in short Rules ). Accordingly, invoking Rule 8D of Rules, Assessing Officer computed total disallowance of Rs.63,85,457/- as under: (i) interest expenses corresponding to average value of investment, income from which does not or shall not form part of total income of assessee under Rule 8D(2)(ii), amounting to Rs. 53,75,318/- (ii) one half percent of average value of investment, income from which does not or shall not form part of total income of assessee under Rule 8D(2)(iii), amounting Rs. 10,10,140/- 3.1 Before learned Commissioner of Income-tax(Appeals), assessee challenged investment made in unit covered under section 10B of Act for purpose of disallowance under section 14A of Act. According to assessee, section 10B provides for deduction and not exemption and, therefore, provisions of section 14A of Act were not applicable for investment made in Export Oriented Unit (EOU). assessee relied upon judgment of Tribunal in case of Maditap Specialities Private Limited Vs. Additional CIT in ITA No. 6835/Mum/2010 and decision of Hon ble Bombay High Court in case of Hindustan Unilever Vs. DCIT, reported in (2010) 325 ITR 102 (Bom.), however, learned Commissioner of Income-tax (Appeals) relied on decision of jurisdictional High Court in case of CIT Vs. TEI Technologies Private Limited in ITA 347/2011 & 2067/2010, wherein, section 10A has been held essentially and in substance held as exemption provision. Accordingly, he held that provisions of section 14A of Act were clearly applicable to investment made in EOU covered under provisions of section 10B of Act. 5 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 3.2 However, learned Commissioner of Income-tax (Appeals) held that no funds have been borrowed for investment in EOU, therefore, no disallowance under Rule 8D(2)(ii) corresponding to interest towards investment in EOU, could be disallowed. 3.3 With regard to investment made in shares, learned Commissioner of Income Tax (Appeals), held that investment in shares/mutual funds was made from regular business account where funds were mixed and, therefore, he upheld disallowance under Rule 8D(2)(ii) corresponding to investment in shares/mutual funds. Commissioner of Income Tax (Appeals) also upheld disallowance at rate of 0.5% of average investment towards administrative expenses under Rule 8D(2)(iii) of Rules amounting to Rs.10,10,140/-. 3.4 Aggrieved, with above findings of learned Commissioner of Income-tax (Appeals), both assessee and Revenue are in appeal before Tribunal raising grounds as reproduced above. 4. ground No. 1 and 2 of assessee s appeal are general in nature and, therefore, not required to be adjudicated upon specifically. 5. ground No. 3 of assessee s appeal relates to issue whether section 10B is deduction or exemption provision. 5.1 learned Authorized Representative of assessee submitted that provisions of section 14A of Act are applicable in respect of income, which is exempt and not in respect of income for which deduction is available. He submitted that in case, assessee has claimed deduction under section 10B of Act in respect of export oriented unit. According to learned Authorized Representative, it was settled law that section 10B is deduction provision and not exemption provision, and, therefore, provisions of section 14A of Act were not applicable to investment made in EOU covered under 6 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 provisions of section 10B of Act. In support of contention, he relied on following decisions: (i) Decision of Tribunal, Mumbai Bench in case of Meditap Specialties Private Limited Vs. ACIT,Range-2(2), Mumbai in ITA No. 6835/Mum/2010. (ii) Decision of Tribunal, Ahmedabad Bench dated 10/06/2011 in case of CIT Vs. Net Square Solution in ITA No. 3145 and 3146/Ahd/2010. (iii) Decision of Hon ble Bombay High Court in case of Hindustan Unilever Ltd. Vs. DCIT reported in (2010) 325 ITR 102. (iv) Decision of Tribunal, Pune Bench in case of Opus software solutions private limited versus ACIT, in ITA No. 584/Pune/2011 5.2 On other hand, learned Sr. Departmental Representative relied on order of learned Commissioner of Income Tax (Appeals) and submitted that section 10B falls under Chapter-III of Act, heading of which clearly says that under Chapter provisions related to income, which does not form part of total income, have been legislated and, therefore, order of learned Commissioner of Income Tax (Appeals) on issue in dispute might be upheld. 5.3 We have heard rival submissions and perused material on record. We find that Tribunal in case of Maditap Specialties Private Limited (supra), Net Square Solution (supra), Opus Software Private Limited (supra) held that section 10A/10B are in nature of deduction and not exemption. relevant findings of decisions are reproduced as under: Meditap Specialities Private Limited Vs. ACIT(supra) Disallowance u/s 14A is contemplated in respect of exempt income and not which is eligible for deduction under any relevant provision. It is impermissible to mix both deduction and exemption provisions and then take them in one stride for computing disallowance u/s 14A. We, therefore, hold that authorities below were not justified in placing exemption provision and deduction 7 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 provision on one platform for purpose of making disallowance under Section 14A. ITO Vs. Net Square Solution (supra) 7.1 Without prejudice to above, we are convinced that for both assessment years, learned Commissioner of Income Tax (Appeals) has given cogent reason for holding that no disallowance under Section 14A can be called for because exemption under Section 10B was allowed after excluding expenses related to such income. said exemption was quantified, in accordance with section 10B of Act. Therefore, applying provisions of section 14A, resulting in duplicating exercise, is not called for. We, therefore, incline to uphold order of learned Commissioner of Income Tax (Appeals) in this regard and dismiss ground no. 2 for both assessment years. Opus Software Solutions Private Limited Vs. ACIT(supra) It is section which seeks to allow deduction of prescribed profits while computing total income of assessee and not provision which provides for exemption or to exclude certain income from total income of assessee. New provisions of section 10A provides for deduction and not exemption Ostensibly, while denying claim of carried forward unabsorbed loss/depreciation assessed under normal provisions of Act, Assessing Officer has proceeded on basis that section 10A provides exemption and, therefore, loss suffered in such unit is not allowed to be set off or carried forward for further set off against other normal business income. In this context, it is found that section 10A was substituted by Finance Act, 2000 with effect from 1-4-2001. From perusal of amended provisions of section 10A, it is quite clear that provision envisages and allows deduction of profits and gains specified therein and it is no longer provision which provides for excluding income from total income of assessee. Therefore, there is weight in plea set up by assessee that in so far as nature of section 10A with effect from 1-4-2001 is concerned, it is section which seeks to allow deduction of prescribed profits while computing total income of assessee and not provision which provides for exemption 8 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 or to exclude certain income from total income of assessee or set off where such loss relates to any of relevant assessment years ending before 1-4-2001. Therefore, view of Assessing Officer that provisions of section 10A as it stood with effect from 1-4-2001 continued to be provision for exemption cannot be subscribed to. Furthermore, section 10A(6)(ii) clearly provides that no loss which relates to business of undertaking shall be carried forward or set off where such loss relates to any of relevant assessment years ending before 1-4-2001. Unabsorbed depreciation loss suffered by on EOU unit can be carried forward from assessment year 2001-02 Quite clearly, losses which are sought to be carried forward by assessee are for assessment year ending after 1-4-2001 and, therefore, do not fall in restriction contained in section 10A(6)(ii). As consequence, therefore, there are no reasons to interfere with conclusion drawn by Commissioner of Income-tax (Appeals) to effect that assessee is eligible to carry forward unabsorbed depreciation/loss, since same related to assessment year 2001-02 and onwards, Thus, on this ground revenue fails. In view of above catena of judgments, it is important to note that provisions of section 14A are not applicable to investment made in EOU covered under provision of section 10B of Act and hence disallowance under Section 14A is untenable. 5.4 Further, Hon ble Bombay High Court in case of Hindustan Unilever Ltd Vs. Deputy Commissioner of Income Tax (supra) held that after substitution of section 10B by Finance Act, 2000, provision as it now stands provides for deduction of such profit and gains as are derived by 100% export oriented undertakings from export of articles or things or computer software. relevant finding of Hon ble High Court is reproduced as under: 23. fourth and final ground which has weighed with Assessing Officer in re-opening assessment is that assessee claimed deduction of Rs. 14.53 crores under section 10B. 9 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 deduction was restricted to Rs. 11.11 crores in order. While re- opening assessment, Assessing Officer has proceeded on basis that section 10B provides exemption and that in respect of Crab Stick Unit assessee had suffered loss of Rs. 1.33crores. Assessing Officer has observed that since income of unit was exempt from taxation, loss of unit could not have been set off against normal business income. However, this was allowed by assessment order and it is opined that assessee s income to extent of Rs. 1.33 crores has escaped assessment. 24. There is merit in submission which has been urged on behalf of assessee that Assessing Officer has while re-opening assessment ex facie proceeded on erroneous premise that section 10B is provision in nature of exemption. Plainly, section 10B as it stands is not provision in nature of exemption but provides for deduction. Section 10B was substituted by Finance Act of 2000 with effect from 1-4-2001. Prior to substitution of provision, earlier provision stipulated that any profits and gains derived by assessee from hundred per cent Export Oriented Undertaking, to which section applies "shall not be included in total income of assessee". provision, therefore, as it earlier stood was in nature of exemption. After substitution of section 10B by Finance Act of 2000, provision as it now stands provides for deduction of such profits and gains as are derived by hundred per cent Export Oriented Undertaking from export of articles or things or computer software for ten consecutive assessment years beginning with assessment year relevant to previous year in which undertaking begins to manufacture or produce. Consequently, it is evident that basis on which assessment has sought to be re- opened is belied by plain reading of provision. Assessing Officer was plainly in error in proceeding on basis that because income is exempted, loss was not allowable. All four units of assessee were eligible under section 10B. Three units had returned profit during course of assessment year, while Crab Stick Unit had returned loss. assessee was entitled to deduction in respect of profits of three eligible units while loss sustained by fourth unit could be set off against normal business income. In these circumstances, basis on which assessment is sought to be re-opened is contrary to plain language of section 10B. 10 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 5.5 However, we find from impugned order that learned Commissioner of Income-tax (Appeals) has relied on decision of Jurisdictional High Court in case of CIT Vs. TEI Technologies Private Limited (supra), wherein Hon ble High Court has taken note of decision of Hon ble Bombay High Court in case of Hindustan Uniliver Ltd and held that section 10A is provision exempting particular kind of income even after amendments by finance Act, 2000 w.e.f. 01/04/2001. relevant finding of Hon ble Delhi High Court is reproduced as under: In interpreting sub-section (1) of Section 10A after amendment made by Finance Act, 2000 w. e. f. 01.04.2001, one cannot deny that there is ambiguity or doubt, because of language used, as to whether sub-section provides for exemption or deduction. We have earlier referred to difficulty caused by language which says that deduction shall be made from total income, when Act contains no provision to allow any deductions from total income. section has been interpreted by Karnataka High Court (supra) as exemption provision whereas Bombay High Court has understood same as deduction section, though ultimate result did not make any difference to assessee's claim in Black & Veatch Consulting (supra). Therefore, it cannot be denied that there is uncertainty and lack of clarity or precision in language employed in sub-section (1). It is, therefore, not impermissible to rely on heading or title of Chapter III and interpret section as providing for exemption rather than deduction. 29. key to problem seems to lie in appreciating difference between provision which exempts income and provision which provides for deduction of income or part thereof in computing total income of assessee. We have attempted to outline difference between two kinds of provisions in light of authorities cited above. matter is not altogether free from difficulty. However, as S. Ranganathan, J. (as he then was) has pointed out in CIT v. Dalmia Cement (Bharat) Ltd. (supra): - "In process of judicial assessment of such conflicting interpretations, there is no sensitive balance with which to weigh 11 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 pros and cons and determine with scientific accuracy which side is weightier and, perhaps in drawing of ultimate inference one way or other, subjective element is not altogether excluded." 30. With this caution or disclaimer in mind we are inclined to hold that Section 10A is provision exempting particular kind of income even in its present form, that is to say, even after being amended by Finance Act, 2000 w.e.f. 01.04.2001. We are inclined, with respect, to agree with view taken by Karnataka High Court in case of CIT v. Yokogava (supra). As noticed, Bombay High Court reached in case of CIT v. Yokogava (supra), in its judgments in Hindustan Unilever Ltd. (supra) and CIT v. Black & Veatch Consulting Pvt. Ltd. (supra), despite taking view that Section provides for deduction and not exemption. We have already seen that Section 10A, as it presently stands, though worded as deduction provision, is essentially and in substance exemption provision. We have also held that implication of exemption provision is that particular income which is exempt from tax does not enter field of taxation and is not subject to any computation. computation provisions of Act do not get attracted at all to exempted income. 5.6 Following above decision of Hon ble Delhi High Court, learned Commissioner of Income Tax (Appeals), held as under: Thus, Hon'ble Delhi High Court has held that from language of heading of Chapter III, it is clear that income as contemplated under section 10B is outside scope of total income and has no relevance with gross total income. It is, therefore, section which provides for exemption of income and not for deduction. It is further important to note that provisions of section 14A are applicable in relation to income which does not form part of total income . This very phrase is heading for Chapter III under which section 10B and also section 10(33) lies. This makes it very apparent and conclusive that provisions of section 14A are clearly applicable to investment made in EOU covered under provisions of section 10B. claim of appellant that section 14A is not applicable to investment made in EOU covered under 12 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 provisions of section 10B is, therefore, not accepted. This ground of appeal is, therefore, dismissed. 5.7 Respectfully, following decision of Jurisdictional High Court, we uphold finding of learned Commissioner of Income Tax (Appeals) on issue in dispute. ground No. 3 of appeal of assessee is accordingly, dismissed. 6. In ground No. 4 of assessee s appeal, assessee has challenged upholding of disallowance under Rule 8D(2)(ii) in respect of shares and mutual funds. 6.1 Before us, learned Authorized Representative of assessee submitted that all investments were made in subsidiary company and there was no change during year except small change in valuation of mutual funds. He further submitted that borrowed funds, on which interest has been paid, were utilized for specific purpose and there was direct nexus between loan and its utilization. 6.2 Referring to page 21 of paper book, learned Authorized Representative submitted that company had introduced capital of Rs.15,01,00,200/- in financial year 2006-07 and during that year, it earned profit of Rs.14,31,35,118/- (PB page-22) and out of these funds, small investment of Rs.12,49,980 (PB Page-21) was made in shares. He further submitted that in financial year 2007-08, assessee company earned profit of Rs.10,12,63,956/- (PB page 37). Its capital as on 31st of March, 2008 was Rs.15,01,00,200/-, its accumulated profit was Rs.20,67,80,239/- (PB page 36) and assessee made further investment of Rs.4,35,61,398/- in shares/mutual funds during year, thus, making total investment at end of year to Rs.2,04,48,11,378/-(PB page 36). He further submitted that in financial year 2008-09, assessee company earned profit of Rs.7,96,56,513/- (PB page 4). Its capital as on 31/03/2009 stood at Rs.15,01,00,200/-, 13 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 accumulated profit was of Rs.29,76,51,796/- (PB page 3) and total investment in shares stood at Rs.4,43,05,740/- ( PB page 3) . In view of above, learned Authorized Representative submitted that no borrowed funds have been utilized in investment in shares/mutual funds. 6.3 Further, learned Authorized Representative of assessee submitted that Assessing Officer has taken into consideration entire interest amount ignoring fact that interest has been paid on loans raised for specific purposes. He submitted that assessee company has car loan which has been utilized for purpose of purchasing car. He further submitted that assessee company took term loan from bank for purchase of machinery and interest paid on such loan was directly relatable to acquisition of machinery. He further submitted that working capital loan raised from bank was utilized for purpose of working capital. As regard loans from others, learned Authorized Representative submitted that entire amount of such loans have been utilized for purpose of business and no part of same was utilized towards investment. In this regard, he submitted that as on 31st of March, 2007, when it raised unsecured loan from Directors and Shareholders to tune of Rs.10,21,65,76/- investment in shares was only of Rs.12,49,980/- which came out of loan capital brought during year to extent of Rs.15,01,00,200/- and profit of Rs.14,31,35,118/- earned during year. He further submitted that there has been no increase in unsecured loan during financial year 2007-08, when investment gone up from Rs.12,49,980/- to Rs.4,48,11,378/- which shows that investment has come out of profit earned by appellant company to extent of Rs.10,12,63,956/- 14 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 6.4 In view of above, learned Authorized Representative submitted that investment in shares was not made out of borrowed funds and accordingly disallowance in respect of shares/mutual funds under Rule 8D2(ii) made by Assessing Officer and upheld by learned Commissioner of Income-tax (Appeals) was not justified. 6.5 On other hand, learned Sr. Departmental Representative relied on findings of learned Commissioner of Income Tax (Appeals) 6.6 We have heard rival submissions and perused relevant material on record including paper book of assessee. issue in dispute before us is whether any borrowed funds have been utilized towards investment in shares/mutual funds by assessee. learned Authorized Representative has demonstrated before us that as on 31/03/2007, investment in shares was of only Rs.12,49,980/-, which was out of owned capital of Rs.15,01,00,200/- and profit of Rs.14,31,35,118/-. During that year, assessee also took unsecured loan of Rs.10,21,65,762/- from Directors and Shareholders. These facts clearly demonstrate that unsecured loan raised from Directors and Shareholders were not utilized towards investment in shares/mutual funds. In subsequent year i.e. financial year 2007-08, investment in shares gone up from Rs.12,49,980/- to Rs.4,48,11,378/- but assessee has not taken any unsecured loan during year, which goes to establish that investment came out of profit earned by assessee company to extent of Rs.10,12,63,956/- during year. assessee has demonstrated that interest paid was to specific loans utilized towards purchase of car, purchase of machinery, working capital etc. Assessing Officer has not been able to establish that interest was towards loans for non-specific purpose, which could be attributed to investment in shares on proportionate basis. 15 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 6.7 In view of above facts and circumstances, we hold that no investment in shares/mutual funds have been made out of borrowed funds and, therefore, no disallowance under Rule 8D2(ii) of Rules could be made for interest on proportionate basis towards investment in shares/mutual funds which could earn exempted income. ground No. 4 of assessee s appeal is accordingly allowed. 7. ground No. 5(i) and 5(ii) of assessee s appeal were not pressed before us and, therefore, accordingly are dismissed as infructuous. 8. In result, appeal of assessee is partly allowed. ITA No. 4112/Del/2013 9. In grounds No. 1 and 2 of Revenue s appeal, Revenue has challenged deletion of disallowance under Rule 8D2(ii) corresponding to investment in EOU unit. 9.1 Before us, learned Sr. Departmental Representative submitted that in ground raised, total amount of Rs.53,78,318/- disallowed by Assessing Officer under Rule 8D2(ii) towards both investment in EOU as well as investment in shares/mutual funds, is mentioned but learned Commissioner of Income-tax (Appeals) allowed relief to assessee only in respect of disallowance towards investment in EOU and disallowance towards shares/Mutual fund investments already stood confirmed, therefore, he preferred to argue only issue of disallowance corresponding to investment in EOU in appeal of Revenue. Addressing ground No. 2, learned Sr. Departmental Representative submitted that assessee debited sum of Rs.2.81 crores in profit and loss account under head interest paid to bank loan, whereas total amount of interest shown in profit and loss account of 100% EOU unit is Rs. 42.60 lakhs only, which showed that assessee company has borrowed funds, which were utilised for mixed 16 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 purposes. In view of arguments, learned Sr. Departmental Representative submitted that disallowance made by Assessing Officer on issue in dispute need to be confirmed. 9.2 learned Authorized Representative, on other hand, submitted that Assessing Officer has assumed that investment in EOU has come out of borrowed funds and taken value of opening investment at Rs.16,04,07,523/- and closing investment at Rs.15,45,31,633/-. To explain that no borrowed funds have been invested in EOU, learned Authorized Representative submitted as under: (i) That assessee company was having capital of Rs.1,00,200/- as on 31/03/2006 ( PB Page No. 21). (ii) In financial year 2006-07, assessee introduced capital of Rs.15 crore and out of which amount of Rs.7,67,14,975/- was invested in EOU. In financial year 2006-07, EOU, earned profit of Rs.5,18,85,665/-and thus making capital of EOU at Rs.12,86,00,636/-. (PB Page 28) (iii) In financial year 2007-08, EOU, further earned profit of Rs.2,49,76,052/- (PB Page No. 44). It further received sum of Rs.68,30,836/- from head office and capital of EOU, became Rs.16,04,07,523/- (PB Page 43). This amount of Rs.68,30,836/-was received out of profit earned by head office during financial year 2007-08. In financial year 2006- 07, head office earned profit of Rs.14,32,18,159/- (PB page- 22) . Thus, this opening balance of Rs.16,04,07,523/- , consisted of opening capital as on 01.04.2007, profit of EOU and part of profit of head office and it is having no links with borrowed funds. 17 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 (iv) In financial year 2008-09 i.e year under consideration, EOU earned profit of Rs.8,27,197/-( PB Page -11) and returned sum of Rs.67,03,086/- to head office leaving balance of Rs.15,45,31,633/- as on 31/03/2009 (PB page-10). Thus, assumption by Assessing Officer that EOU capital consist of borrowed funds was absolutely against facts on record. (v) EOU was maintaining separate books of accounts and preparing its balance sheet and profit and loss account. It has borrowings from bank and for which interest was being debited in profit and loss account of EOU ( PB page-10- 11) 9.3 In view of above, learned Authorized Representative emphasized that action of Assessing Officer in including amount of capital of EOU for purpose of disallowance under section 14A of Act was absolutely unjustified and against provisions of law. 9.4 We have heard rival submissions and perused relevant material on record. It is evident from submission of assessee and documents in support filed in paper book that capital of EOU consists of: (i) investment of Rs.7,67,14,975/- in financial year 2006-07 by head office out of capital raised in financial year 2006-07; (ii) investment of Rs.68,30,836/- by head office in financial year 2007-08 out of profit of head office; (iii) profit of EOU of Rs.5,18,85,665/- in financial year 2006-07, Rs.2,49,76,052/- in financial year 2007-08, and Rs.8,27,197/- in financial year 2008-09. 9.5 In view of above, it is manifested that no borrowed funds have been utilized by head office for investment in EOU. In our 18 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 opinion, argument of learned Sr. Departmental Representative that assessee debited Rs. 2.81 crore in profit and loss account under head interest paid to bank loan, whereas, total amount of back interest shown in profit and loss account of its EOU unit is Rs. 42.63 lakhs only, is thus not relevant to facts for deciding whether any borrowed fund has been utilised in investment in EOU . Before us, assessee has already explained that loans borrowed for specific purpose have been utilized towards those purposes only. In such circumstances, no disallowance could be made under Rule 8D2(ii) of Rules. 9.6 We find that learned Commissioner of Income-tax (Appeals) has also allowed relief to assessee with following observations: (ii) Whether disallowance under Section 14A is to be made on investments made by head office in EOU. appellant has claimed that investment in EOU has been assumed by Assessing Officer to be out of borrowed funds. However, during Financial Year 2006-07, capital of Rs.15 crores was introduced out of which Rs.7,67,14,975/- was contributed towards EOU. Thus no borrowed funds were utilized for purpose of EOU. profits earned by EOU contributed to reserves & surplus. Thus, entire amount of Rs.15,45,31,633/- as on 31.03.2009 is out of capital and profit earned over year. Assessing Officer has in assessment order not provided any basis to show that investment in EOU has been made out of borrowed funds. Unit has on its own taken some loans on which interst is being paid and is being debited to its Profit & Loss Account for purpose of computing its profit. Assessing Officer has not brought anything on record to show that head office has taken loans for purpose of investment in EOU. Assessing Officer has taken opening investment in EOU at Rs.16,04,07,523/- and closing investment at Rs.15,45,31,633/-. disallowance under Section 14A on average of this investment is deleted as funds are out of appellant s own sources. 19 ITA Nos. 3516 & 4112/Del/2013 AY: 2009-10 9.7 In view of our discussion above, we hold that order of learned Commissioner of Income-tax (Appeals) on issue in dispute is well reasoned and no further interference on our part is required, accordingly, we uphold order of learned Commissioner of Income-tax (Appeals) on issue in dispute and grounds of Revenue is dismissed. 10. ground No. 3 of Revenues appeal, being general in nature, not required to be adjudicated upon by us. 11. In result, appeal of assessee is partly allowed and appeal of Revenue is dismissed. decision is pronounced in open court on 21st October, 2016. Sd/- Sd/- (H.S. SIDHU) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 21st October, 2016. Laptop/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi M/s. Riviera Home Furnishings Pvt. Ltd. v. ACIT, Range-15, New Delhi