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TMI Blog2017 (6) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the learned Commissioner of Income Tax (Appeals)-2, Chandigarh dated 2.9.2016 and 21.10.2016 relating to assessment years 2012-13 and 2013-14 respectively. 2. Since the issue involved in both appeals is common, they were heard together and are being disposed off by this common order. For the sake of convenience we shall be dealing with the appeal of the assessee in ITA No.1258/2016. ITA No.1258/Chd/2016 (A.Y. 2012-13): 3. The assessee in the present appeal has raised the following grounds: 1. That the order passed by the Learned CIT (A) is bad in law being based on conjectures and surmises and without appreciating material on record. 2. That the learned CIT (A) has erred in law and on facts of the case by confirming the disallowance of ₹ 27,20,584/- made by Ld. AO u/s 14A by applying Rule 8D of Income Tax Rules 1962. 3. That the learned CIT (A) has erred in law and on facts of the case by making the provisions of Section 14A read with Rule 8D applicable to the Appellant Company in a mechanical manner. 4. That the Learned CIT(A) has erred in law and on facts of the case by ignoring the disallowance made by the Appellant Company himself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e also argued that it had on its own disallowed 100% salary of its Accounts Officer, 10% of its Company Secretary and some expenses out of administrative expenses thus making a total disallowance of ₹ 8,79,416/-. The assessee also submitted that the Assessing Officer had not brought on record any other expenditure which has been incurred by the assessee to earn exempt income and had applied Rule 8D in a mechanical manner. Reliance was placed on the decision of jurisdictional High Court in the case of CIT Vs. Deepak Mittal (2014) 361 ITR 131. The assessee also submitted that it had ample reserves and surplus and all investments were made from its own funds and, therefore, also no disallowance u/s 14A of the Act was warranted. Reliance was placed on the decision of the jurisdictional High Court in the case of CIT Vs. Abhishek Industries Ltd. 380 ITR 652. The CIT(Appeals) rejected both the contentions of the assessee stating that the Assessing Officer had categorically given his satisfaction that the disallowance made by the assessee on its own was not correct. The CIT(Appeals) pointed out that the Assessing Officer had observed that while the assessee had disallowed salary of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch were interest free for the purpose of making the said investments. The Ld. counsel for assessee drew our attention to the annual accounts of the assessee for the impugned assessment year placed at Paper Book pages 9 to 19 and pointed out that while investments during the impugned year increased by ₹ 2333.1 lacs, from ₹ 5778.54 lacs in the preceding year to ₹ 8111.64 lacs in the impugned year, the own interest free funds of the assessee amounted to ₹ 18627.80 lacs being the share capital, reserves and surplus of the assessee, and the profits earned during the year by the assessee amounted to ₹ 7727.5 lacs. Thus the Ld Counsel pointed out that there were sufficient own interest free funds with the assessee to finance the investments made during the year. The Ld. counsel for assessee further submitted that as a matter of fact no interest expenditure had been incurred by the assessee during the impugned year and thus no disallowance u/s 14A r.w.r.8D(2)(ii) on account of interest expenditure was warranted in this case. The Ld. counsel for assessee drew our attention to the Profit Loss Account for the impugned year and pointed out that the total finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that investments made by the assessee showed an increase of ₹ 2333.1 lacs as compared to the preceding year , that the own funds of the assessee ,in the form of share capital and reserves amounted to ₹ 18627.80 lacs and the profits earned by the assessee during the year amounted to ₹ 7727.5 lacs are also not disputed. Also not disputed is the fact that the total interest expenditure incurred by the assessee during the year amounted to Rs ₹ 7.60 lacs which consisted of interest on over draft ₹ 0.21 lacs, bank charges ₹ 3.26 lacs and other interest cost of ₹ 4.13 lacs as disclosed in schedule 2.20 of the Balance Sheet. The break up of the other interest is also not disputed. It is also a fact on record that the assessee had suo moto made a disallowance of ₹ 8,79,416/- u/s 14A of the Act which consisted of entire salary of its Accounts Officer and 10% salary of its Company Secretary and 46% of the aforementioned salaries on account of administrative expenses as follows: Disallowance u/s 14A Amt. (In Rs.) Entire Salary of Mr.Vinod Sharma (Accounts Officer) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the Act, that does not mean that the 'expense have necessarily to be apportioned to earn such income. As you are aware of that 'ours is a large manufacturing concern and all the investment are mainly in electronic mode where the ECS credit of Dividend is automatically done. We can compare this Dividend income with the income from dividends on the investments in shares of companies by the individuals. Once the investment is made, there are hardly any expenses required to be incurred after that. In any case, during the course of Tax Audit for the relevant A.Y. 2012-13, the tax auditors of the company, after taking into consideration the entire facts and detailed deliberations, considered an amount of ₹ 8,79,416/- as expenditure towards earning of exempted dividend income u/s. 14A of Income Tax act, 1961. This amount of ₹ 8,79,416/- has been worked out as follows: Disallowance u/s 14A Amt. (In Rs.) Entire Salary of Mr.Vinod Sharma (Accounts Officer) 3,77,249/- 10% Salary of Mr. M.S.Grewal (Company Secretary) 2,23,856/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under Section 14A of the Act, disallowing such a claim. As there is no tangible material on record that could have enabled the Assessing Officer to record satisfaction in terms of Section 14A of the Act, findings recorded by the CIT(A) and the ITAT that the Assessing Officer has failed to discharge this onus are neither perverse nor arbitrary and, therefore, do not call for interference. 15. The Hon'ble High Court has reiterated the said proposition in the case of Deepak Mittal (2013) 361 ITR 131(P H) as under: 9. When consistent case of the assessee, despite notice given by the Assessing Officer to give details of the expenditure made on earning of exempted income in the nature of dividend, version of the assessee was that he had not made any expenditure on earning such income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer while rejecting assessee s contention has not stated as to how the contention of the assessee that since all investments were made in debt oriented funds and there was a policy laid down for making the said investments and all investments were made electronically, therefore, no expenditure was incurred, was incorrect. The Assessing Officer while recording his satisfaction has neither controverted the contention of the assessee, nor has brought out any fallacy in the claim of the assessee. The Assessing Officer has merely stated that since the assessee had incurred huge expenses on employees and interest it cannot contribute only a very small portion to the earning of dividend income. For the above reasons, we find that the basis with the Assessing Officer for arriving at satisfaction that the claim of the assessee of expenses incurred for the purpose of earning dividend income was incorrect, was neither based on any evidence, nor has any cogent basis and was merely a general statement. As held by the Hon'ble jurisdictional High Court in the case of Abhishek Industries Ltd. And CIT Vs. Deepak Mittal (supra), the Assessing Officer had not exhibited valid satisfaction regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. There is no reason for it not to. The basis of the presumption as we will elaborate later is that an assessee would invest its funds to its advantage. It gains nothing by investing interest free funds towards other assets merely on account of the interest free funds having decreased. In that event so long as even after the decrease thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force. 18. In view of the above, no disallowance of interest expenditure was warranted in the facts of the present case. 19. We therefore hold that in the absence of satisfaction recorded by the Assessing Officer vis- -vis the incorrectness of the claim of the assessee of expenses disallowable u/s 14A of the Act and further on account of sufficient own fund ..... X X X X Extracts X X X X X X X X Extracts X X X X
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