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2017 (6) TMI 135 - ITAT CHANDIGARH

2017 (6) TMI 135 - ITAT CHANDIGARH - TMI - Disallowance of expenses made invoking the provisions of section 14A - sufficiency of funds - Held 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 funds available with the assessee for the purpose of making investments which earned exempt income, the disallowance of ₹ 27,20,584/- made .....

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A, A.M. : These two appeals filed by the same assessee are directed against the separate orders passed 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.1 .....

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f 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 in respect of earning the exempted income u/s 14A of Income Tax Act, 1961. 5. That the appellant craves to leave, add or modify any ground of appeal before the disposal of Appeal. 4. The only issue in the present appeal pertains to dis .....

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ssessee submitted, that the tax auditors, after taking into account relevant facts, considered an amount of ₹ 8,79,416/- as expenditure towards earning of exempt dividend income and the same had been disallowed while computing the taxable income. The Assessing Officer found that only the salary part and some administrative expenses had been considered by the assessee for making disallowance u/s 14A of the Act. He, therefore, rejected the contention of the assessee and computed the disallow .....

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essee vehemently contested the disallowance made, arguing that no disallowance of either interest expenditure or administrative expenses was called for by applying rule 8D(ii) & 8D(iii) respectively, since the entire investments had been made in debt based mutual funds which did not require any expenditure to be incurred as the same are made through electronic mode and the dividend was automatically credited. The assessee also argued that it had on its own disallowed 100% salary of its Accou .....

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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 .....

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held that these findings of the Assessing Officer amounted to objective satisfaction about the incorrectness of the claim of assessee of the expenditure incurred. He therefore rejected the assessee s contention that the said disallowance had been made in the absence of satisfaction of the Assessing Officer regarding the incorrectness of the claim of the assessee. The CIT(Appeals) also held that the assessee had incurred interest expenses from common pool of mixed funds for earning exempt income .....

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of Anil Kumar Singhania Vs. ACIT (2014) 51 Taxmann.com 98 in this regard and further on the decision of the Hon'ble Punjab & Haryana High Court in the case of Avon Cycle Ltd. Thus the appeal of the assessee was dismissed and the disallowance made u/s 14A amounting to ₹ 27,20,584/- was upheld by the CIT(Appeals). 8. Aggrieved by the same, the assessee has now come up in appeal before us. During the course of hearing before us, the Ld. counsel for assessee argued that there was absen .....

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ad enough own surplus funds which 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 .....

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owance 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 cost debited to the Profit & Loss Account amounted to ₹ 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. .....

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assessee also stated that identical issue had been decided in assessee s case by the ITAT Chandigarh Bench in ITA Nos.154 & 155/Chd/2015 relating to assessment years 2010-11 and 2011-12 wherein the matter had been set aside to the file of the Assessing Officer to redecide the issue in the light of the decision of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (supra) and CIT Vs. Kapsons Associates in ITA No.354 of 2013 dated 4.8.2015. Copy of the orde .....

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heard the contentions of both the parties, perused the orders of authorities below and gone through the documents referred to before us. The issue before us pertains to disallowance made u/s 14A of the Act. The undisputed facts are that the assessee had earned exempt income in the form of dividend amounting to ₹ 3,08,09,411/- during the relevant year out of investments made amounting to ₹ 8111 lacs. The fact that investments made by the assessee showed an increase of ₹ 2333.1 l .....

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her 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 Sala .....

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mounted to ₹ 8,79,416/-. On examining the assessment order and on reading para 3.1 of the same, which was pointed out to us by the Ld. DR wherein purportedly the satisfaction of the Assessing Officer was recorded, we find the same reads as under: 3.1 I have examined the above submission of the assessee submitted vide letter dated 18.12.2014 but not inclined to accept the view that only salary of one employee pertains to expenditure attributable towards earning dividend income. From the pro .....

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de by the assessee vide letter dated 18.12.2014, referred to above, is reproduced in the order of the AO as under: "The Assessee Company has earned an exempted dividend income of ₹ 3,08,09,411/- during the F.Y. 2011-12. In this regard, it is submitted that entire exempted income pertains to dividend received from investments made in certain debt based mutual funds. Company's Board of Directors has put in place a policy defining the funds where investments are required to be made. .....

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end 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 toward .....

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rt and was also disallowed in the computation of Income from business or profession under schedule BP of the Income Tax Return. In view of the above facts we herein submit that no further disallowance is warranted in the case of Assessee Company during the A.Y. 2012-13 u/s. 14A read with Rule 8D. Further, in order to substantiate our claim, we rely on the following precedents: 14. Coming to the proposition regarding the satisfaction of the Assessing Officer u/s 14A of the Act which has been laid .....

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r cannot state that he is not satisfied about the correctness of the claim of the assessee by making general observation. The Hon'ble High Court has categorically held that on the basis of clear and cogent material only can be based u/s 14A disallowing the assessee s claim. The Hon'ble High Court has laid down the said proposition at para 9 of its order as under : Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to ea .....

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cer, however, cannot, by recording general 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 ther .....

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e, 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, the Assessing Officer in terms of sub-section 2 of Section 14-A of the Act was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the assessee but the Assessing Officer instead relying on Rule 8-D of the Rules appl .....

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had stated that its entire investments were made in debt oriented mutual funds, that the company s Board of Directors had put in place a policy defining funds where investments were required to be made and making said investment was equivalent to choosing fixed deposits from various available options which does not entail incurring any expenditure. The assessee had also submitted that it is a large concern and all investments are mainly in electronic mode whereas ECS credit to dividend is automa .....

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e without any cogent basis, as a bare reading of para 3.1 of the order, where the Assessing Officer has expressed his satisfaction, reveals. The Assessing Officer has disbelieved the assessee s claim since the disallowance made by the assessee was miniscule as compared to the expenses incurred on employees benefit expenses and interest expenses. Clearly, this alone cannot be the basis for disbelieving the assessee s explanation and contention. More particularly, considering the fact the assessee .....

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isfaction 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 .....

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refore proceeded to apply Rule 8D for the purpose of disallowing expenses incurred for earning exempt income. For this reason, we hold that the disallowance made u/s 14A amounting to ₹ 27,20,584/- is unwarranted and is thereby directed to be deleted. 17. The Ld. counsel for assessee has also raised the argument before us that in any case no disallowance on account of interest expenditure incurred could be made by invoking Rule 8D(2)(ii) of the Income Tax Rules, 1962 since the assessee had .....

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r amounting to ₹ 7.60 lacs, out of which only 0.21 lacs was on account of interest on over draft while the rest related to other interest expenses and were not in the nature of borrowing charges, as is evident from the detail provided in the annual account of the assessee and also placed before us and reproduced above. At the same time, we find that the disallowance made under Rule 8D(2)(ii) amounted to ₹ 1.27 lacs. The interest expenses attributable to interest bearing funds in the .....

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s Max India Ltd., ITA No.186 of 2013 (O&M) dated 6.9.2016 ,holding as under: 9. This presumption is unfounded. Merely because the interest free funds with the assessee have decreased during any period, it does not follow 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 wa .....

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est 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-à-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 funds available with the assessee for the purpose of making investments which earn .....

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