COMMISSIONER OF INCOME TAX-1 LUDHIANA vs. M/S ABHISHEK INDUSTRIES LTD LUDHIANA

impugned order.

The Assessing Officer disallowed dividend earned by the assessee by holding that interest bearing funds had been used to earn this income. The CIT(A) set aside this finding by holding that the Assessing Officer has failed to prove that interest bearing funds were used by the assessee. The ITAT has affirmed this finding by holding that as the Assessing Officer has failed to prove that interest bearing funds were used, it would not invite disallowance under Section 14A of the Act. A relevant extract from the order passed by the ITAT reads as follows:- “8. I have considered the facts of the case and it is seen that the appellant has made a categorical submission of fact before the AO that no interest bearing funds had been diverted to make investments leading to tax exempt income. The AO has not established as a matter of fact that the contention put forwarded by the assessee was erroneous or misleading. In fact the AO has observed that it was not possible to disprove the claim of the assessee in this regard. It clearly meant that the mandatory requirement as stipulated by Section 14A with regard to the satisfaction that certain expenditure had been incurred to earn the tax exempt income, has not been fulfilled.” Section 14A of the Act empowers an Assessing Officer to NARESH KUMAR 2015.02.13 11:28 authenticity of this document Chandigarh -5- disallow, exempted income if interest bearing funds have been used, by the assessee. The scope and ambit of Section 14A of the Act came up for consideration in CIT v. Winsome Textile Inustries Ltd. (supra). After appraisal of Section 14A of the Act, a Division Bench of this Court held that Section 14A of the Act, may only be invoked if the assessee has made investments in purchase of shares out of borrowed funds. As a consequence if the assessee has invested his own money in purchase of shares, there is no question of disallowance under Section 14A of the Act. A relevant extract from the judgment in CIT v. Winsome Textile Inustries Ltd. (supra) reads as follows:- “Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H) relates to the provisions of Section 36(1) (iii) and Section 14A which has been invoked in this case which stands on a different footing. Even if deduction under Section 36(1)(iii) is ordinarily available in respect of borrowed funds utilised for the purpose of business. Section 14A carves out an exception in so far as any expenditure which is relatable to the earning of dividend income not subject to tax is to be disallowed. It would be relevant to point out that the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450 held that in the case of indivisible business where part of business income is exempt the expenditure cannot be apportioned and part relating to income is exempt cannot be disallowed (judgment dated February 23, 2000). However, the Finance Act, 2001, incorporated section 14A with effect from April NARESH KUMAR 2015.02.13 11:28 authenticity of this document Chandigarh -6- 1, 1962, which provides for disallowance of expenditure relating to income not included in the gross total income. Therefore, it is to be ascertained as to whether the assessee has made the investment in purchase of shares out of borrowed funds or invested its own funds. If the assessee has invested its own money in the purchase of shares then there is no question of any disallowance in respect of interest on borrowed funds u/s 14A. However, if the 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 the course of business of the assessee and the 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 the assessee in relating to income which does not form part of the total income under the Act. So, it is, therefore, necessary to find out if any expenditure was incurred by the assessee for making investment in the shares of Winsome Yarns Limited. During the course of assessment proceedings the assessee had furnished written submission in which it was claimed, the paragraph 5 of the letter that investment in the shares of Winsome Yarn Limited was made out of the assessee's own fund and not out of any borrowed funds. Before the Commissioner of Income Tax (Appeals) also, vide letter dated March 15, 2007 the assessee had reiterated that investment in the purchase of the shares of Winsome Yarn Limited in the year 1993-94 had no nexus with the borrowed funds. The Assessing Officer as per the NARESH KUMAR 2015.02.13 11:28 authenticity of this document Chandigarh -7- assessment order has not refuted the claim of the assessee but has made a disallowance on the ground that had the said invested in shares were available with the assessee, the assessee would not have been required to raise loans to that extent and incur expenditure on interest on such loans. In our considered view, the disallowance has got to be made u/s 14A if any expenditure relating to the earning of income which is not chargeable to tax has been debited to the accounts by the assessee. Since in this case, the assessee has not incurred any expenditure for making investment in the purchase of shares of Winsome Yarn Limited, no disallowance is warranted u/s 14A. We, therefore, find no justification to interfere with the order of the Commissioner of Income Tax (Appeals) in having deleted the disallowance. The ground of appeal raised by the revenue in this regard in thus dismissed.” Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the revenue. Thus, if the 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 the assessee's own funds, the Assessing Officer may legitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using NARESH KUMAR 2015.02.13 11:28 authenticity of this document Chandigarh -8- 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. Even otherwise, the controversy, in our considered opinion, is squarely covered in favour of the assessee by the judgment in CIT v. Winsome Textile Industries Ltd. (supra). We, therefore, find no reason to interfere with findings recorded by the Income Tax Appellate Tribunal, answer the questions of law against the revenue and dismiss the appeal accordingly. (RAJIVE BHALLA) JUDGE January 27, 2015 (B.S.WALIA) nt JUDGE

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