CIT, FARIDABAD vs. M/S MASCOT FOOTCARE, FARIDABAD

This order shall dispose of ITA Nos.56 and 67 of 2009 as learned counsel for the parties are agreed that the issue involved in both these appeals is identical. However, the facts are being extracted from ITA No.67 of 2009. 2. ITA No.67 of 2009 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 30.5.2008, Annexure A-III passed by the Income Tax Appellate Tribunal, Delhi Bench ‘G’ New Delhi (in short, “the Tribunal”) in ITA No.3783/DEL/2004, for the assessment year 2000-01, proposing to raise following substantial question of law for determination of this Court:- “Whether, on the facts and in the circumstances of the case, the Hon’ble ITAT is right in law in directing the Assessing Officer integrity of this document High Court Chandigarh to restrict the disallowance to the expenditure for earning dividend of ` 7200/- instead of ` 63,87,408/- made by the Assessing Officer even when the provisions of section 14A of the Income Tax Act are directly applicable in the instant case?”

A few facts relevant for the decision of the controversy involved, as narrated in ITA No.67 of 2009, may be noticed. The assessee firm is engaged in the business of manufacturing hawai chappals. It filed its return for the assessment year 2000-01 declaring income of ` 72,24,727/- on 30.10.2000. The assessment was completed under section 143(3) of the Act on 31.3.2003 at an income of ` 1,37,32,005/- which included addition of ` 63,87,408/- made on account of interest paid to partners which was disallowed under section 14A of the Act. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 21.6.2004, Annexure A.II, the CIT(A) partly allowed the appeal while holding that the Assessing Officer was not correct in applying section 14A of the Act in disallowing the expenditure on account of interest amounting to ` 63,87,408/-. Not satisfied with the order, the revenue went in appeal before the Tribunal. Vide order dated 30.5.2008, Annexure A.III, the Tribunal partly allowed the appeal relying upon its order in the case of M/s Lakhani Marketing Inc., ITA Nos.3782 and 3784/Del/2004 and directed the Assessing officer to restrict the disallowance to the expenditure incurred for earning dividend of ` 7200/-.

We have heard learned counsel for the parties and perused the record.

The CIT(A) vide its order dated 21.6.2004, Annexure A.II recorded as under:- integrity of this document High Court Chandigarh “8.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to ` 63,87,408/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AO. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly.”

The Tribunal vide its order dated 30.5.2008, Annexure A.III held as under:- “4. We have considered the facts of the case and the rival submissions. We find that the issue stands squarely covered by the order of Hon’ble ITAT, Delhi Bench ‘G’ New Delhi in the case of M/s Lakhani Marketing Incl. (supra). The findings in the operative portion of the order as contained in paragraphs 8,9,10 and 11 are reproduced below:- ‘We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:- a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act.

Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the findings of the CIT(A), nor the statement of the assessee before integrity of this document High Court Chandigarh AO that assessee is not in receipt of any dividend income and hence according to us, the Assessing Officer has erred in invoking Section 14A of the Act, to disallow various interest payments on capital account, security deposits and unsecured loans. This conclusion of ours finds support from the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B.V.reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunal is reproduced below:- ‘Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case, the entire income is found to be taxable, no disallowance can be made under section 14A of the Act.’

Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001-02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest bearing funds have not been utilized for investment for purchase of shares.

For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of interest by invoking integrity of this document High Court Chandigarh section 14A of the Act is correct and in accordance with law.

The CIT(A) as well as the Tribunal had rightly come to the conclusion that in respect of assessment year 2000-01, since the assessee had received dividend of ` 7200/-, the expenditure to that extent being on account of interest liability be disallowed.

In view of the aforesaid findings, which could not be shown to be erroneous, the plea of the revenue cannot be accepted. Further, this Court in CIT vs. Hero Cycles Limited, (2010) 323 ITR 518 recorded as under:- “5. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investments in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure; where wherein it was observed as under:- ‘6. The contention raised on behalf of the revenue is that even Limited, (2006) 205 CTR (P&H) 304 : (2006) 286 ITR 1 (P&H) and therefore, disallowance under section 14A was justified.

We do not find any merit in this submission. Judgment of this Court in Abhishek Industries (supra) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application.”

As a result, the substantial question of law is answered against the revenue and in favour of the assessee. Consequently, finding no merit in the appeals, the same are hereby dismissed. (Ajay Kumar MIttal) Judge April 02, 2014 (Jaspal Singh) ‘gs’ Judge integrity of this document High Court Chandigarh integrity of this document High Court Chandigarh