M/S SWARAJ ENGINES LTD.,MOHALI vs. DCIT, C-6(1), MOHALI

आदेश/ORDER Per Annapurna Gupta, Accountant Member

The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-2, Chandigarh (in short ‘CIT(A)’ dated 28.8.2018 relating to assessment year 2015-16, passed u/s 250(6) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).

2 . T h e s o l e i s s u e i n v o l v e d i n t h e p r e s e n t a p p e a l r e l a t e s t o d i s a l l o w a n c e o f e x p e n s e s i n c u r r e d b y t h e a s s e s s e e i n r e l a t i o n t o e a r n i n g o f e x e m p t i n c o m e a s p e r t h e p r o v i s i o n s o f s e c t i o n 1 4 A o f t h e A c t .

3 . B r i e f f a c t s r e l a t i n g t o t h e i s s u e a r e t h a t t h e a s s e s s e e h a d e a r n e d d i v i d e n d i n c o m e o f

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R s . 3 , 2 3 , 7 3 , 7 1 0 / - d u r i n g t h e r e l e v a n t y e a r . D u r i n g

a s s e s s m e n t p r o c e e d i n g s , t h e A . O . q u e s t i o n e d t h e

a s s e s s e e o n d i v i d e n d i n c o m e b e i n g e x e m p t f r o m t a x

a n d , t h e r e f o r e , e x p e n s e s i n c u r r e d t o e a r n e x e m p t

i n c o m e r e q u i r e d t o b e d i s a l l o w e d a s p e r s e c t i o n 1 4 A

r e a d w i t h R u l e 8 D o f t h e I n c o m e T a x R u l e s , 1 9 6 2 . T h e

a s s e s s e e s u b m i t t e d t h a t t h e T a x A u d i t o r s i n t h e

r e l e v a n t y e a r a f t e r t a k i n g i n t o a c c o u n t r e l e v a n t f a c t s

c o n s i d e r e d a n a m o u n t o f R s . 6 , 8 7 , 5 3 1 / - a s e x p e n d i t u r e

t o w a r d s e a r n i n g o f e x e m p t d i v i d e n d i n c o m e a n d t h e

s a m e h a d b e e n d i s a l l o w e d b y t h e a s s e s s e e i n t h e

c o m p u t a t i o n o f i n c o m e . T h e A . O . f o u n d t h a t o n l y t h e

s a l a r y p a r t o f o n e e m p l o y e e h a d b e e n a t t r i b u t e d a s

e x p e n d i t u r e t o w a r d s e a r n i n g d i v i d e n d i n c o m e . T h e

c o n t e n t i o n o f t h e a s s e s s e e w a s r e j e c t e d a n d

d i s a l l o w a n c e u / s 1 4 A r . w . r . 8 D w a s m a d e b y t h e A . O .

that the disallowance made was against the provisions of law

since the A.O. had failed to record his satisfaction regarding

the incorrectness of the claim made by the assessee

regarding the expenses disallowable u/s 14A of the Act

despite the fact that the assessee had in detail explained his

method and reasons for working out the suo moto

disallowance. The assessee also contended that since it had

ample reserves and surpluses, there was no reason for

making any disallowance of interest u/s 14A of the Act since

the presumption in such cases is that the investment had

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been made out of the Act its own funds. The Ld.CIT(A)

dismissed the contention of the assessee and upheld the

order of the A.O. following his decision in the immediately

preceding year in the case of the assessee i.e. assessment

year 2014-15.

appeal before us raising 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 Rs. 21,83,228/- made by Ld. AO u/s 14A by wrongly 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 in respect of earning the exempt 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.” 6. Before us, the Ld. counsel for assessee contended that

the issue involved in the present appeal stands adjudicated

in favour of the assessee by the I.T.A.T. right from

assessment years 2012-13 to assessment year 2014-15. Copy

of the order of the I.T.A.T. relating to assessment year 2014-

15 passed in ITA No.775/Chd/2018 dated 21.11.2018 and

consolidated order for assessment years 2012-13 and 2013-

14 in ITA Nos.1258 & 1259/Chd/2016 dated 1.6.2017 was

placed before us. Drawing our attention to the order passed

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in ITA Nos.1258 & 1259/Chd/2016 it was pointed out that

I.T.A.T. in the said case had deleted the disallowance made

holding that the A.O. had failed to record his satisfaction regarding the incorrectness of the claim of the assessee of

expenses disallowable u/s 14A of the Act. Our attention was

drawn to the findings of the I.T.A.T. at paras 12 to 16 of the

order as under:

“12. The first argument which was raised before us and which needs to be addressed is regarding the satisfaction of the Assessing Officer vis-à-vis the correctness of the claim of the assessee that the expenses incurred for earning the exempt income amounted to Rs.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 profit and loss account, it is observed that the assessee has incurred Rs. 1916.88 lakhs as Employees Benefit Expenses and Rs. 7.60 lakhs on Bank and other financial charges. The assessee has not filed any evidence with regard to the claim that no business assets or funds out of business were utilized or no administrative expenditure is incurred in earning the dividend income. Accordingly, 1 am not satisfied with the correctness of expenditure claimed by the assessee.” 13. The submissions made 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 Rs. 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. Further, making an investment in the prescribed debt based mutual funds is like choosing Fixed Deposits from various available options which do not include any expenditure. Now, just because the income from dividend

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is a tax free income as 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 Rs.8,79,416/- as expenditure towards earning of exempted dividend income u/s. 14A of Income Tax act, 1961. This amount of Rs.8,79,416/- has been worked out as follows:

Amt. (In Rs.) Disallowance u/s 14A Entire Salary of Mr.Vinod Sharma 3,77,249/- (Accounts Officer) 10% Salary of Mr. M.S.Grewal 2,23,856/- (Company Secretary) Sub Total 6,01,105/- Add: 46.30% (% age of 2,78,311/- Administrative expenses to the salary) for Admn. Exp. Gross Total 8,79,416/- This disallowance has been depicted in clause 17(1) of the Tax Audit report 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 down by the jurisdictional High Court in the case of Abhishek Industries Ltd.(2016) 380 ITR 652(P&H) and Deepak Mittal (supra), we find that the Hon’ble High Court in the case of Abhishek Industries Ltd. (supra), while dealing with the issue, held that the satisfaction to be recorded must be based on credible and relevant evidence. The Hon'ble High Court has held that onus to prove that the claim of the assessee was incorrect lies on the shoulders of the Revenue and

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the Assessing Officer 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 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 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, 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 applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt which is not the case of the present assessee, which was clearly a wrong application introduced as a substitute for sub-

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section 2 of Section 14-A of the Act and thus was not permissible in law. 16. Now applying the aforesaid proposition laid down by the Hon'ble High Court to the facts of the present case, we find that the assessee 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 automatically done. Thus the assessee had submitted that the investments hardly entailed incurring of any expenses. Further the assessee had submitted that it had disallowed expenses of two of its employees, being 100% of its Accounts Officer and 10% salary of its Company Secretary and further 46.30% of salary given to these persons, on account of administrative expenses incurred. Now, the Assessing Officer, we find, has recorded his satisfaction vis-a-vis the incorrectness of the claim of the assessee 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 has explained as to why it was incurring only a small amount of expenditure for the earning of dividend income. The Assessing Officer 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

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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 regarding incorrectness of the claim of the assessee. The Assessing Officer in the absence of satisfaction regarding correctness of the claim of the assessee, could not have therefore 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 Rs.27,20,584/- is unwarranted and is thereby directed to be deleted.” 7. The Ld. counsel for assessee pointed out that the

impugned case was identical with the assessee having

explained the manner of working out suo moto disallowance

u/s 14A amounting to Rs.6.88 lacs by taking into

consideration 100% salary of its Accounts Officer and

proportionate administrative expenses incurred in relation to

the total personal cost and had explained that since the

investments had been made as per defined investment policy

of the company in debt based mutual funds which was like

choosing fixed deposits from various available options it did

not require any expenditure. The Ld. counsel for assessee

contended that in the present case also the A.O. had not

recorded any satisfaction as to why the claim of the assessee

as above was incorrect, but had summarily dismissed it

holding at para 3.1 of his order as under:

“3.1 I have examined the above submission of the assessee submitted vide letter dated 31.08.2017 but not inclined to accept the view that only salary of one employee pertains to expenditure attributable towards earning dividend income. From

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the profit and loss account, it is observed that the assessee has incurred Rs.2507.05 lakhs as Employees Benefit Expenses and Rs.1.28 lakhs on Bank and other financial charges. The assessee has not filed any evidence with regard to the claim that no business assets or funds out of business were utilized or no administrative expenditure is incurred in earning the dividend income. Accordingly, I am not satisfied with the correctness of expenditure claimed by the assessee.” 8. The Ld. counsel for assessee, therefore,, contended that

the facts and circumstances in the present case were

identical to that in assessment years 2012-13 and 2013-14

and the disallowance, therefore, made u/s14A of the Act

required to be deleted following the order of the I.T.A.T. in

assessment years 2012-13 and 2013-14. It was further

contended that the I.T.A.T. had also accepted the assessee’s

contention that in view of sufficient own funds available, no

disallowance of interest expenses was warranted u/s 14A of

the Act. Our attention was drawn to the findings of the

I.T.A.T. in ITA Nos.1258 & 1259 at pages 17 to 19 of its

order as under:

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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 Rs.1.27 lacs. The interest expenses attributable to interest bearing funds in the present case not exceeding to Rs.0.21 lacs the disallowance could not in any case have exceeded the said amount. Further we find that it has been clearly demonstrated before us that the assessee had sufficient own interest free funds to make the impugned investments and, therefore, the presumption in such cases is that the investment has been made out of the same. The Hon’ble Punjab and Haryana High Court has laid down the said proposition in the context of section 14A, in the case of CIT vs 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 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- 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 earned exempt income, the disallowance of Rs.27,20,584/- made u/s 14A of the Act was unwarranted in the present case. The order of the Ld.CIT(Appeals) is, therefore, set aside on this count and the disallowance made u/s 14A amounting to Rs.27,20,584/- is directed to be deleted. The grounds of appeal raised by the assessee are, therefore, allowed.”

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And also to the findings of the I.T.A.T. in ITA

No.775/Chd/2018 relating to assessment year 2014-15 at

para 3 of the order as under:

“3. So far as the issue relating to disallowance out of interest expenditure is concerned, the Ld. Counsel for the assessee has submitted that the assessee during the year has not raised any secured or unsecured loans and no interest expenditure has been incurred by the assessee on any loan. The only interest paid by the assessee was in respect of delay on payment of excise duty and service tax. The Ld, DR also could not contradict this factual aspect pleaded by the assessee. Since the assessee did not borrow any interest bearing funds during the year, hence, there is no question of disallowance of expenditure out of the interest expenditure. In view of this, so far as the disallowance u/s 14A of the Act in respect of interest expenditure is concerned, we do not find any justification on the part of the lower authorities in making / confirming the same. Moreover, the Ld. Counsel for the assessee has also relied upon the decision of this Tribunal in the own case of the assessee in relation to the earlier assessment years 2012-13 and 2013-14, wherein, identical issue has been raised in ITA Nos.1258 & 1259/Chd./2016 and the Tribunal vide order dated 1.6.2017, on identical facts has decided the same in favour of the assessee.” 9. The Ld. counsel for assessee contended that in the

present case also the assessee had demonstrated the

availability of sufficient own funds in the form of share

capitals and reserves amounting to Rs.212.07 crores while

the investments for earning exempt income amounted to

Rs.164.27 crores only. It was, therefore, contended that

following the decision of the I.T.A.T. in the preceding year no

disallowance of interest was warranted.

decided by the I.T.A.T. in favour of the assessee in the

preceding years as pointed out by the Ld. counsel for

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assessee though he vehemently relied upon the orders of the A.O. and the CIT(A) supporting the disallowance so made.

Order pronounced in the Open Court.

Sd/- Sd/- संजय गग� अ�नपूणा� गु�ता (ANNAPURNA GUPTA) (SANJAY GARG) �याय�क सद�य/Judicial Member लेखा सद�य/Accountant Member �दनांक /Dated: 29th March, 2019 *रती*

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आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar