RAJBIR SINGH WALIA,CHANDIGARH vs. DCIT, C-I(I), CHANDIGARH

आदेश/Order

PER ANNAPURNA GUPTA, A.M.

Both the appeals have been filed by the same assessee against the orders passed u/s 250 (6) of the Income Tax Act, 1961 ( hereinafter referred to as 'Act') by the Commissioner of Income Tax (Appeals) Chandigarh, [in short as CIT(A)]. While the appeal in ITA 59/CHD/2015 is in relation to the quantum proceedings and is against order passed by the CIT(A) dated 31.10.2014, the appeal in ITA 413/CHD/2018 is against the action of the Id. CIT(A) in affirming the levy of penalty u/s 271(l)(c) of the Act consequent to the additions made in quantum proceedings vide his order dated 27.02.2018. Since both the issues are inter-related, they were therefore taken up together for hearing.

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1) The order of the CIT(Appeals), Chandigarh is bad in law & on facts. 2) The Ld. CIT(Appeals) has erred in confirming the order passed by AO in invoking the provisions of Sec 14A as there is no nexus between exempt income and interest expenditure. 3) The Ld. CIT(Appeals) has erred in confirming the order passed by AO regarding disallowance of proportionate interest as per the provisions of section 36(1) (in) as fund has been incurred for the purpose of business and there is no diversion of funds. 4) The appellant craves leave to add or amend any ground of appeal. 3. The ground Nos. 1 and 4 are general in nature and need

no adjudication.

expenditure made in relation to earning of exempt income under the

provisions of Section 14A of the Act. Briefly stated the assessee had made

total investments of Rs. 24,56,448/- in shares of various companies.

The Assessing Officer (AO) noted that interest of Rs. 30,52,044/- had been

debited to the Profit & Loss Account on the unsecured loans taken by

the assessee and so he questioned the assessee about disallowance u/s

14A of the Act. The assessee claimed that he had not incurred any

expenditure for earning the exempt income but the AO was not satisfied

with the explanation of the assessee and accordingly, made disallowance of

Rs. 27,09,084/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962. 5. The matter was carried in appeal before the CIT(A) who upheld the

disallowance so made. 6. Before us, Id. counsel for the assessee contended that it had been

pointed out to the CIT(A) that the assessee had sufficient own

funds for the purpose of making the investments calling for no

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disallowance of interest at all. Our attention was drawn to the fact

that the capital balance of the assessee as at the end of the

impugned year i.e. on 31.03.2011 was Rs. 27,39,16,007/- and the profits

earned during the year amounted to Rs. 13,71,78,938/-. Our

attention was drawn to the Balance Sheet of the assessee for the

impugned year placed at Paper Book page No. 91 to 111 reflecting the

above figures. It was further pointed out that even in earlier years, there

was sufficient funds available with the assessee. Our attention was drawn

to this fact as under :

F. Y. Capital as on Profit for the year 31st March 2007-08 Rs. 776.37 lacs Rs. 173.26 lacs (Page No. 42 of Paper Book) 2008-09 Rs. 683.21 lacs Rs. 0.50 lacs (Page No. 53 of Paper Book ) 2009-10 Rs. 1762.41 lacs Rs. 1019.06 lacs (Page No. 71 of Paper Book) 2010-11 Rs. 2739.16 lacs Rs. 1371.79 lacs (Page No. 92 of Paper Book)

High Court in the case of CIT Vs HDFC Bank Ltd. ITA No. 330 of 2012 has held

that, "No disallowance u/s 14A can be made in respect of interest paid on

borrowing if the assessee has sufficient own interest free funds". Reliance

was also placed on the decision of the Hon'ble Bombay High Court in the

case of Reliance Utilities & Power Ltd. 313 ITR 340 and the Hon'ble Gujrat

High Court in the case of CIT Vs Suzlon Energy Ltd. Tax Appeal No. 223 of

2013 . The Id. counsel for the assessee further contended that out of the

total investments made in shares of Rs. 24.56 lacs, only investments of

Rs. 4.24 lacs were capable of earning dividend, while the rest were non-

dividend paying companies where the assessee was one of the promoter as

well as Director and not investor. Detail of the investments made was

filed before us as under:

a. TCS Rs. 1,23,250

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b. Rolta Rs. 341.65 c. DSQ Software Rs. 5180.79 d. Himachal Futuristic Rs. 2,95,246.32 e. Divine Distributors Pvt. Ltd. Rs. 5,93,430/- f. Horizon Fincap Ltd Rs. 14,39,000/-

lacs in shares of listed companies were capable of earning dividend. It

was, therefore, contended that in any case, the disallowance of

expenses was to be worked out only in relation to those investments as

per Rule 8D(2)(ii). It was also contended that the assessee had in any

case earned dividend income of Rs. 30,000/- during the year and

the disallowance could not have exceeded the said amount. Reliance

was placed on the decision of the Chandigarh Bench of the Tribunal in the

case of ACIT Vs Punjab State Cooperative & Marketing Federation Ltd.

in ITA No. 548/CHD/2011 in support of this proposition.

authorities contending that the assessee's contention could not be

accepted in view of the explicit provisions of Section 14A of the Act

read with Rule 8D.

orders of the authorities below. We find merit in the contention of

the Id. counsel for the assessee that no disallowance u/s 14A was

warranted in the present case under Rule 8D(2)(ii) on account of

sufficiency of own interest free funds available with the assessee.

The fact that the own funds available with the assessee in the form

of profits made during the year were to the tune of Rs. 13.71 Cr and

in the form of share capital, to the tune of Rs. 27.39 Cr, while the

investment in shares of companies, amounted to a mere Rs. 24.56

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lacs, is not disputed. In the face of the said fact and considering the

position of law in this regard laid down by various Courts as relied

upon by the Id. counsel for the assessee in the case of HDFC Bank Ltd.

(supra) and Reliance Utilities (supra), no disallowance u/s 14A could be

made- of interest where sufficient own funds are available with the

assessee. In view of the same, we delete the disallowance of interest

made by applying Rule 8D(2)(ii) in the present case.

8D(2)(iii) of the Act, we agree with the contention of the Id. Counsel for

the assessee that firstly the disallowance in any case cannot exceed

the quantum of exempt income earned by the assessee. The Hon'ble

Apex Court in the group of cases with the lead case being Maxopp

Investment Ltd. vs CIT in C. No. 104-109 of 2015 dt.12- 02-2018 dealt

with the case of State Bank of Patiala also wherein it upheld the order

of the Hon'ble Punjab 85 Haryana High Court restricting the

disallowance to the extent of exempt income earned. The relevant

findings of the Hon'ble Apex Court in the said case is as under : 8. " 40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT (A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the IT AT"

case, cannot exceed the exempt income which undisputedly is Rs.

30,000/- by way of dividend. Further, we also agree with the Id.

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counsel for the assessee that even while applying Rule 8D(2)(iii), only

those investments which have earned dividend income during the year

have to be taken into action while applying the stipulating affirmation. The

Hon'ble Delhi High Court in the case of ACB Ltd. vs ACIT in ITA

No.615/2014 dt.24-03-15, has categorically laid down this proposition

holding as under :

"The AO, instead of adopting the average value of investment of -which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT(Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of ^38,61,09,287/- with the figure of^3,53,26,800/- and thereafter arrive at the exact disallowance of .05%. 5. In view of the above reasoning, the findings of the IT AT and the lower authorities are hereby set aside. The appeal is allowed"

under Section 14A read with Section 8D(2)(ii) is to be deleted since

the assessee had sufficient own funds for the purpose of making the

impugned investments while the disallowance of other expenses under Rule

8D(2)(iii) is to be restricted to the extent of exempt income earned and is

to be worked out by considering only those investments which have

earned exempt income during the year. The ground of appeal No. 2 is,

therefore, partly allowed.

expenses u/s 36(l)(iii) of the Act Briefly stated the assessee had debited

interest of Rs. 30,52,044/- to the Profit & Loss Account. The AO

noticed that the assessee had invested an amount of Rs. 1,81,59,583/-

in purchase of land and its development in Zirakpur. The AO was

of the view that this investment was not for business

consideration or commercial expediency and accordingly, we

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disallow proportionate interest @ 12% on the investment so made which

was upheld by the CIT(A).

sufficient own funds for the purpose of making the impugned

investment in the form of profits for the year being Rs. 13.171 Cr and

own capital to the tune of Rs. 27.39 Cr and therefore, no

disallowance u/s 36(l)(iii) of the Act was warranted. Reliance was placed

on the decision of the Hon'ble jurisdictional High Court in the case of CIT,

Ludhiana Vs Rakesh Gupta in ITA 37/2014 and on the decision of the

Hon'ble Apex Court in the case of Hero Cycles Pvt. Ltd. Vs CIT(Central)

Ludhiana in Civil Appeal No. 514 of 2008.

authorities stating that the disallowance had been rightly made since

the assessee had failed to demonstrate commercial expediency for making

the impugned investment.

with the contention of the Id. counsel for the assessee that no

disallowance of interest was warranted in the present case in view of the fact

that the assessee had sufficient funds which far exceeded the investment

made in land and the presumption in such case was that the own interest

free funds had been used for making the investment. The fact that the

assessee had earned profits to the tune of Rs. 13.71 Cr. during the year is

not disputed and also not in dispute is the fact that the investment in land

amounted to Rs. 1.81 Cr. Therefore, the availability of own interest free funds

with the assessee for making the impugned investment is established beyond

doubt. Further, we agree with the Id. counsel for the assessee that

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the judicial position in this regard as laid down by the jurisdictional High

Court in the case of Shri Rakesh Gupta (supra) and by the Hon'ble Apex

Court in the case of Hero Cycles (supra) is that where sufficient own funds

are available, it is to be presumed that the same have been utilized for

investment. In view of the same, there is no reason for making any

disallowance of interest u/s 36(l)(iii) of the Act and the entire disallowance

made is, therefore, deleted. The ground of appeal No. 3 is, therefore, allowed.

In a fact, appeal of the assessee is partly allowed.

413/CHD/2018. Penalty u/s 271(l)(c) of the Act was levied for

concealing/furnishing inaccurate particulars of income relating to the two

additions made u/s 14A and u/s 36(l)(iii) of the Act in the

quantum proceedings. Since we have deleted the addition made u/s

36(l)(iii) of the Act and also the disallowance made of interest u/s 14A

amounting to Rs. 17,78,886/-, no penalty survives in relation to the same.

As for the disallowance of expenses made under Rule 8(D)(2)(iii) of the Rules,

the same has been directed by us to be re- worked by taking into

consideration only those investments which have yielded dividend income

subject to restriction of the disallowance to the extent of dividend income

earned. The penalty, therefore, at most survives only on this disallowance

upheld. But even the same is not leviable since undisputedly all particulars

relating to the expenses were duly furnished by the assessee and it was only

on account of disallowing claim of the assessee by applying

Rule prescribed under law in this regard that the addition was

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made. The assessee cannot in such circumstances be charged with having concealed/furnished any inaccurate particulars of income so as to attract levy of penalty u/s 271(1)© of the Act. The penalty so levied is directed to be deleted. The appeal of the assessee therefore is allowed.

Sd/- Sd/-

(संजय गग�) (अ�नपूणा� गु�ता) (SANJAY GARG) (ANNAPURNA GUPTA) �या�यक सद�य/ Judicial Member लेखा सद�य/ Accountant Member 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