M/S. DYNEMIC PRODUCTS LTD.,,AHMEDABAD vs. THE ADDL. CIT, RANGE-1,, AHMEDABAD

Facts of the case are that the assessee was carrying on business of manufacturing and dealer/exporter in eyes, intermediates and food colours used for food items, chemicals, pharmaceuticals, fertilizers etc. It is seen from the record that the assessee has earned dividend income of Rs.26,000/- from mutual fund and dividend from companies of Rs.27,675/- which is claimed as exempt from tax u/s.10(34) of the I.T.Act. The assessee has taken loan of Rs.16,77,85,195/- on which interest of Rs.81,90,732/- has been claimed by the assessee. It is noticed that the assessee has disallowed only Rs.5,17,206/- which is expenditure directly related to income which does not form part of total income. The assessee did not take into account interest portion and the administrative/other expenses which would be attributable to tax free income. In this regard, the AO issued show cause notice as to why disallowance u/s.14A r.w. Rule 8D of the Act should not be made. The assessee filed reply as under: “With regard to the exempt Income like dividend on mutual funds etc., we have dividend income mutual fund Investment amounting to Rs.26000/- and dividend on shares of the company Rs.27675/- which are exempt Income U/s 10(34) & 10(35). We have come out with IPO of Rs.1547 lacs in the month of Feb 06 in year FY 2005-06 for the backward Integration at our EOU-I and forward Integration at EOU- II, so pending the utilization of these funds for the project: execution, we have invested these funds temporarily in the Mutual Funds and equities and we have earned dividend on the same. We have not incurred any extra expenditure for these Investments and the dividend are transferred through the ECS and whatever the direct expenditures Incurred for these Investments, amounting to Us, 517206/-, we have already disallowed in the calculation of the statement of total income, and so we have not claimed these expenditures from the Income. The list of such expenditures Is already give in the balance sheet. Wherein we have invested through the Kotak and whatever expenses paid to them have been added back to our income in the calculation statement of Income. There is no additional investments made during the FY 2010-11, it is only the carried forward investments and there is sales of

Reply of the assessee was considered, but not found acceptable and disallowance of Rs.1,99,193/- was made against the assessee. Against the order of the AO, the assessee filed first appeal before the ld.CIT(A), but no success.

We have gone through the record and relevant orders of the Revenue authorities. The ld.AR stated that identical issue came up for consideration in assesee’s own case before the ld.CIT(A) for the Asstt.Year 2009-10, the ld.CIT(A) vide order dated 8.11.2013 in appeal No.CIT(A)-VI/R-1/146/11-12 held as under:

The assessee has filed balance sheet of the assessment year in question. We can see that the assessee has reserve and surplus fund of Rs.34,45,25,075/- and had investment of Rs.4,18,74,581/-. It has been held in the case of CIT Vs. Reliance Utilities and Power ltd. 313 ITR 340 (Bom) that if there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available. In the judgment of Hon’ble Punjab & Haryana in the case in ITA No.331 (Del)2009 A.Y.2008-09, CIT Vs. Hero Cycles Ltd., section 14A and Rule 8D has been considered and it was held that 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 it is found that earning exempted income no expenditure has been incurred, disallowance u/s.14A cannot stand.

In view of the above judgments, we are of the considered opinion that the assessee was having much more reserves and surplus than the investment. In these circumstances, appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed. Order pronounced in the Court on 30th October, 2017 at Ahmedabad.