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Income Tax Appellate Tribunal, CHANDIGARH
Before: SHRI A.D.JAIN & SHRI VIKRAM SINGH YADAV
आदेश/ORDER
PER A.D.JAIN, VICE PRESIDENT
ITA 200/CHD/2023 is assessee's appeal for assessment year 2012-13 against the order of the ld. Commissioner of ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 2 Income Tax (Appeals)-3, Gurgaon [hereinafter referred to as ‘ld. CIT(A)’] dated 25.01.2023. The assessee has raised the following grounds of appeal :
“1. That the Ld. CIT(A) has erred in sustaining the disallowance made by the Assessing Officer u/s 14A to the tune of Rs. 33,75,210/ against the disallowance of Rs. 2,55,05,020/ 2. That the part disallowance as sustained by the Ld. CIT(A) is against the facts and circumstances of the case and judgment of the jurisdictional ITAT, Chandigarh Bench in the assessee's own case and written submissions as filed during the course of assessment proceedings in this regard have not been considered appropriately.
3. That the Ld. CIT(A) has erred in sustaining the disallowance made by the Assessing Officer u/s 36(1)(iii) to the tune of Rs. 2,85,443/- against the disallowance of Rs. 1,35,56,224/- as made by the Ld. Assessing Officer.
4. That the replies as submitted during the appellate proceedings have not been considered appropriately.
On perusal of the record, it is noticed that there is a delay of two days in filing the appeal before this Tribunal, as pointed out by the Registry in the Defect Notice dated 18.04.2023. The assessee has filed reply to the said Defect Notice in which it has been submitted that the business of the company has closed and the Bank accounts of the assessee company have become NPA. The assessment record and appellate record was misplaced which was being traced by the Director of the assessee company, but the same could not be traced timely. Thereafter, the copies of the documents were located and appeal was filed, which was late by two days. It is further stated that the delay of two days
ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 3 occurred on account of transit from Ludhiana to Chandigarh.
The ld. Counsel for the assessee has requested to condone the delay of two days.
The ld. DR has posed no objection to the request of the ld. Counsel for the assessee.
We have heard the parties and are satisfied with the contentions made by the ld. Counsel for the assessee.
Accordingly, the delay of two days in filing the appeal before this Tribunal is condoned.
Apropos Ground Nos. 1 & 2, as available at page 4 of the impugned order, at the end of the year ., the assessee had total outstanding investments to the tune of Rs.67,50,42,000/-. The AO made an addition of Rs.2,55,05,020/- by applying the provisions of Rule 8D of the IT Rules making disallowance under the same.
Before the ld. CIT(A), the assessee contended that the AO had not reflected any satisfaction with regard to the expenses incurred for the purposes of earning exempt income and that the assessee had sufficient interest free funds. An alternative plea was also taken to the effect that the ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 4 disallowance could not exceed the dividend income earned by the assessee.
By virtue of the impugned order, however, the ld. CIT(A) held that the element of establishment expenses incurred for earning the exempt income could not be ruled out. Thereby, applying the provisions of Rule 8D(iii) of the Rules, the ld. CIT(A) restricted the disallowance to Rs.33,75,210/-.
Before us, on behalf of the assessee, It has been reiterated that the investments made by the assessee had been made out of the assessee's own funds and no borrowed funds were utilized; that further, neither of the authorities below has pointed out anything regarding the existence of any nexus of any expenditure debited in the Profit & Loss Account with the exempt income earned by the assessee.
The ld. DR, on the other hand, has placed strong reliance on the impugned order.
It is seen that indeed, the ld. CIT(A) has observed in the impugned order that there was no nexus between the borrowed funds and the investment made in this case.
Thereby, it has not been denied that the investment had been made from out of the assessee's own funds and that no ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 5 borrowed funds were utilized for the purpose of investment.
Further, it also remains undisputed that neither of the taxing authorities has recorded any satisfaction to the effect that there was any nexus of any expenditure depicted in the Profit & Loss Account with the exempt income earned by the assessee. The ld. CIT(A) has merely stated that there is always some element of establishment expenses which are incurred for earning of exempt dividend income. However, nothing concrete has been brought on record as to how such imaginary expenditure was incurred for the purpose of earning of exempt income by the assessee. In the absence of any such satisfaction recorded, the provisions of Section 14A of the Act ought not to have been invoked.
10.1 In this regard, in the assessee's own case in “M/s Ganeshaya Overseas Industries Ltd. Vs DCIT”, vide order dated 19.10.2015 passed by a Co-ordinate Bench, in for assessment year 2010-11 and in “DCIT Vs LOIL Health Foods”, in ITA No. 235/CHD/2015, also rendered by a Co-ordinate Bench of the Tribunal, it has been held that the AO has to give a clear-cut satisfaction regarding nexus in respect of expenditure incurred vis-à-vis the exempt income made by the assessee.
ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 6 10.2 Again, the Hon'ble jurisdictional High Court, in the case of “CIT Vs Kapsons Associates”, 381 ITR 204 (P&H), it has been held that, "The entire record of the Assessee was available. The Assessee cannot establish the negative. If the Assessing Officer disbelieved the Assessee, it was for him to have established the same from the records,, or otherwise. The Assessing Officer has not even considered this assertion expressly made by the Assessee. The Assessing Officer's conclusion that the assessee had not provided details of expenses incurred on making these investments, therefore, cannot be accepted. The Assessee's case was that no such expenses have been incurred. It was therefore, rightly observed by the Commissioner of Income Tax (Appeals) that the Assessing Officer had not recorded any reasons in the assessment order to hold that any expenditure had been incurred on earning the exempt income, and that the Assessing Officer had rejected the claim of the appellant without giving any reasons for the same. We have already dealt with this issue.
The conclusion, therefore, that the Assessing Officer had mechanically applied Rule 8D of the Income Tax Rules, 1962 is well founded. The Tribunal reiterated these facts and the same position."
10.3 Moreover, it is trite that disallowance under Section 14A of the Act cannot exceed the amount of exempt income earned by the assessee during the year. Reliance in this ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 7 case has rightly been placed on the decision of the Co- ordinate Bench of the Tribunal in one of the group cases of the assessee, namely, “Lakshmi Energy & Foods Ltd. Vs DCIT, Central Circle-3, Ludhiana”, passed vide order dated 05.09.2019 in & 134/CHD/2019.
10.4 Further, in “Joint Investment Pvt. Ltd. Vs CIT”, the Hon'ble Delhi High Court, in ITA 117/2015, has held as follows :
"By no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is be disallowed. The window for disallowance is indicated in Section 14A, and is only to be extent of disallowing expenditure "incurred by the assessee in related to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case". 10.5 In “Sahara India Financial Corporation Ltd. Vs DCIT”, the Delhi Tribunal has held to the same effect.
10.6 The Mumbai ITAT, in “DCIT Vs Anant Raj Ltd.”, in & 626/Mum/2023, has held as follows :
"Hon'ble Supreme Court in the case of State Bank of Patiala (2018) 99 com 286 (SC) and Hon'ble Delhi High Court in the case of CIT Vs. Joint Investment Pvt. Ltd. (2015) 372ITR 69 (Delhi) held that disallowance is to be restricted to the extent of exempt income earned by the assessee. Therefore, following the decision of Hon'ble Apex Court and High Court, we direct the A.O to restrict the disallowance to the extent of exempt income earned by the assessee. Therefore, we don't find any infirmity in the decision of Id. CIT(A). Accordingly, the ground of appeal of the revenue stand dismissed."
ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 8 11. No decision to the contrary has been brought to our notice.
In the present case, the amount of exempt income earned by the assessee during the year is of Rs.9,26,400/-.
Therefore, in keeping with the above, we hereby direct the AO to restrict the disallowance u/s 14A of the Act to Rs.9,26,400/-. Ground Nos. 1 and 2 are, accordingly, partly accepted.
Ground Nos. 3 and 4 deal with disallowance made u/s 36(1)(iii) of the Act. At the end of the year, the assessee had total outstanding advances to the tune of Rs.13,55,62,248/-.
On the basis thereof, the AO made disallowance of interest expenditure @ 10% on the said advances u/s 36(1)(iii) of the Act, amounting to Rs.1,35,56,224/-.
13.1 The ld. CIT(A) was of the view that the advance made in the earlier year had been made from the assessee's own sources. The disallowance made on the said advances was, accordingly, deleted. However, the ld. CIT(A) held that the assessee had failed to prove the business purpose for the advance given by the assessee to M/s LOIL Overseas Ltd. during the year, amounting to Rs.1,44,00,000/-. The ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 9 disallowance made by the assessee amounted to Rs.2,85,443/-, representing interest expenditure claimed in the Profit & Loss Account.
13.2 As available from the financials of the assessee, including the Balance Sheet, as pointed out, it is seen that the assessee had available with it, interest free funds amounting to Rs.31,26,00,000/-. This included revenue reserves of Rs.9,85,46,997/-, long term interest free funds from the companies and Directors and relatives, amounting to Rs.7,68,55,000/- and Rs.13,71,49,242/-, respectively.
Thus, the amount of interest free funds available with the assessee was more than the interest free advances made by the assessee. In such a situation, it is a valid presumption that the advances made have been made by the assessee out of such interest free funds available. In this regard, the Co- ordinate Bench of the Tribunal, in the case of “M/s BCL Industries & Infrastructure Ltd. Vs The DCIT”, in has held that in the event of mixed funds available with the assessee, it can safely be presumed that the investments are made out of owned funds.
13.3 Likewise, in “DLF Ltd. Vs Addl. CIT”, the Delhi Bench of the Tribunal, in has held that if ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 10 interest free funds available with the assessee are more than non-interest bearing funds or investment, the nexus is required to be proved by the Revenue for making any disallowance and in the absence of such nexus, a presumption is to be drawn that investments in tax free income yielding investment has been made out of interest free funds available with the assessee.
The following decisions are also to the same effect :
a) Bright Enterprises Pvt. Ltd. vs CIT, 381 ITR 107. b) Munjal Sales Corporation vs CIT, 298 ITR 298. c) Omax Bikes Ltd. in (ITAT Chandigarh ) d) CITvs Reliance Utilities and Power 313 ITR 340 (Bombay HC)
In view of the above, Ground Nos. 3 and 4 are accepted and the disallowance made is deleted.
Accordingly, the appeal is partly allowed as indicated.
ITA 253/CHD/2023
This is an appeal filed by the Revenue against the order of the Ld. CIT(A)-5 Ludhiana dated 17.02.2023 pertaining to A.Y 2018-19.
It is noted that the tax effect involved in the present appeal is Rs.25,10,158/-. Accordingly, in terms of the CBDT
ITA 200 & 253/CHD/2023 A.Y.2012-13 & 2018-19 11 Circular dated 08.08.2019, wherein, the Department has specified the monetary limit for an appeal to be filed by the Revenue before the ITAT as Rs. 50 lacs, the appeal so filed by the Revenue is not maintainable.
In view of the above facts and circumstances, the present appeal filed by the Department is dismissed due to low tax effect with a liberty to seek recall in case the matter falls under any of the exceptions so carved out in the aforesaid circular.
It is, however, clarified that the dismissal of the above appeal shall not be taken to be affirmation of the order of the CIT(A) on merits. The legal issue raised by the Revenue is being left open to be adjudicated in an appropriate case.
In the result the appeal of the Revenue is dismissed.
In the result, appeal of the assessee is partly allowed and appeal of the Revenue is dismissed.
Order pronounced on 22.04.2024.