HIGH COURT OF PUNJAB & HARYANA
Commissioner Of Income-Tax.
Winsome Textile Industries Limited.
(2009) 319 ITR 204 (P&H)
ADARSH KUMAR GOEL J.-The Revenue has preferred this appeal under section 260A of the Income-tax Act, 1961 (in short, “the Act”), against the order of the Income-tax Appellate Tribunal, Chandigarh Bench-B, in I.T.A. No. 613/Chandi/2007, dated November 26, 2007, for the assessment year 2004-05, proposing to raise following substantial question of law:
“Whether, in the facts and circumstances of the case and in law, the hon’ble Income-tax Appellate Tribunal was justified in holding that the order of the jurisdictional High Court in the case of CIT Vs. Abhishek Industries Ltd. reported in  286 ITR 1 (P&H); 156 Taxman 257 (P&H) are not applicable in this case and the disallowance made by the Assessing Officer under section 14A of the Income-tax Act is not as per law.”
The assessee is engaged in manufacture and sale of cotton yarn. During assessment, the Assessing Officer disallowed interest on the amount of investment in shares on the ground that since dividend income is exempt from tax, section 14A applied.
On appeal of the assessee, the Commissioner of Income-tax (Appeals) reversed the said view and held that section 14A of the Act could not apply when the assessee had not made any claim for exemption. The relevant finding is as under:
“The Assessing Officer has ignored the fact that investment in shares was made in the assessment year 1994-95 using its own funds. Thus, no interest expenditure was incurred in the year under consideration which could be disallowed under section 14A.
The authorized representative submitted that the assessee’s accounts are tax audited and the company has never been found lacking in keeping vouchers for expenses. It was pointed out that not a single instance has been pointed out in assessment order though it was admitted that details stand filed. The authorised representative argued that the action is simply a tinkering with results. No ad hoc additions permissible and hence not sustainable.
The Assessing Officer has not given details or expenses which were not vouched. Considering the facts mentioned above, the impugned addition is held to be arbitrary, whimsical and capricious, hence it is deleted.”
The above finding has been affirmed by the Tribunal in following terms:
“20. We have given our careful consideration to the rival contentions. In this case, the Assessing Officer has presumed that the investment in shares had been made by the assessee out of borrowed funds. He has accordingly estimated the interest payable in respect of such borrowed funds to make a disallowance under section 14A. This finding has been disputed by the assessee as, according to it, no borrowed funds have been utilised for the purpose of acquisition of shares. In our considered view, the decision in the case of CIT Vs. Abhishek Industries Ltd.  286 ITR 1 (P&H) relates to the provisions of section 36(1)(iii) and section 14A which has been invoked in this case which stands on a different footing. Even if deduction under section 36(1)(iii) is ordinarily available in respect of borrowed funds utilised for the purpose of business section 14A carves out an exception in so far as any expenditure which is relatable to the earning of dividend income not subject to tax is to be disallowed. It would be relevant to point out that the hon’ble Supreme Court in the case of Rajasthan State Warehousing Corporation Vs. CIT  242 ITR 450 held that in the case of indivisible business where part of business income is exempt the expenditure cannot be apportioned and part relating to income which is exempt cannot be disallowed (judgment dated February 23, 2000). However, the Finance Act, 2001, incorporated section 14A with effect from April 1, 1962, which provides for disallowance of expenditure relating to income not included in the gross total income. Therefore, it is to be ascertained as to whether the assessee has made the investment in purchase of shares out of borrowed funds or invested its own funds. If the assessee has invested its own money in the purchase of shares then there is no question of any disallowance in respect of interest on borrowed funds under section 14A. However, if the borrowed funds have been utilised for purchase of shares of M/s. Winsome Yarns Limited, disallowance under section 14A shall have to be calculated even when investment has been made in the course of business of the assessee and the assessee qualifies for deduction under section 36(1)(iii). So, however, section 14A provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relating to income which does not form part of the total income under the Act. So, it is, therefore, necessary to find out if any expenditure was incurred by the assessee for making investment in the shares of Winsome Yarns Limited. During the course of assessment proceedings the assessee had furnished written submission in which it was claimed, vide paragraph 5 of the letter that investment in the shares of Winsome Yarn Limited was made out of the assessee’s own fund and not out of any borrowed funds. Before the Commissioner of Income-tax (Appeals) also, vide letter dated March 15, 2007, the assessee had reiterated that investment in the purchase of the shares of Winsome Yarn Limited in the year 1993-94 had no nexus with the borrowed funds. The Assessing Officer as per the assessment order has not refuted the claim of the assessee but has made a disallowance on the ground that had the said funds invested in shares were available with the assessee, the assessee would not have been required to raise loans to that extent and incur expenditure on interest on such loans. In our considered view, the disallowance has got to be made under section 14A if any expenditure relating to the earning of income which is not chargeable to tax has been debited to the accounts by the assessee. Since in this case, the assessee has not incurred any expenditure for making investment in the purchase of shares of Winsome Yarns Limited, no disallowance is warranted under section 14A. We, therefore, find no justification to interfere with the order of the Commissioner of Income-tax (Appeals) in having deleted the disallowance. The ground of appeal raised by the Revenue in this regard in thus dismissed.”
We have heard learned counsel for the parties.
The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT Vs. Abhishek Industries Ltd.  286 ITR 1 and, therefore, disallowance under section 14A was justified.
We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd.  286 ITR 1 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. The 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.
No substantial question of law arises. The appeal is dismissed.