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CIT Vs. Winsome Textile Industries Limited (Punjab &
Haryana High Court)
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HIGH COURT OF PUNJAB & HARYANA
Commissioner Of Income-Tax.
Vs.
Winsome Textile Industries Limited.
(2009) 319 ITR 204 (P&H)
Dated 25/8/2009
JUDGMENT
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 [2006] 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.
[2006] 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 [2000] 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. [2006] 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. [2006] 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.
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