2009 (8) TMI 220

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....sessment 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 v. 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." 2. 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 ....

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....st 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 v. 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 i....

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....d by the assessee for making investment in the shares of Winsome Yams 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 Yam 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 fu....