2009 (11) TMI 33

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....nd in law, the Hon'ble ITAT was legally justified in deleting the disallowance of Rs.3,48,04,375/- under Section 14A of the Income-tax Act, 1961 by ignoring the evidence relied on by the Assessing Officer and holding that a clear nexus has not been established that the interest bearing funds have been vested for investments generating tax free dividend income." 2. The assessee is engaged in manufacturing of cycles and parts of two-wheelers in multiple units. It earned dividend income, which is exempted under Section 10 (34) and (35). The Assessing Officer made an inquiry whether any expenditure was incurred for earning this income and as a result of the said inquiry addition was made by way of disallowance under Section 14A (3), which was ....

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....nd the CIT (Appeals) also. The entire evidence in this regard, which is submitted before the lower authorities have been compiled in the paper book, to which we have already adverted to in the earlier part of the order. Therefore, merely because the assessee has incurred interest expenditure on funds borrowed in the main unit, Ludhiana, it would not ipso-facto invite the disallowance under Section 14A, unless there is evidence to show that such interest bearing funds have been invested in the investments which have generated the 'tax exempt dividend income.' As noted earlier, there is no nexus established by the Revenue in this regard and therefore, on a mere presumption, the provisions of Section 14A cannot be applied. Thus, we find that t....

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....r earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in ITA No. 504 of 2008 (Commissioner of Income Tax Chandigarh II vs. M/s Winsome Textile Industries Limited, Chandigarh), decided on 25.8.2009, wherein it was observed as under:- "6. 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 v. Abhi....