K.S.JHAVERI,J. - (1.) By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby Tribunal has dismissed the appeal preferred by the department and partly allowed the appeal of the assessee.
(2.) This court while admitting the appeal on 19.8.2015 framed following substantial question of law:- "Whether the Tribunal was legally justified in holding that the assessee was not liable to be assessed on account of "deemed dividend" within the meaning of Section 2(22)(e) as the assessee had entered into trade transactions to circumvent the provisions of Section 2(22)(e)? Whether the Tribunal was legally justified in confirming the findings of the CIT(A) and holding that Rs. 1,84,15,499/- was liable to tax under section 2(22)(e) on account of funds received from the company in which the assessee was holding more than 10% share capital?" 2.1 Subsequently, since question no.5 was typed out, vide order dated 11.12.2015 following question was also added:- "Whether the findings of the tribunal are perverse in deleting addition of Rs. 92,94,092/- when the interest bearing loans were taken from banks and parties and utilized in investment of shares which earned dividend being tax free then the expenditure incurred for earning tax free income was to be disallowed under section 14A."
(3.) Counsel for the respondent Mr. Jhanwar has pointed out that in view of the circular dated 12.6.2017 wherein para no.2 and 3 reads as under:- "2. The Board has observed that some Courts in the recent past have held that trade advances in the nature of commercial transactions would fall within the ambit of the provisions of Section 2(22)(e) of the Act. Such views have attained finality. 2.1 Some illustrations/examples of trade advances/commercial transactions held to be covered under Section 2(22)(e) of the Act are as follows: i. Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do fall within the definition of deemed dividend under Section 2(22)(e) of the Act. (Commissioner of Income Tax v. Creative Dyeing and Printing Pvt. Ltd., Delhi High Court) . ii. Advance was made by a company to its shareholder to install plant and macinery at the shareholder's premises to enable him to do job work for the company so that the company could fulfil an export order. It was held that as the assessee proved business expediency, the advance was covered by section 2(22)(e) of the Act. (Commissioner of Income Tax v. Amrik Singh, P and H High Court) . iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did attract section 2(22)(e) of the Act. (CIT, Agra v. Atul Engineering Udyog, Allahabad High Court) . 3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would fall within the ambit of the word 'advance' in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon." 3. 1 In that view of the matter, in respect of two issues which are admitted on 19.8.2015, the appeal will survive in view of the circular issued by CBDT. 3. 2 The other issue regarding 14A is squarely covered by the decision of Bombay High Court in Godrej and Boyce MFG. Co. Ltd. v. Deputy Commissioner of Income Tax and anr. reported in (2010) 328 ITR 81 which has been now confirmed by the Supreme Court in (2017) 81 taxmann.com 111 (SC) wherein it has been observed as under:- "36. Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in Sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that Subsections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income. Insofar as the Appellant-Assessee is concerned, the issues stand concluded in its favour in respect of the Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier to the introduction of Subsections (2) and (3) of Section 14A of the Act, such a determination was required to be made by the Assessing Officer in his best judgment. In all the aforesaid assessment years referred to above it was held that the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of the dividend income in question. In the appeals arising out of the assessments made for some of the assessment years the aforesaid question was specifically looked into from the standpoint of the requirements of the provisions of Subsections (2) and (3) of Section 14A of the Act which had by then been brought into force. It is on such consideration that findings have been recorded that the expenditure in question bore no relation to the earning of the dividend income and hence the Assessee was entitled to the benefit of full exemption claimed on account of dividend income. 37. We do see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does form part of the total income under the Act in a situation where the Assessing Officer is satisfied with the claim of the Assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the Assessee, as placed before him, it is possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. 38. In the present case, we do find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the Assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. Commissioner of Income Tax (1992) 193 ITR (SC) 321 [At Page 329] . We are aware of the fact that strictly speaking res judicata does apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by challenging the order, it would be at all appropriate to allow the position to be changed in a subsequent year." 3.3 He also relied upon the decision of this court in DB ITA No.172/2008 SBBJ v. Commissioner of Income Tax decided on 19.5.2017 wherein it has been held as under:- "4.1. In Godrej and Boyce Manufacturing Company Ltd. v. Deputy Commissioner of Income Tax (2017) 81 taxmann.com 111(SC) wherein Supreme Court held as under:- "36. Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in Sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that Sub-sections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income. Insofar as the Appellant-Assessee is concerned, the issues stand concluded in its favour in respect of the Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier to the introduction of Subsections (2) and (3) of Section 14A of the Act, such a determination was required to be made by the Assessing Officer in his best judgment. In all the aforesaid assessment years referred to above it was held that the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of the dividend income in question. In the appeals arising out of the assessments made for some of the assessment years the aforesaid question was specifically looked into from the standpoint of the requirements of the provisions of Subsections (2) and (3) of Section 14A of the Act which had by then been brought into force. It is on such consideration that findings have been recorded that the expenditure in question bore no relation to the earning of the dividend income and hence the Assessee was entitled to the benefit of full exemption claimed on account of dividend income. 37. We do see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Subsections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does form part of the total income under the Act in a situation where the Assessing Officer is satisfied with the claim of the Assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the Assessee, as placed before him, it is possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. 38. In the present case, we do find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the Assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. Commissioner of Income Tax (1992) 193 ITR (SC) 321 [At Page 329] . We are aware of the fact that strictly speaking res judicata does apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by challenging the order, it would be at all appropriate to allow the position to be changed in a subsequent year. 5. In view of this, part no.1 of issue regarding exemption under section 14A stand concluded. The income which has been earned from survey made and no loan is taken for investment, the benefit under section 14A is required to be granted. 5.1 In commissioner of Income Tax v. Reliance Utilities and Power Ltd. (2009) 178 Taxman 135 (Bombay) wherein Bombay High Court held as under:- "5. From the order of the Assessing Officer the assessee in respect of disallowance of interest amounting to Rs. 4.40 crores preferred an Appeal to the C.I.T. (Appeals). It was the contention of the Assessee that the assessee had invested Rs. 389.60 in Reliance Gas Limited and Rs. 1.01 in Reliance Strategic Investments Limited. The Assessee themselves were in the business of generation of power. The Companies in which the investments were made, were in the energy sector. Investments were made mainly during January, 2000 to March, 2000. It was the submission of the Assessee that they had earned regular business income from distribution of power and investments made were in the companies in energy sector and were with a view to build long term business prospects. Investments were in the regular course of business and accordingly no part of interest can be disallowed when the fund is utilized for the purpose of business. It was also pointed out that respondent had borrowed Rs. 43.62 crores by way of issue of Debentures and the said amount was utilised as capital expenditure and inter corporate deposit. It was the submission that no part of the interest bearing fund have gone into investments in the two companies. In so far as funds are concerned it was pointed out that income from operation of the company was Rs. 418.04 crore which was evenly distributed. Considering this, till December, 1999 the appellant had earned Rs. 313.53 crore from its operation. It had raised capital of Rs. 7.90 crores and had also received interest free deposit of Rs. 10.03 crores. Also it had recovered Rs. 39.04 from its debtors. It was also pointed out that considering the balance sheet for the year ending 31st January, 2000 the availability of interest free fund was as under: JUDGEMENT_50_LAWS(RAJ)8_2017_1.html It was, therefore, submitted that from the analysis of balance sheet as on 31st March, 2000 the respondent had enough interest free funds at its disposal for making investment. In the light of the above material the C.I.T. (Appeals) held that it agreed with the contention advanced by the Assessee that they had enough interest free fund at its disposal for investment and accordingly deleted the addition of Rs. 4,40,00,000/- made by the Assessing Officer and directed him to allow the same under Section 36(1)(iii) of the Income Tax Act. We have heard learned Counsel for both the parties. In our opinion the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs. 172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, we are concerned with the balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the learned Counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the profit and loss account and the balance sheet would show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also. Apart from that we have noted earlier that both in the order of the C.I.T. (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest free funds of its own which had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by C.I.T. (Appeals) and I.T.A.T. as to availability of interest free funds really cannot be faulted. 10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had been advanced earlier it did require to be answered. It then noted that in Woolcomber's case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the C.I.T. (Appeals) and I.T.A.T. 5.2 In Commissioner of Income Tax v. Winsome Textile Industries Ltd (2009) 319 ITR 204 (P&H) wherein Punjab and High Court held as under:- "4. 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 Commissioner of Income Tax 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 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 v. Commissioner of Income Tax [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 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 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 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 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 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 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 chargeable to tax has been debited to the accounts by the assessee. Since in this case, the assessee has 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." 5. We have heard learned Counsel for the parties. 6. 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 Commissioner of Income Tax v. Abhishek Industries Ltd. [2006] 286 ITR 1 and, therefore, disallowance under Section 14A was justified. 7. We do 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 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 make any claim for exemption. In such a situation, Section 14A could have no application. 5.3 In Commissioner of Income Tax v. Gujarat Power Corporation Ltd (2013) 352 ITR 583 (Guj) wherein Gujarat High Court held as under:- "3. The Assessing Officer disallowed the deduction of interest of Rs. 17,31,926/- paid on the borrowed funds under Section 14A of the Act and added it back to the total income of the Assessee. This issue was carried in appeal by the Assessee. CIT(Appeals) accepted the Assessee's explanation deleted the addition making following observations: 4. The facts of the case and arguments of the Appellant have been considered. The Appellant had utilized own funds for making investments in shares, debentures, etc. The loan availed from the Power Finance Corporation was entirely utilized for business purpose and the interest paid was eligible for deduction Under Section 36(1)(iii) of the I.T. Act. There was no finding that any expenditure by way of interest was incurred in respect of the investments in securities and shares and accordingly the disallowance Under Section 14A is justified. The Assessing Officer is directed to delete the allowance." 4. Revenue carried the issue in appeal before the tribunal. Tribunal by impugned judgment confirmed view of the CIT (Appeals) holding as under: 6. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the Assessee paid interest of Rs. 17.31 lakhs to Power Finance Corporation on the sum of Rs. 3.83 crores borrowed from them during the year under appeal. The Assessee has also made investment of Rs. 30.79 crores in shares, debentures and bonds and shown tax free income of Rs. 5.68 crores earned on the investment made. The A.O. was of the view that the Assessee has made huge investment of Rs. 30.79 crores for earning tax free income and for this reason, the Assessee has to resort to borrow funds for his other business purposes. Thus, the borrowing has a nexus with the tax free investment and, therefore, he disallowed the interest paid by the Assessee. In appeal, the Ld. CIT(A) after considering the submissions of the Assessee, held that the entire borrowed funds was utilized by the Assessee for its business purposes and, therefore, the A.O. was justified in disallowing the claim for deduction of interest for Rs. 17.31 lakhs to the Assessee. We find that in the instant case it is in dispute that the Assessee has utilized its own funds for the purpose of making investment in shares, etc. from which tax free income were earned. It is also in dispute that the interest bearing borrowed funds were utilized for its own business purposes from which taxable income were earned by the Assessee. The only grievance of the A.O. is that, the Assessee has arranged the above affairs in such a manner so as to reduce its tax liability. The A.O. was of the view that as the Assessee has invested its own fund for earning tax free income, it would have required to borrow interest bearing funds for its own business. In this view of the matter, the A.O. Observed that interest bearing funds had a nexus with the tax free income of the Assessees. In this regard, the Ld/D.R. also placed reliance on the decision of the Hon'ble Delhi Special Bench of the Tribunal in the case of Aquarius Travels Pvt. Ltd. v. Income Tax Officer 111 ITD 53 (SB) (Del.) wherein it is held that where tax free income was earned by the Assessee by making investment out of borrowed funds, then the proportionate amount of interest on funds utilized for earning tax free income by the Assessee was to be disallowed. It is thus, observed that the above decision is applicable to the facts of the instant case as in the instant case it is in dispute that the borrowed funds were utilized for its own business purposes and the investment in earning tax free income were made out of own interest free funds. In our considered opinion, the Assessee is fully justified in arranging its affairs in such a manner where his tax liability is reduced provided the Assessee does resort to any illegal means or enter into a sham transaction for the said purpose. It is the prerogative of the Assessee to use its own fund in the manner in which it considers proper. The Revenue cannot dictate the Assessee that how the Assessee should use its own fund. Thus in our considered opinion the A.O.'s approach in the instant case was justified. The nexus between the interest bearing fund ant interest free investment as claimed by the A.O. was correct when it is in dispute that the own funds were utilized for making tax free investment. Under these circumstances, we do find any infirmity in the order of the Ld. CIT(A) which is confirmed and the ground of appeal of the Revenue is dismissed. 8. Having thus heard learned Counsel for both sides and having perused the orders on record, we find that in the present case Assessee had sufficiently explained its investment for borrowed funds pointing out that loan was obtained in assessment year 1997-1998 and its majority of the investment for tax free security were made before the said period. Only a small portion of investment was made subsequently. Assessee had demonstrated that it had other sources of investment and that therefore, according to Assessee no part of the borrowed fund could be stated to have been diverted to earn tax free income. When CIT(Appeals) and tribunal both on facts in the present case found that the Assessee did invest borrowed fund for earning interest free income, we are of the view that applying provision of Section 14A of the Act for taxing such interest was justified. No question of law therefore, is arising for our consideration. 5.4 In Director of Income Tax (IT)-II v. BNP Paribus SA (2013) 214 Taxman 548 (Bom) wherein Bombay High Court held as under:- "2. So far as question (b) is concerned, the Tribunal in the impugned order upheld the finding of the CIT(A) wherein a finding of fact has been reached that the dividend earned on shares by the respondent assessee is from its investments in shares out of the respondent-assessee's own funds. Consequently, the question of invoking section 14A of the Income Tax Act, 1961 to disallow expenditure would arise. Before the Tribunal, the revenue did challenge the finding of fact recorded by the CIT(A) in the impugned order. In this view of the matter, we see no reason to entertain question (b)." 5.5 In Commissioner of Income Tax v. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom) wherein Bombay High Court held as under:- "4. We do agree. In the case at hand, as recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr. Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v. Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s. Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s. Reliance Gas Ltd. And M/s. Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs. 43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs. 313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs. 398.19 crores. In view thereof, it was submitted that from the analysis of the balance-sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under:- If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. Commissioner of Income Tax (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had been advanced earlier it did require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. 5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do find that question (A) gives rise to any substantial question of law and is therefore rejected.";