2012 (10) TMI 24 - ITAT, KOLKATA

Dis-allowance u/s 14A - application of Rule 8D - AY 08-09 - assessee challenges the very application of Section 14 A in absence of AO recording a specific satisfaction to the effect that claim of the assessee, i.e. no expenditure is incurred on earning the tax exempt dividend, is incorrect - Held that:- A plain reading of the statutory provisions of Section 14A(2) and (3) shows that when assessee offers a dis-allowance u/s 14A, the provisions of Section 14A(2) read with rule 8 D cannot be invoked unless the AO is satisfied about incorrectness of the dis-allowance so offered, but when assessee does not offer any dis-allowance under section 14 A on his own, the provisions of section 14A(2) read with rule 8 D can be invoked without there being any need to express satisfaction about incorrectness of such a claim. In view of aforesaid, provisions of Section 14 A r.w.r. 8 D were rightly invoked on the facts of this case - Decided against assessee.

Dispute regarding computation of dis-allowance under rule 8D(2)(ii) - Held that:- Rule 8D(2)(ii) allocates “expenditure by way of interest………..which is not directly attributable to any particular income or receipt” and the only categories of income and receipt, so far as scheme of rule 8 D is concerned, are mutually exclusive categories of ’tax exempt income and receipt’ and ‘taxable income and receipt’. However, the definition of variable ‘A’ embedded in the formula under Rule 8D(2)(ii) refers only to interest expenditure directly related to tax exempt income but not to interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate “expenditure by way of interest, which is not directly attributable to any particular income or receipt” it ends up a llocating “expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income”. This is clearly incongruous.

In Godrej & Boyce Mfg Co Ltd (2010 (8) TMI 77 - BOMBAY HIGH COURT), the department took the stand, to defend the constitutional validity of Rule 8 D, that both, interest directly attributable to tax exempt income as well as interest directly relatable to taxable income would be excluded from the definition of variable ‘A’ in the Rule 8D(ii) formula. Once the Revenue has taken a particular stand about the applicability of the formula in Rule 8 D(2)(ii) based on which the constitutional validity of Rule 8D is upheld, it is not open to the Revenue to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Accordingly, the correct application of the formula set out in Rule 8D(2)(ii) is, as noted in Godrej and Boyce, that interest expenses directly attributable to tax exempt income as also directly attributable to taxable income have to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii) - Plea raised by the Assessing Officer is thus rejected in principle but the matter is remitted to the file of the Assessing Officer for verification of factual elements