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2022 (1) TMI 140 - ITAT BANGALOREAddition u/s 14A r.w. Rule 8D(2)(iii) - disallowance at 0.5% of the average amount of tax exempt investments - as submitted that the disallowance made u/s 14A is that of expenditure in relation to income not forming part of total income - whether the AO could tinker with that formula prescribed under Rule 8D(2)(iii) of the I.T. Rules or interpret in any other manner other than what is mentioned by the plain words of the said Rule? - HELD THAT:- This issue came up before in the case of Godrej & Boyce Mfg. Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT] wherein constitutional validity of Rule 8D(2)(iii) was challenged. The Court observed that it is only the interest on borrowed funds that will be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt - it is not only the interest directly attributable to tax exempt income i.e., under Rule 8D(2)(i), but also directly relatable to taxable income which has to be excluded from the definition of variable ‘A’ in the formula as per Rule 8D(2)(ii) and rightly so, because it is only then that common interest expenses which are to be allocated as indirectly relatable to taxable income and tax exempt income can be computed. When assessee is paying interest on borrowings and the assessee is not able to show that investment in shares are out of internal accruals or non-interest bearing funds, and in the light in the case of Dhanuka & Sons [2011 (4) TMI 861 - CALCUTTA HIGH COURT] disallowance under section 14 A can indeed be made. Thus, interest expenses directly attributable to tax exempt income is also directly attributable to taxable income are required to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii). In the present case, wherein the assessee does not offer any disallowance under Rule 8D(2)(ii) in respect of exempt income, then the provisions of section 14A(2) r.w. Rule 8D(2) can be invoked u/s.14A(3) of the Act by the AO and there is no necessity of recording further satisfaction by the AO - when the assessee itself fails to make disallowance suo motu u/s. 14A r.w. Rule 8D, then the AO is at liberty to invoke these provisions. We find no infirmity in the action of the lower authorities on this issue and the same is confirmed. Appeal of the assessee is dismissed.
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