TMI Blog2014 (10) TMI 655X X X X Extracts X X X X X X X X Extracts X X X X ..... ing held out as a precedent - Rule 8D becomes effective, and mandatorily so, w.e.f. the current year – there was no scope for either non-application of, or even scaling down of the amount workable with reference, to r. 8D(2)(iii) where the shares, on which the exempt income is received, are held as stock-in-trade, for the disallowance of interest u/r.8D(2)(ii). The disallowance under r. 8D has to be in any case restricted to the amount of the relevant expenditure actually claimed per the return of income – thus, the matter is to be remitted back to the AO to allow the assessee an opportunity to present its case before him with reference to the expenditure claimed as also including expenditure which is in fact not relatable to the income not forming part of the total income - assessee is also in the business of share trading, so that the direct expenditure in respect thereof would also stand debited in its accounts and, accordingly, claimed - The onus to establish its case would only be on the assessee, which the AO shall decide by issuing definite finding/s of fact/s, limiting the disallowance under r.8D(2)(iii) to the amount of expenditure as so determined by him – Decided part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the disallowance under r. 8D(2)(iii) (Rs.130.51 lacs) exceeded the expenditure actually incurred by the assessee (Rs.128.65 lacs). The value of shares held as stock-in-trade was accordingly directed for deletion in arriving at the indirect expenditure relatable to the divided income, allowing partial relief to the assessee. Aggrieved, both the parties are in appeal. 3. Before us, the assessee s case was confined to the reasonability of the disallowance, made suo motu. How could an estimation, valid for A.Y. 2004-05, be not so for a subsequent year, even if r.8D stands since prescribed, i.e., without bringing any distinguishing feature on record? In fact, the Tribunal had for A.Y. 2007-08 remanded the matter back to the file of the A.O. to determine the disallowance on a reasonable basis (PB pgs.40-41). The A.O. worked out the same with reference to certain expenditure, aggregating to ₹ 10.57 lacs, which he considered as having a proximate nexus with the exempt dividend income. The same was disallowed in the ratio of the said income to the total income (38.29%), at ₹ 4,04,808/- (PB pgs.42-44). Adducing a working, it was submitted by the ld. Authorized Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e discharging the primary onus on it, by making a claim with reference to its accounts, that the same (onus) would stand shifted to the A.O. Why, for instance, should the claim be restricted to 2% of the dividend income, and not (say) 5% or 10% or 50%, et. al. Reference in this context may be made to the decision in the case of AFL (P.) Ltd. vs. Asst. CIT [2013] 28 ITR (Trib) 263 (Mum), rendered considering and following the decision in Godrej Boyce Mfg. Co. Ltd. (supra), as also others cited by the assessee in that case, viz. Maxopp Investment Ltd. vs. CIT [2012] 347 ITR 272 (Del). Rather, continuing further, why should the same (disallowance) be at all based on income? The disallowance is of expenditure, and which is not incurred as a percentage, or as a linear function, of income, which is itself uncertain, both as to its timing and quantum of accrual. If expenditure were to be at a defined ratio of gross income, the income determination would be a simple exercise of applying the said ratio to the gross income arising in a particular period. We are of-course not speaking of an expenditure which is incurred under contract, which also contains provision with regard to the corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant in view of section 14A, which, as explained by the hon ble high court in Godrej Boyce Mfg. Co. Ltd. (supra), widens the theory of apportionment, toward which r.8D comes into play (w.e.f. A.Y. 2008-09). 4.3 We may next consider the issue on merits. We have already noted the assessee s method, despite its acceptance by the Revenue for the preceding years, i.e., A.Ys. 2004- 05 and 2007-08, as being both factually and legally untenable (refer para 4.2 of this order). That the tribunal may have in some other cases also followed the same approach would not in any manner detract from the validity of the said finding, which in fact is only an endorsement of what it had found and held in a number of decisions cited supra. The volume of the expenditure incurred in relation to a particular activity or income there-from, it may be appreciated, is a matter of fact, so that its estimation in the given facts and circumstances, is again a factual matter. If, therefore, with no prescribed rule or basis, and without even discussing the merits of the method chosen, a method is adopted to resolve an issue, which is essentially one of quantification, and which is accepted by either party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of r. 8D is the relevant expenditure, i.e., that incurred in relation to tax-exempt income, which connotes a broad, though discernable, relationship, where ascertainable from the assessee s accounts. It is only in such a case that the expenditure to be disallowed is determined de hors and in disregard of r.8D. Toward this, the very fact that the method canvassed by the assessee is based on income rather than expenditure, is itself an admission of its accounts being not geared to furnish the relevant data or information. In fact, to be fair, the assessee nowhere contends so, or claims its accounts to be maintained or recording expenditure activity-wise. In fact, in the case of shares held as stock-in-trade, it is the same activity, i.e., the purchase and sale of shares, that results in two streams of income, being the share trading income (which is taxable) and dividend income (which is not taxable), so that there is no feasibility of recording expenditure separately, and the estimation of expenditure becomes inevitable. Again, where the same employee (say) is looking after investments, which may result in dividend (tax-free) as well as profit on their sale (taxable), the relevant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and to the extent, the stock-intrade yields income that is tax-exempt, the expenditure relatable thereto, both direct and indirect, would attract statutory disallowance u/s.14A. In fact, we have further found even the investment also to be an operating asset, i.e., given the assessee s business. The direction by the ld. CIT(A) is thus without any basis either on facts or in law. In fact, it would be observed that the disallowance at a percentage of income (2% or higher), as being pressed by the assessee, has no relationship with the shares held as stock-in-trade. 4.5 Finally, we may also address the assessee s reliance on the decision in the case of CIT vs. Godrej Agrovet Ltd. (in ITA No. 934 of 2011 dated 08.01.2013), being by the hon ble jurisdictional high court. The relevant question, as posed before the hon ble court, at the Revenue s instance, was as under: a) Whether on the facts and in the circumstances of the case and in law, the ITAT was correct in holding that the CIT(A) was not justified in applying the said Rule 8D to quantity the disallowance u/s.14A? b) . The hon ble court answered the same vide para 3 of its decision, which reads thus:- 3. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(iii)) cannot be altered on account of hardship (reference is drawn to the section of the judgment in Godrej Boyce (supra) on the constitutionality of sub-sections (2) (3) of section 14A and rule 8D/pgs. 113 123). Even so, the rule prescribes the same as the ratio of indirect expenditure required to support an investment. We say so as the expenditure prescribed for disallowance is based only on one variable, i.e., the value of the investment (on an average). Investment activity, it may be appreciated, is much stabler in character in comparison to the trading activity, which involves continuous churning of funds and, thus, activity, requiring a much higher level of organizational support/expenditure. Investments, on the other hand, are long term and strategic, requiring only periodic review of performance with reference to the investment objective/s, besides on account of environmental changes, if any. Why, the prescribed allocation ratio of 0.5% of the investment value qua indirect expenditure is very nominal, recommending itself to easy acceptance, is itself based, even as observed by the hon ble court (at 116 of the report), on the 2% to 2.5% (of the investment) usually c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn of the amount workable with reference, to r. 8D(2)(iii) where the shares, on which the exempt income is received, are held as stock-in-trade, as advocated by the tribunal in the said cases for the disallowance of interest u/r.8D(2)(ii). 4.7 So, however, we observe that the Revenue has in the assessee s own case for the immediately preceding year, i.e., A.Y. 2007-08, considered only some of the expenditure debited to the profit and loss account (at ₹ 10.57 lacs/PB pgs.42-44) as relevant for the purpose of disallowance of indirect administrative expenditure. We have already noted that the disallowance under r. 8D has to be in any case restricted to the amount of the relevant expenditure actually claimed per the return of income. Under the circumstances, we therefore only consider it fit and proper that the matter is restored back to the file of the A.O. to allow the assessee an opportunity to present its case before him with reference to the expenditure claimed (and thus disallowed) as also including expenditure which is in fact not relatable to the income not forming part of the total income. This becomes also relevant in view of the assessee being also in the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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