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2016 (4) TMI 119 - AT - Income TaxValidity of the disallowance u/s. 14A - correct quantification of the disallowance of the indirect interest expenditure u/s. 14A r/w r. 8D(2)(ii)- Held that:- The excess current liabilities (over current assets) translate into liquid funds with the entity only on the liquidation of the corresponding current assets. It is only this excess – and to that extent only, that represents a non-dedicated source of funds, and go to swell the general pool of funds or the common hotch-potch, funding any asset that may be acquired for the time being. This would also hold in relation to ‘advance for orders’ (from customers), at ₹ 52.55 cr. as at 31.3.2008, as well, as to the extent the amount is retained in the form of current assets (as cash/bank balance or inventory of goods), the same is only a targeted funding, financing current assets only. The unsecured loans, constituting the other major source of finance, is similarly not toward financing any specific asset/s (or class of assets). Self generated funds (profits), which are normally also available, again on a non-dedicated basis, is absent in-as-much as the assessee-company has suffered a loss during the year, which is primarily responsible for the decline in the NWC. Rather than being a generator or source of funds, the firm’s operations have become an avenue for absorption of the funds for the current year. In fact, the excess (outstanding) current liabilities (as at the year-end), as a portfolio, represents such loss to the extent not met - the assessee continuing to maintain the current assets at the same level. Looked at in any manner, the enhanced current liabilities or funds generated from the decline in NWC can therefore only be said to finance all the additions to the assets proportionately. The pro-rata formula of funding enshrined in Rule 8D(2)(ii) would thus apply on facts to the assets, both as at the beginning and the close of the relevant year and, thus, to the average assets, including investments, held during the year, signifying the appropriateness of the formula u/r. 8D(2)(ii) both on facts and in law. Finally, the ld. CIT(A) has, subject to A.O.’s verification, held for an adjustment for interest on (bank) FDRs. The same shall, accordingly, stand to be similarly excluded, at an average for the year, both from the value of investments and the total assets in computing the pro-rata indirect interest u/r. 8D(2)(ii). Subject to these adjustments in applying the said rule, we confirm the same.
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