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2018 (10) TMI 786 - AT - Income TaxDisallowance u/s 14A - working out of deduction - Held that:- We find that during the year under consideration the gross interest expense was ₹ 97,24,941/- and gross interest receipt was ₹ 65,00,064/-. Thereby the net interest expenditure was ₹ 32,24,877/-. This net expenditure in our considered view was relatable to earning dividend, derived from investments acquired out of borrowed funds. Accordingly we hold that the interest dis allowable under Section 14A should be ₹ 32,34,877/- instead of ₹ 89,46,546/-. As regards amount disallowance under Rule 8D(2)(iii), we agree with assessee's contention that in working out the common business establishment expenses the AO should have excluded the expenditure debited by way of interest bad debts written off & provision for NPA. Excluding these three items, the common business expenses which could be considered for disallowance under Rule 8D(2)(iii) amounted only to ₹ 16,86,399/-. This expenditure was much below ₹ 61,78,722/- worked out by the AO by applying the formula under Rule 8D(2)(iii). We therefore find that mechanical application of Rule 8D(2)(iii) in the present case leads to absurd results. The expenses inter alia included items such audit fees, ROC expenses etc. which were required to be incurred to maintain corporate identity of the appellant. Such expenses were required to be incurred irrespective whether tax free or taxable income was earned. It would be inappropriate to conclude that the entire expenditure of ₹ 16,86,399/- was relatable only to earning tax free income. To hold so would mean that the other taxable income was earned by the appellant without incurring even a single rupee expenditure and such conclusion would be anomalous. We find merit in the assessee's submissions that the disallowance out of common establishment expenses should be made in proportion of dividend income to gross receipts credited to P&L A/c. This methodology was also upheld by the coordinate Bench of this Tribunal in the case of Dy.CIT Vs S.G. Investment & Industries Ltd [2003 (5) TMI 198 - ITAT CALCUTTA-C] as affirmed by in the case of ISG Traders Ltd Vs CIT [2011 (9) TMI 58 - CALCUTTA HIGH COURT]. Applying the said pro-rata calculation, we find that the amount disallowable out of common administrative expenses works out to ₹ 8,74,170/-. - Decided partly in favour of assessee.
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