TMI Blog2012 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... “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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs 3,71,687 under section 14A, read with Rule 8D, even after finding that there is no proximate link of expenditure with exempt income and further there was no satisfaction recorded by the Assessing Officer is erroneous, unjustified and excessive. 2. The material facts are not in dispute. The assessee is engaged in the business of trading in chemicals and dyes. In the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned tax exempt dividend income of Rs 6,63,033 but the assessee has not income any of the related expenditure for disallowance under section 14 A. It was explained by the assessee (i) that the assessee s entire turnover of around Rs 35 crores is in respect of chemicals and dyes and that there has been no trading of shares at all; (ii) that the assessee s own capital is of Rs 8.09 crores (borrowings are to the tune of Rs 4.05 crores) while assessee s total investment in shares is only Rs 5.40 crores, which shows that assessee s entire investment in the shares is out of own interest free capital; (iii) that the assessee has paid interest of Rs around Rs 41 lakhs on the borrowings whereas assessee s interest income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer is aggrieved of the disallowance being restricted to Rs 3,71,7867, as against disallowance of Rs 30,81,503 made in the assessment proceedings, grievance of the assessee is that the disallowance should have been deleted in entirety. That is how we have come to be in seisin of the matter. 5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 6. Let us take up assessee s grievance first, as it challenges the very application of Section 14 A to the facts of the case before us, because the Assessing Officer has not recorded 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. We see no substance in this plea. We dind that section 14 A (2) provides that, (t)he Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment. 7. In the light of the views so expressed by Hon ble jurisdictional High Court, we hold that the provisions of Section 14 A r.w.r. 8 D were rightly invoked on the facts of this case. As the views of Hon ble jurisdictional High Court legally bind us, see no need to deal with the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the ass essee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year." (3) For the purposes of this rule, the t otal assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. 11. There is no dispute about working of this method so far as rule 8D(2)(i) and (iii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re by way of interest other than the amount of interest included in clause (i) [ i.e. direct interest expenses for tax exempt income] incurred during the previous year . Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be Rs 18,000 whereas entire common interest expenditure will only be Rs 10,000. 13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule 8 D (2)(ii). 15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon ble Bombay High Court in the case of Godrej Boyce Mfg Co Ltd Vs DCIT (328 ITR 81) when constitutional validity of rule 8 D was in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus , the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon ble Bombay High Court in the case of Godrej and Boyce (supra), 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 (for example any aspect of the assessee's business such as plant/machinery etc.) . Accordingly, even by revenue s own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8 D (2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8 D was in challenge before Hon ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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