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2015 (8) TMI 1026 - ITAT AHMEDABAD

2015 (8) TMI 1026 - ITAT AHMEDABAD - TMI - Disallowance u/s 14A(2) r.w.r. 8D(2)(ii) - CIT(A) delted addition - Held that:- As find that in the case of Morgan Stanley India Securities Ltd Vs ACIT (2014 (1) TMI 1412 - ITAT MUMBAI) a co-ordinate bench of this Tribunal has held that for the purpose of disallowance under section 14A what is to be taken into account is net amount debited in the profit and loss account and not the gross interest debited to the profit and loss account. Same was the view .....

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ts of this case, has been passed on the AIDL and entire interest on this borrowing has been received from the AIDL. It is completely a back to back transaction and the material on record clearly demonstrates that. Just because it is routed through the same bank account, it cannot be presumed that the money is out of the common funds. Such a presumption, as has been strenuously argued before us by the learned Departmental Representative, will be contrary to the clearly established facts on record .....

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, are directed against the order dated 11th July, 2012, passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act'), for the assessment year 2009-10. 2. In the appeal filed by the Assessing Officer, the following grievances are raised: "1. That the ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 23.77 crores made u/s 14A(2) r.w.r. 8D(2)(ii) despite the fact that the assessee .....

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ly attributable to earning any particular income as envisaged in Rule 8D(2)(ii). 3. Thus, section 14A(2) r.w.r. 8D(2)(ii) was rightly invoked by the AO considering the intricate facts of the case which are thoroughly discussed in the assessment order. On the fact and in the circumstances of the case and in law, the ld. CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income/book profit." 3. In the .....

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on the ground that appellant has sufficient interest free funds available with it to make investment in shares/securities and partnership firms from which exempt income is earned. 3. On the facts and in the circumstances of the case, disallowance of proportionate interest expenditure made by the Assessing Officer is uncalled for even on the ground that interest income earned during the year and taxed as income from business & profession is much more than interest expenditure claimed as expe .....

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,104. Out of these three items, so far as dividend income and partnership profits are concerned, the same are not includible in income liable to be taxed in view of the provisions of Section 10(36) and 10(2A). As for interest receipts, it was noted that the assesse set off the same against the interest expenses of ₹ 25,77,86,144. The Assessing Officer also noted that the investment in the shares of Mundra Port & Special Economic Zone Limited had gone up from 576.12 crores to 933.27 cro .....

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es, ₹ 1,98,000 for professional charges and ₹ 3,01,746. The AO also noted that the assesse has not maintained separate books of accounts for exempt and taxable incomes and, therefore, the disallowance under section 14A must be computed by taking into account all these expenses including interest. The assessee's contention, that interest expenditure was a back to back transaction in the sense whatever has been spent as interest on borrowing from IDFC has been recovered from Adani .....

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nder rule 8D(2)(ii), expenses which is the issue in dispute before us. The disallowance included ₹ 7,26,15,653, under rule 8D2(iii), but then subsequently it was rectified by the Assessing Officer himself and was thus reduced to ₹ 20,15,150. The matter rests there and there is no controversy about the same. Coming back to the disallowance of ₹ 23,77,67,259, when the matter was carried in appeal before the CIT(A), he deleted the same on the ground that the interest expenditure o .....

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r. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that in the case of Morgan Stanley India Securities Ltd Vs ACIT (ITA Nos 5072/Mum/2005 and 6774/Mum/2008; order dated 13th April 2011), a co-ordinate bench of this Tribunal has held that for the purpose of disallowance under section 14A what is to be taken into account is net amount debited in the profit and loss account and not .....

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as been held that under rule 8D(2)(ii) what can be allocated as expense incurred for earning tax exempt and taxable income is the net figure of expenses after reducing expenses incurred exclusively for earning tax exempt income as also expenses incurred exclusively for earning taxable income. In effect thus only expenses common to taxable and exempt income can be allocated under this rule. While holding so, the coordinate bench has observed as follows: 9. The next issue is whether the computatio .....

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d in direct expenses incurred for earning tax exempt income', but, for the reasons we will now set out, in our considered view, this action of the CIT(A) is, even if somewhat serendipitously, in accordance with the correct legal position. 10. We find that in terms of the provisions of section 14 A (2), "(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 .....

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a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in 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, .....

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ous year." (3) For the purposes of this rule, the 'total 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 pr .....

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ip;….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'. No other classification is germane to the context in which rule 8 D is set out, nor does the scheme of Section 14 A leave any ambiguity about it. 12. Ironically, however, the definition of variable ' .....

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directly attributable to any particular income or receipt,plus interest which is directly attributable to taxable income" (emphasis by underlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A & Co Ltd, total interest expenditure is ₹ 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is ₹ 10,000. Out of the balance ₹ 90,000, the assessee has .....

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llocated between tax exempt and taxable income) will be "A = amount of expenditure 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 ₹ 18,000 whereas entire common interest expenditure will only be &# .....

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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 challenge, is that " It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will e .....

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ly then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. This is clear from the following observations made by Their Lordships of Hon'ble Bombay High Court in the case of Godrej & Boyce (supra): 60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. So .....

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eipt (for example-any aspect of the assessee's business such as plant/machinery etc.)……….The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the meth .....

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;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 att .....

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make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present, in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of 'perversity, caprice or irrationality' in rule 8D before Hon'ble High Court, and take another stand when it comes to actual implementation of the rule in real lif .....

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