TMI Blog2015 (3) TMI 1113X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2. Grievance raised by the Assessing Officer is as follows :- 1. Whether the Ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 2,75,99,750/- made u/s 14A. a) The Ld. CIT(A) has erred in law and on facts that Rule 8D is applicable from A.Y. 2008-09. Further, disallowance of administrative expenses and interest expenses on earning of dividend income claimed exempt is also held/permitted by the Hon ble Supreme Court in the case of CIT vs. United General Trust, 200 ITR 488 (SC). b) It is a legal issue and department is in appeal which is pending before various appellate authorities and since Rule 8D w.e.f. 24.03.2008 gives the method for determining amount of expenditure in relation to income which do not form part of income. 3. The material facts of the case are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned dividend income of ₹ 89,02,540/- out of which ₹ 68,44,790/- have been claimed as exempt under Secton10(34)of the Act but the assessee has offered only ₹ 6,84,479/-, being 10% of the dividend receipts of tax exempt dividends of ₹ 68,44,79 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of ₹ 2,79,02,402/- is disallowed u/s 14A of the I.T. Act and added to the total taxable income of the assessee company. (Addition aRs.2,79,02,402) 4. Aggrieved by the disallowance so made, assessee carried the matter in appeal before the ld. CIT(A) who deleted this disallowance and, in support, observed as follows:- From a perusal of the asst. order para-4, it has been seen that the AO is not satisfied with the version of the appellant that it had incurred ₹ 6,84,479/- being 10% of net exempt income as disallowance but he has not given the basis as to why he is not satisfied with version of the appellant. The AO has worked out disallowance of the expenditure of ₹ 2,79,02,402/- for earning of exempt income of ₹ 68,44,790/- which is an absurdity. However, during appeal proceedings the issue has been discussed in detail by the undersigned and it has been found that actually the amount of interest attributable to the earning of dividend income should have been taken at proportion of ₹ 83 lacs for the purpose of applying Rule 8D (as submitted by the appellant noted above) and not ₹ 5,52,83,131/- as adopted by the AO. Adopting the figure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L, as allowable in view of the decision of Supreme Court in SA Builders 228 ITR 1 83,90,178 There is no interest which is attributable for the purposes of Rule 8D. The sum of ₹ 83,90,178/- is the only balance interest which as per assessee is allowable. 8. It is important to bear in mind the fact that what can be allocated under rule 8D2(ii) is the amount of expenditure by way of interest other than interest directly relatable to tax exempt income as also other than interest directly related to taxable income. To this extent, the incongruity in rule 8D is to be read down as was held by a co-ordinate bench of this Tribunal in the case of ACIT vs. Champion Commercial Co. Ltd. (139 ITD 108) in the following words :- 12. Ironically, however, the definition of variable A embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate expenditure by way of interest, which is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutional 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 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.) . Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 6D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable A in formula as per rule 6D(2)(ii), and rightly so, because it is only 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decline the same. Ideally, it is for the Central Board of Direct Taxes to 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 life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice 9. When we so approach the matter, and in view of the fact that there is no common interest expenditure in the present case as per the uncontroverted submissions of the assessee, no portion of interest really survives for allocation under rule 8D(2)(ii). However, as the ld. CIT(A) has given partial relief and the assessee is not in appeal against the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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