TMI Blog2016 (5) TMI 1128X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in this appeal is with regard to confirm the disallowance of ₹ 52,45,531/- made by the ld. Assessing Officer u/s.14A of the Act by applying Rule-8D of Income Tax Rules,1962. 3. The facts of the case are that the AO worked out the disallowance u/s.14A r.w.Rule 8D at ₹ 52,45,531/- being the expenditure attributable to the exempt income. The Ld.CIT(A) dismissed the claim of the assessee, by placing reliance on the judgement of Co-ordinate Bench of the Tribunal in the case of M/s.Lakshmi Ring Travellers Vs ACIT in ITA No.2083/Mds/2011 dated 02.11.2012 wherein held as follows:- rule 8D has already been prescribed. Sub-section 3 further provides that even in a case where the assessee claims that no expenditure was incurred; the assessing authority has to presume the incurring of such expenditure as provided in sub-section 2 read with the rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no such expenditure was so incurred, the statute has provided for presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) incurred during the previous year and all the components in Rule-8D being applied wrongly, it is to be recomputed. 6. In our opinion, there is merit in the plea of the assessee. The interest paid by the assessee on borrowings, which are used for specific purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w.rule 8D. Similarly investments, which are yielding taxable income also, cannot be considered while applying the ( B ) in the formula specified in Rule-8D. More so, similar issue was considered by the Co-ordinate Bench in the case of ACIT vs. Best Crompton Engineering Ltd., in ITA No.1603/Mds./2012 vide order dated 16.07.2013 wherein held that:- 10. Heard both sides. Perused the orders of lower authorities and the decision of Calcutta Bench of this Tribunal relied on by the assessee s counsel. This issue has been considered elaborately by the Commissioner of Income Tax (Appeals) and deleted the interest on bank loan and term loans which were not utilized for making any investments having tax free income. While holding so, the Commissioner of Income Tax (Appeals) held as under:- 5.2.1 Having held that provisions of rule 80 are appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take into account only the remaining interest on other accounts amounting to ₹ 1 ,29,43,000/- for computing the proportionate disallowance under rule 80 (2)(ii). 11. On going through the order of the Commissioner of Income Tax (Appeals), we find that the Commissioner of Income Tax (Appeals) excluded the interest on bank loan and term loans from the calculation of disallowance under Rule 8D(2)(ii) as the assessee has utilized the bank loan and term loan for the purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for specific project and such loans were also used for the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii). 12. The decision of Calcutta Bench of this Tribunal in the case of Champion Commercial Co.Ltd. (supra) also supports the view of the Commissioner of Income Tax (Appeals). The Tribunal had considered a situation when the loans were utilized for the purchase of machineries, interest arising out of such loans, whether such int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which clearly relates to the taxable income. The interest expenditure which is not directly attributable to any particular receipt or income is thus only ₹ 10,000. However, in terms of the formula in rule 8 D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for ₹ 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated 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 ₹ 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon ble High Court, it cannot be open to revenue authorities to take any 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, intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances to its subsidiary companies on the ground that the assessee failed to substantiate that the advances have been made in the course of normal business. The Commissioner of Income Tax (Appeals) deleted the disallowance following the order of his predecessor in assessee s own case for the assessment year 2004-05 where similar claim for write off of bad advances made to subsidiary companies written off has been allowed. We find that the coordinate Bench of this Tribunal sustained the order of the Commissioner of Income Tax (Appeals) for the assessment year 2004-05 on the issue of write off of advances to subsidiary companies holding as under:- 6. We have heard the parties and have perused the orders passed by the CIT(A) as well as the Assessing Officer. We have also gone through the judgements cited by the respective parties. It is an admitted fact that loan was advanced by the assessee company to the subsidiaries. The Assessing Officer in his assessment order dated 23.3.2006 has stated that one of the subsidiary companies has paid interest to the tune of ₹ 9,19,270/- to the assessee. The other subsidiary companies to whom loan has been advanced, they have filed appli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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