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M/s. Tafe Motors and Tractors Ltd. Versus The Assistant Commissioner of Income Tax

Disallowance u/s 14A - AO considered the investments yielding taxable income and also investments not yielding taxable income to apply the formula in Rule 8D of I.T Rules - Held that:- 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. .....

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he grievance of the 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 Tribun .....

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enditure 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 convenience as a deeming provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutory presumption and the AO has to follow the consequence stated in the statute. It means that even in a case where .....

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ectness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income is not satisfied by the ld. Assessing Officer. The ld.A.R further submitted that Ld.CIT(A) failed to appreciate that Section 14A only the actual expenditure incurred for the purpose of earning exempt income should be disallowed and in the instant case, all the investments have been made by assessee s own fund and the assessee has not incurred any expenditure for .....

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e of REI Agro Ltd. V. DCIT in 144 ITD 141(Kol.). Ld.D.R on the other hand relied on the order of Ld.CIT(A). 5. We have heard both the parties and perused the material on record. The main contention of the assessee s counsel is that the AO considered the investments yielding taxable income and also investments not yielding taxable income to apply the formula in Rule 8D of I.T Rules. According to him, the AO also included the interest expenditure which is incurred for a specific purpose while comp .....

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xable 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 .....

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ule 80 (2) respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at ₹ 1,04,38,000/. The AO has taken into account the entire interest expenditure of ₹ 5,79,46,000/- for computing the above disallowance. The Id.AR, in his submission, has given the break-Up of interest which in .....

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c requirement that the loan shall be utilized for purchase of imported machinery while in the case of loan from Federal Bank, it is seen that the loan was to be utilized for expansion of projects. Sanction of both these loans prohibit utilization of funds for purposes other than for the utilization for which they are sanctioned. From the ledger extract for the year ended 31.03.2008 for both loan accounts, it is seen that no amount has been utilized for investment in subsidiaries which earns tax- .....

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loan amounting to ₹ 67,92,000/- and ₹ 3,82, 11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to 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 .....

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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 interest is to be excluded for the purpose of computing disallowance under Rule 8D(2)(ii), the Tribunal held that .....

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r income or receipt . Clearly, therefore, this sub clause seeks to allocate common interest expenses to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is 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 exem .....

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ltantly, 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 allocating 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 (emphasis byunderlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A & Co L .....

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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 .....

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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 ch .....

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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 .....

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f 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.)…………… 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 .....

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he 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 bus .....

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titutional 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 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, .....

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ove, we uphold the order of the Commissioner of Income Tax (Appeals) in excluding the interest on bank loan and term loans for the purpose of computing disallowance under Rule 8D(2)(ii). The grounds raised by the Revenue are rejected on this issue. 14. The last issue in the grounds of appeal of the Revenue is that the Commissioner of Income Tax (Appeals) erred in deleting the disallowance of advances made to subsidiary companies written off. 15. The Departmental Representative supported the orde .....

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d 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 th .....

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id interest to the tune of ₹ 9,19,270/- to the assessee. The other subsidiary companies to whom loan has been advanced, they have filed application before BIFR as they have gone sick. As per the conditions laid down by the BIFR no interest can be charged by holding company on its subsidiary. The facts and circumstances of the case show that the assessee has extended loans and advances to its subsidiaries to support the business and on account of commercial expediency. The subsidiaries coul .....

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