TMI Blog2018 (4) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... rder reversing Assessing Officer s action making Section 14A r.w. Rule 8D disallowance with the following detailed discussions: 4. I have carefully considered the facts on record and submission of the Ld. AR. Ground No.1 pertains to disallowance of ₹ 3,80,764/- u/s 14A r.w. Rule 8D. in addition to the disallowance of ₹ 13,22,660/- already made by the appellant. Since the appellant has made the disallowance out of interest expenditure as per the provisions of Section 14A r.w. Rule 8D, the applicability of this rule has been conclusively established. Undisputedly, the appellant has not maintained separate set of accounts for investments and earning of exempted income. During the course of appellate proceedings, the ld.AR has raised mainly two contentions that the investments made in certain companies being a strategic investment amounting to ₹ 1,08,24,270/- should be excluded from the average value of investments while computing the disallowance and such investments were made out of own funds. On perusal of the details furnished, 1 find that there is no direct nexus between the investments and non-interest bearing funds and hence this argument of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and these investments are carried forward from an earlier point of time much before the related borrowings were resorted to. He contention is that, in view of this factual position, as a matter of no part of interest expenditure cannot be disallowed under section, and, accordingly, the disallowance offered by the assessee on its own was far more than adequate. While learned Departmental Representative has not disputed the factual elements embedded in her arguments, he nonetheless relies upon the stand of the authorities below. 5. The plea of the learned counsel is indeed well taken, particularly as it is beyond any doubt or controversy that the interest free funds available to the assessee were far in excess of the investments yielding tax exempt income. We find that firstly, in view of the fact that the assessee has interest free funds far in excess of the investments yielding tax exempt income, a presumption is necessarily to be taken that the investments were made out of interest free funds. That position is supported by Hon'ble Bombay High Court's decision in the case of CIT Vs Reliance Utilities Power Ltd [ (2009) 313 ITR 340 (Bom)], and a series of the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 supplied]. 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 paid interest of ₹ 80,000 for factory building construction 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 8D(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 incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icitor General it has been stated, with reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. 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.) 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 method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8D(2)(ii), and based on such a stand constitutional validity is upheld by Hon'ble High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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