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TMI Blog2018 (10) TMI 786X X X X Extracts X X X X X X X X Extracts X X X X ..... g financial company, which is engaged in the business of money lending. Apart from the foregoing, the appellant also invests in shares of its group / associate companies. During the relevant year the assessee derived exempt income of Rs. 70,04,061/- from the shares & securities, against which disallowance of Rs. 3,500/- was offered u/s 14A of the Act. The AO sought clarification from the assessee as to why Rule 8D should not be applied. After considering the appellant's submissions, the AO however rejected the assessee's explanations and made the disallowance of Rs. 1,26,51,029/- by invoking Rule 8D(2). The AO held that for earning tax free dividend of Rs. 70,04,061/- it was inconceivable to accept that only demat expenses of Rs. 3,500/- were incurred. In AO's opinion the administrative expenses incurred by the appellant were attributable to earning dividend income, as held by the coordinate Bench of this Tribunal in the case of Dy.CITVs S.G. Investments & Industries Ltd (89 ITD 44). Accordingly the AO computed the amount disallowable as per Rule 8D(2) at Rs. 1,51,28,768/- but since the interest & expenses debited in the P&L A/c and claimed in the return were Rs. 1,26,51,029/-, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purposes of making disallowance under Rule 8D(2)(iii). Similarly bad debts written off related exclusively to the assessee's financing business from which no tax free income was earned and therefore the same was also liable to be excluded from the ambit of administrative expenses liable for disallowance under Rule 8D(2)(iii). The Ld. AR therefore argued that if the foregoing three items debited in P&L A/c were excluded, then the business establishment expenses worked out only to Rs. 16,86,399/-, which alone could be taken into account for disallowance under Rule 8D(2)(iii). The Ld. AR further submitted that expenditure of Rs. 16,86,399/- inter alia included items of expenses which were necessarily required to be incurred by every corporate assessee to maintain its corporate identity and to comply with regulatory requirements under the Companies Act, 1956 and under various laws which govern the functioning of the corporate entities. He therefore submitted that it would be wholly inappropriate to disallow the entire such expenditure merely because as per the mathematical formula prescribed in Rule 8D(2)(iii), the expenditure disallowable exceeded the actual expenses. Relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resents the average of value of investment, income from which does not form part of the total income, as per the balance sheet on the first and the last day of the previous year and 'C' is the average of total assets as per the balance sheet again on the first and the last day of the previous year. As per this formula therefore, interest expenditure to be disallowed would be the total interest expenditure which is in proportion of assessee's average value of investment not forming part of the total income to the average total assets. The legislature has therefore provided that whenever it is not possible to correlate with precision a certain interest expenditure for the purpose of earning income not forming part of the total income, disallowance of such expenditure would be in the proportion of assessee's average investment earning income not forming part of the total income, to the average value of assessee's total assets. 11. It is in this context that the computation of factor 'A' in the said formula assumes significance. In plain terms, 'A' represents the amount of expenditure by way of interest ignoring the interest expenditure already i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion suggested by the Revenue and apply the formula by computing factor 'A' by taking into account interest paid ignoring the interest earned, there would be disallowance under this formula even if in the net result, the assessee may have not paid any interest on borrowings. 7. Applying the ratio laid down in the above judgment to the facts of the appellant's case, we find that during the year under consideration the gross interest expense was Rs. 97,24,941/- and gross interest receipt was Rs. 65,00,064/-.Thereby the net interest expenditure was Rs. 32,24,877/-. This net expenditure in our considered view was relatable to earning dividend, derived from investments acquired out of borrowed funds. Accordingly we hold that the interest disallowable under Section 14A of the Act should be Rs. 32,34,877/- instead of Rs. 89,46,546/-. 8. As regards amount disallowable under Rule 8D(2)(iii), we agree with the Ld. AR's contention that in working out the common business establishment expenses the AO should have excluded the expenditure debited by way of interest bad debts written off & provision for NPA totaling to Rs. 1,45,47,922/-. Excluding these three items, the common business e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure debited in P&L A/c for the FY 2009-10 was Rs. 1,77,81,539/-, which inter alia included interest of Rs. 55,35,341/-, considered for disallowance under Rule 8D(2)(ii) and Rs. 1,14,10,300/- being provision for NPA disallowed by the appellant separately. Excluding these two items, the common business expenses which could be considered for disallowance under Rule 8D(2)(iii) amounted to Rs. 8,35,898/-. The Ld. AR therefore submitted that on pro rata basis, the amount disallowable should be worked out. 11. We find that the facts and the issue involved in this appeal are identical with the issue involved in AY 2009-10. In the present appeal, the appellant has not disputed the amount disallowable under Rule 8D(2)(i) and (ii) amounting to Rs. 28,500/- and Rs. 16,01,480/- respectively and the same are accordingly confirmed. The assessee's grievance relates only to amount disallowed under Rule 8D(2)(iii). For the reasons discussed in Para 8 of this order, we hold that the AO was not justified in disallowing Rs. 26,37,064/- under Rule 8D(2)(iii) when the actual common administrative expenditure was only Rs. 8,35,898/-. The dividend income during the relevant year was Rs. 1,42,68,931/- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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