TMI Blog2018 (10) TMI 786X X X X Extracts X X X X X X X X Extracts X X X X ..... d out by the AO by applying the formula under Rule 8D(2)(iii). We therefore find that mechanical application of Rule 8D(2)(iii) in the present case leads to absurd results. The expenses inter alia included items such audit fees, ROC expenses etc. which were required to be incurred to maintain corporate identity of the appellant. Such expenses were required to be incurred irrespective whether tax free or taxable income was earned. It would be inappropriate to conclude that the entire expenditure of ₹ 16,86,399/- was relatable only to earning tax free income. To hold so would mean that the other taxable income was earned by the appellant without incurring even a single rupee expenditure and such conclusion would be anomalous. We find merit in the assessee's submissions that the disallowance out of common establishment expenses should be made in proportion of dividend income to gross receipts credited to P&L A/c. This methodology was also upheld by the coordinate Bench of this Tribunal in the case of Dy.CIT Vs S.G. Investment & Industries Ltd [2003 (5) TMI 198 - ITAT CALCUTTA-C] as affirmed by in the case of ISG Traders Ltd Vs CIT [2011 (9) TMI 58 - CALCUTTA HIGH COURT]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were ₹ 1,26,51,029/-, the AO restricted the disallowance u/s 14A to ₹ 1,26,51,029/-. Aggrieved by the AO s order, the assessee preferred appeal before the CIT(A). The Ld. CIT(A) however dismissed the assessee s appeal against which the assessee is in appeal before us. 3. We have heard the rival submissions and perused the material on record. At the time of hearing the Ld. AR submitted that during the relevant year the appellant carried on only two activities viz., granting of loans and making investment in shares. The assessee s business funds were utilized in these two activities. He submitted that save except the foregoing two activities the appellant did not conduct any other business activity, nor any income received from any other source. Drawing attention to the appellant s financial statements, the Ld. AR pointed out that from the said two activities the appellant derived income in form of interest amounting to ₹ 65,00,064/- and dividend of ₹ 70,04,061/-. The Ld. AR further pointed out that in connection with earning the foregoing income the appellant had paid interest of ₹ 97,24,941/-. Netting off the interest paid against interest receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Rule 8D(2)(iii), the expenditure disallowable exceeded the actual expenses. Relying on the judgment of the jurisdictional Calcutta High Court in the case of Dhanuka Sons Vs CIT (339 ITR 319), he therefore submitted that the appropriate course in such a scenario would be to allocate the actual administrative expenditure on proportionate basis and disallow the expensewhich is relatable to earning tax free income. The Ld. AR therefore submitted that if such proportionate expenditure was disallowed then the amount disallowable under clause (iii) of Rule 8D(2) would amount only to ₹ 8,74,170/-. 5. Per contra, the Ld. DR appearing on behalf of the Revenue fully supported the order of the lower authorities. He submitted that since the appellant had himself offered only ₹ 3,500/- as the sum disallowable under Section 14A which was clearly not supported by any logic, the AO was left with no other alternative but to make the disallowance in conformity with Rule 8D(2) and in that view of the matter the authorities below were justified in making the disallowance of ₹ 1,26,51,029/- and no interference in the orders of lower authorities was called for. 6. After cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms, 'A' represents the amount of expenditure by way of interest ignoring the interest expenditure already included in clause (i). The expression used by the legislature is amount of expenditure by way of interest . When the legislature has therefore, used this expression amount of expenditure , the said term shall have to be interpreted in the manner that will bring about the correct legislative intent and equitable application thereof. As in case on hand, when the assessee pays interest on borrowings as also earns taxable interest on investments made by him during a particular year, his interest expenditure has to be considered as one which is the net of interest paid minus interest earned. Any other view would give the unintended computation of factor 'A' provided in clause (ii) of sub-rule (2) of Rule 8D which will in turn distort the computation of disallowable expenditure under the said clause. It is true that the legislature has not given any further indication as to how such amount of expenditure would be ascertained. We would therefore have to apply the reasonable test and interprete the provision as is most likely to give effect to legislative inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by way of interest bad debts written off provision for NPA totaling to ₹ 1,45,47,922/-. Excluding these three items, the common business expenses which could be considered for disallowance under Rule 8D(2)(iii) amounted only to ₹ 16,86,399/-. This expenditure was much below ₹ 61,78,722/- worked out by the AO by applying the formula under Rule 8D(2)(iii). We therefore find that mechanical application of Rule 8D(2)(iii) in the present case leads to absurd results. We also find force in the Ld. AR s submissions that the expenses inter alia included items such audit fees, ROC expenses etc. which were required to be incurred to maintain corporate identity of the appellant. Such expenses were required to be incurred irrespective whether tax free or taxable income was earned. In the circumstances therefore it would be inappropriate to conclude that the entire expenditure of ₹ 16,86,399/- was relatable only to earning tax free income. To hold so would mean that the other taxable income was earned by the appellant without incurring even a single rupee expenditure and such conclusion would be anomalous. In the circumstances therefore we find merit in the Ld. AR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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