Rule 8D disallowance and pro-rata common expense apportionment sustained in part, with interest issue remitted for verification.

Under the amended Rule 8D, disallowance of interest expenditure linked to exempt income required a proper factual examination of fund utilisation; because the record did not conclusively show how borrowed funds were deployed, the interest issue was remitted for fresh verification after hearing the assessee. The proportionate disallowance of common expenses was sustained because the assessee was engaged in investment activity and the expenditure had been apportioned on a pro-rata basis. Stock-in-trade could not be included in the revenue base for that computation, as it is not revenue and its inclusion would distort the disallowance exercise.

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Issues: (i) Whether the disallowance of interest expenditure under Rule 8D in relation to exempt income was sustainable. (ii) Whether the proportionate disallowance of common expenses was justified, including the exclusion of stock-in-trade from the revenue base used for apportionment.

Issue (i): Whether the disallowance of interest expenditure under Rule 8D in relation to exempt income was sustainable.

Analysis: The amended Rule 8D was treated as governing the dispute, and the earlier approach under the deleted interest component of the former Rule 8D(2)(ii) was held inapplicable. The available material did not conclusively establish the utilisation of the borrowed funds, while the record also indicated fresh investments and other advances. On the facts, the interest disallowance was viewed as resting on incomplete appreciation of the utilisation of funds, warranting further verification.

Conclusion: The interest disallowance was not finally sustained and the matter was remitted to the Assessing Officer for fresh adjudication after giving the assessee an opportunity to explain the deployment of borrowed funds.

Issue (ii): Whether the proportionate disallowance of common expenses was justified, including the exclusion of stock-in-trade from the revenue base used for apportionment.

Analysis: The assessee was primarily engaged in investment activity, and the common expenditure had been identified and apportioned on a pro-rata basis. The argument that stock-in-trade should be treated as part of total revenue for the purpose of such apportionment was rejected, because stock-in-trade is not revenue and its inclusion would distort the disallowance exercise. The assessment of common expenses was therefore found to be proper.

Conclusion: The disallowance of common expenses was upheld and the assessee's challenge on this issue failed.

Final Conclusion: The appeal succeeded only in part, with the interest issue sent back for reconsideration and the disallowance of common expenses sustained.

Ratio Decidendi: Under the amended Rule 8D, disallowance must be linked to expenditure directly relatable to exempt income, while pro-rata disallowance of common expenses may be sustained on a proper factual basis and stock-in-trade cannot be treated as revenue for that computation.

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