TaxTMI 
TaxTMI 
2012 (10) TMI 24
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....87, by not applying the formula as per Rule 8 D correctly as applied by the Assessing Officer? Grievances of the assessee in cross objection: 1. That on the facts and in the circumstances of the case, the action of the learned CIT(A) to confirm addition of Rs 3,71,687 under section 14A read with rule 8 D is bad in law. 2. That on the facts and in the circumstances of the case and material evidences on record, the action of the learned CIT(A) to make addition of Rs 3,71,687 under section 14A, read with Rule 8D, even after finding that there is no proximate link of expenditure with exempt income and further there was no satisfaction recorded by the Assessing Officer is erroneous, unjustified and excessive. 2. The material facts are not in dispute. The assessee is engaged in the business of trading in chemicals and dyes. In the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned tax exempt dividend income of Rs 6,63,033 but the assessee has not income any of the related expenditure for disallowance under section 14 A. It was explained by the assessee (i) that the assessee's entire turnover of around Rs 35 crores is in respect of c....
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....51,71,541 5,09,25,290 Rs 1,80,034 8D(2)(ii) 0.5% of 5,41,47,604+1,61,95,478 2 Rs 1,75,857 Total disallowance under section 14 A r.w.r 8 D Rs 3,71,687 4. None of the parties is satisfied by the stand so taken by the learned CIT(A), and the Assessing Officer is in appeal, and the assessee in related cross objection, before us. While Assessing Officer is aggrieved of the disallowance being restricted to Rs 3,71,7867, as against disallowance of Rs 30,81,503 made in the assessment proceedings, grievance of the assessee is that the disallowance should have been deleted in entirety. That is how we have come to be in seisin of the matter. 5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 6. Let us take up assessee's grievance first, as it challenges the very application of Section 14 A to the facts of the case before us, because the Assessing Officer has not recorded a specific satisfaction to the effect that claim of the assessee, i.e. no expenditure is incurred on earning the tax exempt dividend, is incorrect. We see no substance in this plea. We dind that section 14 ....
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....essee was unable to produce any material before the authorities below showing the source from which such shares were acquired....................... 10. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assess....
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.... total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A X ______B______ C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the ass essee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year." (3) For the purposes of this rule, the 't otal assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account....
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....articular receipt or income" is thus only Rs 10,000. However, in terms of the formula in rule 8 D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for Rs 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 income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be Rs 18,000 whereas entire common interest expenditure will only be Rs 10,000. 13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or constr....
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....te 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 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon'ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the 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 business such as plant/machinery etc.)". Accordingly, even by revenue's own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated ....