2015 (8) TMI 1026

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.... only exempt income (Rs.79.38 crores from dividend and share of profit) and interest income (Gross Rs. 26.08 crores). 2. It was also found that during the year there was fresh investments/transfer in/of shares and interest free advances of Rs. 33.78 crores were given to group concerns. The entire interest expenses were thus, not directly attributable to earning any particular income as envisaged in Rule 8D(2)(ii). 3. Thus, section 14A(2) r.w.r. 8D(2)(ii) was rightly invoked by the AO considering the intricate facts of the case which are thoroughly discussed in the assessment order. On the fact and in the circumstances of the case and in law, the ld. CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income/book profit." 3. In the cross objection filed by the assessee, the following grievances are raised: 1. On the facts and in the circumstances of the case the learned CIT(A) erred in upholding disallowance u/s 14A for Rs. 20,15,150/- being other expenses debited in books of account and disallowed as per rule 8D(iii). 2. On the facts and in the circumstances of the case, di....

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....ng interest. The assessee's contention, that interest expenditure was a back to back transaction in the sense whatever has been spent as interest on borrowing from IDFC has been recovered from Adani Infrastructure & Developers Ltd (AIDL) and whatever borrowing was made from IDFC has been passed on to AIDL too, was brushed on the ground that since all the funds are routed through a common bank account, which is used for taxable as also exempt incomes, usage of funds cannot be segregated. It was in this backdrop that the Assessing Officer proceeded to compute disallowance under section 14A r.w.r 8D which included disallowance of Rs. 23,77,67,259 in respect of proportionate interest, under rule 8D(2)(ii), expenses which is the issue in dispute before us. The disallowance included Rs. 7,26,15,653, under rule 8D2(iii), but then subsequently it was rectified by the Assessing Officer himself and was thus reduced to Rs. 20,15,150. The matter rests there and there is no controversy about the same. Coming back to the disallowance of Rs. 23,77,67,259, when the matter was carried in appeal before the CIT(A), he deleted the same on the ground that the interest expenditure of Rs. 25,77,86,14....

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....;amount of interest paid in the relevant previous year, other than interest included in direct expenses incurred for earning tax exempt income', but, for the reasons we will now set out, in our considered view, this action of the CIT(A) is, even if somewhat serendipitously, in accordance with the correct legal position. 10. We find that in terms of the provisions of section 14 A (2), "(t)he Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed..." and rule 8 D prescribes this method as follows: Method for determining amount of expenditure in relation to income not includible in total income. - (1) ....................... (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely : - (i) the amount of expenditure directly relating to income which does not form part of 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 particu....

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.... inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate "expenditure by way of interest, which is not directly attributable to any particular 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 by underlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A & Co Ltd, total interest expenditure is Rs. 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is Rs. 10,000. Out of the balance Rs. 90,000, the assessee has paid interest of Rs. 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 Rs. 10,000. However, in terms of the formula in rule 8 D (2) (ii), allocation of i....

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.... Court in the case of Godrej & Boyce (supra): 60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. Solicitor 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....