TaxTMI 
TaxTMI 
2015 (12) TMI 1423
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....incorporated on 21st November 2005 as a service sector company engaged in the promotion of international telecom business and insurance business. For the AY 2008-09, the Assessee filed its original return of income on 19th September 2008 declaring loss of Rs. 16,07,22,655. The income was revised on 16th December 2009, at a loss of Rs. 13,93,37,943. The revision of the amount of loss was pursuant to the scheme of arrangement approved by the High Court with effect from 1st October 2007. 5. The return was picked up for scrutiny. It was observed by the Assessing Officer ('AO') that the Assessee had shown dividend income of Rs. 89, 02,540 out of which Rs. 68, 44,790 was claimed as exempt under Section 10 (34) of the Act. The Assessee was asked to show cause why a disallowance under Section 14A of the Act read with Rule 8D should not be made for the expenditure incurred in relation to income not forming part of the total income. The authorised representative (AR) of the Assessee in response thereto submitted a letter dated 24th November 2010, stating that in terms of Note 4 of the computation of taxable income, a sum of Rs. 6,84,479 constituting 10% of the net exempted dividend ....
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....s adopted by the AO". The disallowance was therefore re-worked at Rs. 37,11,031. After adjusting the sum offered by the Assessee, the disallowance was restricted to Rs. 30, 26,552. 8. The Revenue went in appeal before the ITAT. Significantly, no cross objections were filed by the Assessee. Therefore the only question considered by the ITAT was whether the CIT (A) was justified in restricting the disallowance under Section 14A of the Act as noted hereinbefore. The ITAT referred to the decision of the Kolkatta Bench of the ITAT in ACIT v. Champion Commercial Co. Ltd., (2012) 139 ITD 108 , which in turn referred to the decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd (supra) and held that for the purposes of Rule 8D (2) (ii), the amount of interest not attributable to the earning of any particular item of income, i.e., 'common interest expenses' that was required to be allocated would have to exclude both expenditures, i.e., interest attributable to tax exempt income as well as that attributable to taxable income. The ITAT observed that notwithstanding the rigid wording of Rule 8D (2), this interpretation was permissible in view of the stand taken by the Reven....
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....e which does not form part of the total income under this Act". Rule 8D of the Rules sets out the "method for determining amount of expenditure in relation to income which does not form part of income". Rule 8D reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (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 particular income or receipt, an amount computed in accordance with the f....
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....pense which is relatable to tax exempt income and not expenditure in relation to any taxable income. This object behind Section 14A has to be kept in view while examining Rule 8D (2) (ii). In any event a rule can neither go beyond or restrict the scope of the statutory provision to which it relates. 17. Rule 8D (2) states that the expenditure in relation to income which is exempt shall be the aggregate of (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to "allocate" some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets. It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8 D (2) (ii) is concerned with only 'common interest expenditure' i.e. expenditure which cannot be attributable to ....
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....hallenge to the constitutional validity of Rule 8 D (2). The stand of the Revenue was that variable A in the formula in Rule 8D (2) (ii) would exclude both interest attributable tax exempt income as well as taxable income. The Bombay High Court took on board the said statement and negatived the challenge to the constitutional validity of the provision by holding as under: "60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying Rule 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 et.)..... The justification ....