TaxTMI 
TaxTMI 
2015 (3) TMI 1113
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....ssue and department is in appeal which is pending before various appellate authorities and since Rule 8D w.e.f. 24.03.2008 gives the method for determining amount of expenditure in relation to income which do not form part of income. 3. The material facts of the case are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned dividend income of Rs. 89,02,540/- out of which Rs. 68,44,790/- have been claimed as exempt under Secton10(34)of the Act but the assessee has offered only Rs. 6,84,479/-, being 10% of the dividend receipts of tax exempt dividends of Rs. 68,44,790/-, as disallowable under section 14A of the Act on notional basis out of administrative expenses. He was of the view that "invocation of section 14A is automatic and comes into operation without any exemption as soon as dividend is acclaimed as exempt." It was in this backdrop and applying Rule 8D, the Assessing Officer computed further disallowance under section 14A of the Act as follows :- (All figures in Rs.) (i) Amount of expenditure directly relating to income which does not form part of total income Nil (ii) ....
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....dend income should have been taken at proportion of Rs. 83 lacs for the purpose of applying Rule 8D (as submitted by the appellant noted above) and not Rs. 5,52,83,131/- as adopted by the AO. Adopting the figure of Rs. 83 lacs; for the purpose of Rule 8D the disallowance works out to Rs. 37,11,031/- as against Rs. 6,84,479/- offered by the appellant. Therefore the disallowance is confirmed to the extent of Rs. 30,26,552/- only i.e. (37,11,031 - 6,84,479). The ground of appeal is partly allowed." 5. The Assessing Officer is aggrieved of the partial relief so granted by the ld. CIT(A) and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. As can be clearly discerned from the computation of disallowance by the Assessing Officer, the short point of dispute in the present case is definition of variable 8D(2)(ii)(A), while the A.O. has adopted this variable as Rs. 5,52,83,131/-, the CIT(A) has adopted the same as Rs. 83,90,178/-. As a matter of fact, according to the assessee, the amount against this variable (i.e. common interest expenditure not sp....
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.... 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 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 p....
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....ctual 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 exampleany 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 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 ....