TaxTMI 
TaxTMI 
2017 (6) TMI 391
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, the Assessing Officer rejected the offer of the assessee with regard to disallowance of Rs. 10 lakhs, offered suo motu under section 14A, and proceeded to make a disallowance on the basis of rule 8D. There was no dispute that no direct expenses incurred in earning of tax exempt income, and, as such, no amount was held to be disallowable under rule 8D(2)(i). The total interest paid by the assessee being Rs. 42,18,273, the proportionate interest was disallowed a Rs. 25,27,200 under rule 8D(2)(ii), and finally 5% of average value of investments yielding tax exempt income, which worked out to Rs. 62,94,250, was disallowed under rule 8D(2)(iii). The total disallowance thus worked out to Rs. 88,21,450. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us. 5. 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. 6. We have noted that so far as interest disallowance under section 14A is concerned, it is not in dispute that the assessee had sufficient interest free funds available to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 14A(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 8D 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 particular income or receipt, an amount computed in accordance with the follos A= 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 assessee, on the f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any particular income or receipt, plus interest which is directly attributable to taxable income" [Emphasis supplied]. 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 8D(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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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.)âEUR¦âEUR¦âEUR¦âEUR¦âEUR¦ 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 8D(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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of administrative expenses for earning tax exempt income cannot be more than actual administrative expenses. The prescribed formulae thus fails on the facts of this case. What the assessee has offered for suo motu disallowance on the facts of this case is Rs. 10,00,000 which is almost one third of total administrative expenses. When it was pointed out to the learned Departmental Representative and she was asked as to whether given the peculiar facts of this case, how the suo motu disallowance offered by the assessee cannot be considered reasonable, she did not have much to say. We agree with the learned counsel that the disallowance so offered cannot be considered to be unreasonable by any standard nor has that been alleged before us either. In view of these discussions, as also bearing in mind entirety of the case, we disapprove the additional disallowance by invoking rule 8D, particularly 8D(2)(iii) as well, and delete the impugned additional disallowance so restored to by the Assessing Officer. The assessee succeeds on this point. 8. Ground no. 1 is thus allowed. 9. In ground no. 2, the assessee has raised the following grievance: On the facts and in the circumstances of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tly on the issue. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 15. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 16. Learned Commissioner (DR) does not dispute that coordinate bench decision, in the case of Virendra Kumar Jain (supra), is directly on the issue before us, but her grievance is essentially confined to the fact that the said decision does not take into account the law laid down by Hon'ble Supreme Court in the case of Reliance Jute (supra). That objection is not really sustainable for the reason that neither Reliance Jute (supra) decision is directly on the issue which came up before the coordinate bench, or is before us, nor that is the only view expressed by Hon'ble Supreme Court on that issue in view of a subsequent decision, by a bench of equal strength in the case of CIT Vs Shah Sadiq & Sons [(1987) 166 ITR 102 (SC)]. It cannot, therefore, be said that not following the Reliance Jute decision was a clear mistake and, for that reason, coordinate bench decision is required to be treated as per incurium. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the 1922 Act, that right came to an end when the new Act came into force. This contention was rejected by the Supreme Court. At page 108 of the report, it was held as follows:- "In our opinion, the right given to the assessee for the assessment year 1961-62 under section 24(2) of the 1922 Act was an accrued right and a vested right. It could have been taken away expressly or by necessary implication. It has not been so done. Neither section 297(2)(b) nor any other sub-clauses of sub-section (2) of section 297 indicates a contrary intention of the Legislature regarding any vested right of the assessee under the 1922 Act. On the contrary, section 6(c) of the General Clauses Act indicates that that right should be preserved." Again at page 109 of the report, the Supreme Court observed as under:- "The fact that the right created by the operation of section 24(2) is a vested right cannot, in our opinion, be disputed. See in this connection the observations of this court in Gujarat Electricity Board Vs. Shantilal R.Desai (1969) 1 SCR 580, 587 and Isha Valimohamad Vs. Haji Gulam Mohamad & Haji Dada Trust (1975) 1 SCR 720, 723. Under the Income-tax Act of 1922, the assessee was e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment made by the Finance Act, 2005 with effect from 01.04.2006 is merely to substitute the words "four assessment years" for the words "eight assessment years". In our opinion, the assessee's contention that any speculation loss computed for the assessment year 2006-07 and later assessment years alone would be hit by the amendment and such loss can be carried forward only for four subsequent assessment years is correct. The vested right of the assessee has not been taken away. 6. It is also significant, as rightly pointed out on behalf of the assessee, that subsection (4) of section 73 refers only to the loss to be carried forward to the subsequent years. It does not say anything about the set off of the speculation loss brought forward from the earlier years. There is a distinction between a loss brought forward from the earlier years and a loss to be carried forward to the subsequent years. The sub-section deals only with the speculation loss to be carried forward to the subsequent years and in the very nature of things it cannot apply to speculation loss quantified in any assessment year before the assessment year 2006-07. The Income Tax Rules which prescribe the return form f....