TaxTMI 
TaxTMI 
2017 (9) TMI 485
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....or the assessment year 2008-2009, the assessee had filed the return of income on 30.9.2008 declaring loss of Rs. 5.63 crores (rounded off). The return was taken in scrutiny by the Assessing Officer. During such scrutiny, the Assessing Officer noted that the assessee had shown dividend income of Rs. 25.26 lacs (rounded off) from the investment made by it in the shares and securities which was claimed as an exempt income. In context of disallowance of expenditure to earn such income in terms of section 14A of the Income Tax Act("the Act" for short), the Assessing Officer called upon the assessee to furnish details of the investment and the income earned thereon. The Assessing Officer was of the opinion that the assessee failed to prove that the investment in shares and securities was made out of interest free funds only. On the contrary, he noted that the assessee had made substantial borrowings in form of unsecured and secured loans and had claimed interest expense thereof. In that view of the matter, the Assessing Officer applied the formula provided in Rule 8D of the Income Tax Rules ("the Rules" for short) read with section 14A of the Act. While computing disallowance of interest....
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....eckoned as assessee's interest expenditure or the difference between the interest paid i.e. Rs. 7.01 crores and the interest received i.e. Rs. 6.83 crores? 6. In this context, learned counsel Shri Bhatt for the Revenue submitted that Rule 8D of the Rules provide for a complete formula for computing disallowance under section 14A of the Act. Once this formula is invoked, there would thereafter be no possibility of any adjustment or tinkering with the formula. He drew our attention to the judgment of the Supreme Court in case of Indian Molasses Co. Private Ltd. v. Commissioner of Incometax, West Bengal reported in 37 ITR 66 where the term 'expenditure' came to be explained as under : "But there is no case directly on what is "expenditure", and if the authorities under the English statute were to be of real assistance, the whole of the matter should have been before us. The question however limits the approach to whether the payments made towards the policy were "expenditure" within clause(xv). "Expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present as when we speak ....
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....eld that when there was no nexus between the expenditure incurred and the exempt income generated, disallowance under section 14A of the Act would not be permissible. 8. To resolve the controversy, we may refer to the statutory provisions applicable. Section 14A of the Act, pertains to expenditure incurred in relation to income not includible in total income. Subsection (1) of section 14A provides that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. As per subsection( 2) of section 14A, if the Assessing Officer having regard to the accounts of the assessee, is not satisfied with the correctness of of the claim of the assessee in respect of such expenditure, he would determine the same in accordance with the method as may be prescribed. Such method has been prescribed under Rule 8D which at the relevant time read 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 ....
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....equal to onehalf percent of the average of the value of investment not forming part of total income would be further disallowed in addition to those mentioned in clauses (i) and (ii) of subrule( 2) of Rule 8D. 10. Formula under clause(ii) of subrule( 2) of Rule 8D is A X B/C, where 'A' represents the amount of expenditure by way of interest other than the amount of interest included in clause(i) incurred during the previous year, 'B' represents the average of value of investment, income from which does not form part of the total income, as per the balance sheet on the first and the last day of the previous year and 'C' is the average of total assets as per the balance sheet again on the first and the last day of the previous year. As per this formula therefore, interest expenditure to be disallowed would be the total interest expenditure which is in proportion of assessee's average value of investment not forming part of the total income to the average total assets. The legislature has therefore provided that whenever it is not possible to correlate with precision a certain interest expenditure for the purpose of earning income not forming part of the t....
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....the borrowed funds. This may be because assessee's investments may have earned interest at rates higher than the interest rate paid by the assessee on the borrowings or may also be because assessee's investment in earning interest may be higher in value than the assessee's borrowings, inviting interest. In such a situation, essentially, the assessee would have earned more interest than the interest paid. If we accept the interpretation suggested by the Revenue and apply the formula by computing factor 'A' by taking into account interest paid ignoring the interest earned, there would be disallowance under this formula even if in the net result, the assessee may have not paid any interest on borrowings. 12. Significantly the Rule refers to interest expenditure and not interest paid. Expenditure in the present context must mean interest paid minus taxable interest earned. In case of ACG Associated Capsules Pvt. Ltd.(supra), the Supreme Court while considering ignorable portion of interest, rent etc. for computation of deduction under section 80HHC of the Act had held and observed as under : "12.If we now apply Explanation (baa) as interpreted by us in this judgm....