TaxTMI 
TaxTMI 
2017 (4) TMI 1332
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....icer under section 14A of the Act. 3. To adjudicate on this appeal, only a few material facts need to be taken note of. The assessee is a non banking finance company (NBFC), and has, inter alia, made certain investments yielding tax exempt income by way of dividends. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has earned a dividend income of Rs. 14,80,805, which is exempt from tax. He also noticed that the assessee was offered a disallowance of Rs. 9,23,156 but was of the view that this is inadequate in view of the fact that assessee has paid interest of Rs. 80,20,105, which, divided in the ratio of investment yielding tax exempt income (i.e. Rs. 5,21,42,893) to the total investments (Rs 30,....
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....el has, however, gives a new twist to the case now. She submits that the interest free funds available to the assessee are far in excess of the investments yielding tax exempt income and these investments are carried forward from an earlier point of time much before the related borrowings were resorted to. He contention is that, in view of this factual position, as a matter of no part of interest expenditure cannot be disallowed under section, and, accordingly, the disallowance offered by the assessee on its own was far more than adequate. While learned Departmental Representative has not disputed the factual elements embedded in her arguments, he nonetheless relies upon the stand of the authorities below. 5. The plea of the learned counse....
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....s concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which "the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt". Clearly, therefore, this sub clause seeks to allocate 'common interest expenses' to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is "expenditure by way of interestâEUR¦âEUR¦âEUR¦..which is not directly attributable to any particular income or receipt" and th....
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....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 to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8D(2)(ii) will be ....
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....iable 'A' in formula as per rule 8D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. This is clear from the following observations made by Their Lordships of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (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....
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....f 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.)". Accordingly, even by revenue's own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8D(2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when co....