TAFE Motors and Tractors Limited, CHENNAI V. ACIT, CHENNAI

ITA 1141/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9629 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 14-05-2015
• Court: TRIBUNAL
• Department Lawyers: M M BHUSARICIT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Commercial expediency
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' #! ' $ . %& ' () BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.1141 /MDS./2015 ( / ASSESSMENT YEAR :2010-11) M/S.TAFE MOTORS AND TRACTORS LTD . 35,NUNGAMBAKKAM HIGH ROAD, NUNGAMBAKKAM, CHENNAI. 600 034. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 3(1), CHENNAI 600 034. PAN AACCT 2459 B ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) / APPELLANT BY : MR.R.VIJAYARAGHAVAN,ADVOCATE / RESPONDENT BY : MR.M.M.BHUSARI,CIT, D.R / DATE OF HEARING : 02.03.2016 ! /DATE OF PRONOUNCEMENT : 06.04.2016 . / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)- 11, CHENNAI DATED 30.01.2015 PERTAINING TO THE ASSESSMENT YEAR 2010-11. ITA NO1141./MDS/2015 2 2. THE GRIEVANCE OF THE ASSESSEE IN THIS APPEAL IS WITH REGARD TO CONFIRM THE DISALLOWANCE OF ` 52,45,531/- MADE BY THE LD. ASSESSING OFFICER U/S.14A OF THE ACT BY APPLYING RULE-8D OF I NCOME TAX RULES,1962. 3. THE FACTS OF THE CASE ARE THAT THE AO WORKED OU T THE DISALLOWANCE U/S.14A R.W.RULE 8D AT ` 52,45,531/- BEING THE EXPENDITURE ATTRIBUTABLE TO THE EXEMPT INCOME. THE LD.CIT(A) DISMISSED THE CLAIM OF THE ASSESSEE, BY PLACING REL IANCE ON THE JUDGEMENT OF CO-ORDINATE BENCH OF THE TRIBUNAL IN T HE CASE OF M/S.LAKSHMI RING TRAVELLERS VS ACIT IN ITA NO.2083/ MDS/2011 DATED 02.11.2012 WHEREIN HELD AS FOLLOWS:- RULE 8D HAS ALREADY BEEN PRESCRIBED. SUB-SECTION 3 FURTHER PROVIDES THAT EVEN IN A CASE WHERE THE ASSE SSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED; THE ASSESS ING AUTHORITY HAS TO PRESUME THE INCURRING OF SUCH EXPE NDITURE AS PROVIDED IN SUB-SECTION 2 READ WITH THE RULE PRE SCRIBED. THEREFORE, IT BECOMES CLEAR THAT EVEN IN A CASE WHE RE THE ASSESSEE CLAIMS THAT NO SUCH EXPENDITURE WAS SO INCURRED, THE STATUTE HAS PROVIDED FOR PRESUMPTIVE EXPENDITURE WHICH HAS TO BE DISALLOWED BY FORCE OF THE ITA NO1141./MDS/2015 3 STATUTE. IN A DISTANT MANNER, LITERALLY SPEAKING, IT MAY EVEN BE CONSIDERED FOR THE PURPOSE OF CONVENIENCE AS A DEEMING PROVISION. WHEN SUCH DEEMING PROVISION IS MADE ON THE BASIS OF STATUTORY PRESUMPTION, THE REQUIREMENT OF FACTUAL EVIDENCE IS REPLACED BY STAT UTORY PRESUMPTION AND THE AO HAS TO FOLLOW THE CONSEQUENC E STATED IN THE STATUTE. IT MEANS THAT EVEN IN A CAS E WHERE NO EXPENDITURE IS STATED TO HAVE BEEN INCURRED, THE AO HAS TO APPLY RULE 8D. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. BEFORE US, THE LD.A.R SUBMITTED THAT THE ASSES SEE HAD WORKED OUT THE EXPENDITURE AT ` 19,85,000/- IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THE AO WITHOU T GIVING ANY REASONS FOR REJECTING THE CORRECTNESS OF THE CLAIM, CANNOT WORK OUT THE DISALLOWANCE U/S.14A R.W.R.8D.HE FURTHER EMPHASIZES THAT SEC.14A CAN BE INVOKED ONLY IF THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME IS NOT SATISFIED BY THE LD . ASSESSING OFFICER. THE LD.A.R FURTHER SUBMITTED THAT LD.CIT(A) FAILED TO APPRECIATE THAT SECTION 14A ONLY THE ACTUAL EXPENDITURE INCURRED FO R THE PURPOSE OF ITA NO1141./MDS/2015 4 EARNING EXEMPT INCOME SHOULD BE DISALLOWED AND IN T HE INSTANT CASE, ALL THE INVESTMENTS HAVE BEEN MADE BY ASSESSEES OW N FUND AND THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNI NG THE DIVIDEND INCOME. HE FURTHER PLACED RELIANCE IN THE JUDGEMNE T OF HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF HERO C YCLES REPORTED IN 323 ITR 518 AND THE DELHI TRIBUNAL IN THE CASE O F ACIT VS. SUN INVESTMENTS REPORTED IN 8 ITR (TRI) 33 HAVE HELD TH AT UNLESS THE AO ESTABLISHED THAT SPECIFIC EXPENDITURE HAS BEEN INC URRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME, THERE CAN BE NO DISALLOWANCE U/S.14A OF THE ACT. HE FURTHER RELIED ON THE JUDGE MENT OF KOLKUTTA HIGH COURT IN THE CASE OF REI AGRO LTD. V. DCIT IN 144 ITD 141(KOL.). LD.D.R ON THE OTHER HAND RELIED ON THE ORDER OF LD. CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE ASSESSEES COUN SEL IS THAT THE AO CONSIDERED THE INVESTMENTS YIELDING TAXABLE INCOME AND ALSO INVESTMENTS NOT YIELDING TAXABLE INCOME TO APPLY TH E FORMULA IN RULE 8D OF I.T RULES. ACCORDING TO HIM, THE AO ALSO INC LUDED THE INTEREST EXPENDITURE WHICH IS INCURRED FOR A SPECIFIC PURPOS E WHILE COMPUTING ITA NO1141./MDS/2015 5 THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST, OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR AND ALL THE COMPONENTS IN RULE-8D BEING APPLIED WRONGLY , IT IS TO BE RECOMPUTED. 6. IN OUR OPINION, THERE IS MERIT IN THE PLEA OF THE ASSESSEE. THE INTEREST PAID BY THE ASSESSEE ON BORROWINGS, WHICH ARE USED FOR SPECIFIC PURPOSE CANNOT BE CONSIDERED FOR THE PURPO SE OF COMPUTING DISALLOWANCE U/S.14A R.W.RULE 8D. SIMILARLY INVEST MENTS, WHICH ARE YIELDING TAXABLE INCOME ALSO, CANNOT BE CONSIDERED WHILE APPLYING THE ( B ) IN THE FORMULA SPECIFIED IN RULE-8D. MORE SO , SIMILAR ISSUE WAS CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF ACIT VS. BEST & CROMPTON ENGINEERING LTD., IN ITA NO.1603/MDS./2012 VIDE ORDER DATED 16.07.2013 WHEREIN HELD THAT:- 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF T HIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HA S BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOM E TAX (APPEALS) AND DELETED THE INTEREST ON BANK LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAKING ANY INVEST MENTS HAVING TAX FREE INCOME. WHILE HOLDING SO, THE COMMI SSIONER OF INCOME TAX (APPEALS) HELD AS UNDER:- ITA NO1141./MDS/2015 6 5.2.1 HAVING HELD THAT PROVISIONS OF RULE 80 ARE APPLICABLE, LET US NOW EXAMINE WHETHER THE AMOUNT H AS BEEN CORRECTLY QUANTIFIED. THE AO HAD CALCULATED TH E DISALLOWANCE AT ` NIL, ` 1,04,38,000/- AND ` 26,87 ,000/- UNDER (I), (II) & (III) OF RULE 80 (2) RESPECTIVEL Y. THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT, BECAUSE I T IS NIL. WITH REGARD TO THE SECOND COMPONENT BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECT LY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, T HE AO HAS DETERMINED THE AMOUNT AT RS.1,04,38,000/. THE A O HAS TAKEN INTO ACCOUNT THE ENTIRE INTEREST EXPENDI TURE OF RS.5,79,46,000/- FOR COMPUTING THE ABOVE DISALLOWAN CE. THE ID.AR, IN HIS SUBMISSION, HAS GIVEN THE BREAK-U P OF INTEREST WHICH INCLUDES (1) INTEREST ON BANK LOANS : RS.67,92,000/- (2) INTEREST ON TERM LOANS RS.3,82,11,000/- AND (3) INTEREST ON OTHER ACCOUNT S: RS.1,29,43,000/-. IF LOANS HAVE BEEN SANCTIONED FOR SPECIFIC PROJECTS/EXPANSION AND HAVE BEEN UTILIZED TOWARDS THE SAME, THEN OBVIOUSLY THEY COULD NOT HA VE BEEN UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX -FREE INCOMES. FROM THE COPY OF THE SANCTION LETTERS FROM STATE BANK OF BIKANER & JAIPUR IT CAN BE SEEN THAT THE LOAN WAS GRANTED WITH A SPECIFIC REQUIREMENT THAT T HE LOAN SHALL BE UTILIZED FOR PURCHASE OF IMPORTED MACHINERY WHILE IN THE CASE OF LOAN FROM FEDERAL B ANK, IT IS SEEN THAT THE LOAN WAS TO BE UTILIZED FOR EXP ANSION OF PROJECTS. SANCTION OF BOTH THESE LOANS PROHIBIT UTI LIZATION OF FUNDS FOR PURPOSES OTHER THAN FOR THE UTILIZATIO N FOR WHICH THEY ARE SANCTIONED. FROM THE LEDGER EXTRACT FOR THE YEAR ENDED 31.03.2008 FOR BOTH LOAN ACCOUNTS, I T IS SEEN THAT NO AMOUNT HAS BEEN UTILIZED FOR INVESTMEN T IN ITA NO1141./MDS/2015 7 SUBSIDIARIES WHICH EARNS TAX-FREE INCOME. THE LOAN AMOUNTS WERE FULLY DISBURSED AND UTILIZED IN THE YE AR ENDED 31.03.2008 (A.Y. 2008-09) ITSELF. TAKING INTO ALL THE FACTS AS STATED ABOVE, I AM OF THE CONSIDERED O PINION THAT IF LOANS/BORROWED AMOUNTS ARE GRANTED FOR SPEC IFIC PROJECTS/EXPANSION AND NO AMOUNT FROM THE SAME HAS BEEN DIRECTLY UTILIZED FOR INVESTMENTS, THEN THE F IRST AND SECOND LIMB OF RULE 80 ATTRIBUTING THE INTEREST PAY MENTS TO THE INVESTMENTS WILL NOT BE APPLICABLE. ACCORDIN GLY, INTEREST ON BANK LOAN AND TERM LOAN AMOUNTING TO RS.67,92,000/- AND RS.3,82, 11,000/- RESPECTIVELY ARE TO BE EXCLUDED FROM THE CALCULATION TO DETERMINE TH E DISALLOWANCE UNDER RULE 8D(2)(II). THE AO IS, THERE FORE, DIRECTED TO TAKE INTO ACCOUNT ONLY THE REMAINING I NTEREST ON OTHER ACCOUNTS AMOUNTING TO RS.1 ,29,43,000/- FO R COMPUTING THE PROPORTIONATE DISALLOWANCE UNDER RUL E 80 (2)(II). 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INC OME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TE RM LOANS FROM THE CALCULATION OF DISALLOWANCE UNDER RULE 8D( 2)(II) AS THE ASSESSEE HAS UTILIZED THE BANK LOAN AND TERM LOAN F OR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSIO N OF PROJECTS AND THESE LOANS WERE SPECIFICALLY SANCTION ED FOR SPECIFIC PROJECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANC ES, WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS R IGHTLY EXCLUDED SUCH INTEREST FROM THE PURVIEW OF COMPUTAT ION OF DISALLOWANCE UNDER RULE 8D(2)(II). 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNA L IN THE CASE OF CHAMPION COMMERCIAL CO.LTD. (SUPRA) ALSO SUPPORT S THE ITA NO1141./MDS/2015 8 VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). T HE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOAN S WERE UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SUCH LOANS, WHETHER SUCH INTEREST IS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)( II), THE TRIBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED . WHILE HOLDING SO, IT HAS HELD AS UNDER:- 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METH OD SO FAR AS RULE 8D(2)(I) AND (III) IS 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 PARTICULA R INCOME OR RECEIPT . CLEARLY, THEREFORE, THIS SUB CLAUSE S EEKS TO ALLOCATE COMMON INTEREST EXPENSES TO TAXABLE INCO ME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY TH E PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS EXPENDITURE BY WAY OF INTEREST..WH ICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCO ME OR RECEIPT AND THE ONLY CATEGORIES OF INCOME AND RECE IPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALL Y EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECE IPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFI CATION IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DOES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DI RECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WHILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR ITA NO1141./MDS/2015 9 INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITU RE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BYUNDERLINING SUPPLIED BY US). THIS INCONGRUITY WIL L BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAM PLE: IN THE CASE OF A & CO LTD, TOTAL INTEREST EXPENDITURE IS RS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESP ECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNE D IS RS 10,000. OUT OF THE BALANCE RS 90,000, THE ASSESS EE HAS PAID INTEREST OF RS 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE I NCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATT RIBUTABLE TO ANY PARTICULAR RECEIPT OR INCOME IS THUS ONLY R S 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8 D (2)(II), ALLOCATION OF INTEREST WHICH IS NOT DIRECT LY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WI LL 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 AMOUN T OF INTEREST INCLUDED IN CLAUSE (I) [ I.E. DIRECT INTER EST EXPENSES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO T AXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4: 1. IN SUCH A CASE, THE INTEREST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE RS 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE ` 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPENSE S, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME AR E EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO T AXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME ITA NO1141./MDS/2015 10 TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER TH AN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2 )(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITI ES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (3 28 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WA S IN CHALLENGE, IS THAT 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 ASPEC T OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INC OME, WHICH IS TO BE EXCLUDED FROM THE DEFINITION OF VARI ABLE A IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, B ECAUSE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH A RE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INC OME AND TAX EXEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR F ROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED O N 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 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 ITA NO1141./MDS/2015 11 BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN TH E 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 PARTI CULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT I N RULE 8 D(2)(II), AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UPHELD BY HONBLE 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 FOR MULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II ) IS THAT, AS HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN T HE CASE OF GODREJ AND BOYCE (SUPRA), 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 A NY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTA BLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM COMPUTATIO N OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). ITA NO1141./MDS/2015 12 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROC EED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II) IS REL AXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAV ING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RU LE 8 D WAS IN CHALLENGE BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BO ARD OF DIRECT TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RU LE 8D(2)(II) OR BY ADOPTING AN INTERPRETATION AS PER P LAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THI NGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSITY, CAPRICE OR IRRAT IONALITY IN RULE 8D BEFORE HONBLE HIGH COURT, AND TAKE ANOT HER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH THE STRICT WOR DING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FOR THE REASO NS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTI CE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING T HE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOS E OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE G ROUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. 14. THE LAST ISSUE IN THE GROUNDS OF APPEAL OF THE REVENUE IS THAT THE COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN DELETING THE DISALLOWANCE OF ADVANCES MADE TO SUBSIDIARY COMPANIES WRITTEN OFF. 15. THE DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE ASSESSING OFFICER. ITA NO1141./MDS/2015 13 16. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT T HE ISSUE IN APPEAL HAD ARISEN IN THE ASSESSMENT YEAR 2004-05 A LSO AND ON IDENTICAL FACTS, THE CO-ORDINATE BENCH OF THIS T RIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN ITA NO.1673 & 1674/MDS/2008 DATED 03.5.2012. COPY OF THE ORDER I S PLACED ON RECORD. 17. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT DISALLOWED THE CLAIM OF THE ASSESSEE FOR WRITE OFF OF ADVANCES TO ITS SUBSIDIARY COMPANIES ON THE GROU ND THAT THE ASSESSEE FAILED TO SUBSTANTIATE THAT THE ADVANC ES HAVE BEEN MADE IN THE COURSE OF NORMAL BUSINESS. THE COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE FOLLOWING THE ORDER OF HIS PREDECESSOR IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05 WHERE SIMILAR CLAIM FOR WRITE OFF OF BAD ADVANCES MADE TO SUBSIDIARY COMPANIES WRITTEN OFF HAS BEEN ALLOWED. WE FIND TH AT THE CO- ORDINATE BENCH OF THIS TRIBUNAL SUSTAINED THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) FOR THE ASSESS MENT YEAR 2004-05 ON THE ISSUE OF WRITE OFF OF ADVANCES TO SUBSIDIARY COMPANIES HOLDING AS UNDER:- 6. WE HAVE HEARD THE PARTIES AND HAVE PERUSED TH E ORDERS PASSED BY THE CIT(A) AS WELL AS THE ASSESSIN G OFFICER. WE HAVE ALSO GONE THROUGH THE JUDGEMENTS C ITED BY THE RESPECTIVE PARTIES. IT IS AN ADMITTED FACT T HAT LOAN WAS ADVANCED BY THE ASSESSEE COMPANY TO THE SUBSIDIARIES. THE ASSESSING OFFICER IN HIS ASSESSME NT ORDER DATED 23.3.2006 HAS STATED THAT ONE OF THE SUBSIDIARY COMPANIES HAS PAID INTEREST TO THE TUNE OF ` 9,19,270/- TO THE ASSESSEE. THE OTHER SUBSIDIARY COMPANIES TO WHOM LOAN HAS BEEN ADVANCED, THEY HAVE FILED APPLICATION BEFORE BIFR AS THEY HAVE GONE SIC K. AS PER THE CONDITIONS LAID DOWN BY THE BIFR NO INTERES T CAN BE CHARGED BY HOLDING COMPANY ON ITS SUBSIDIARY. TH E FACTS AND CIRCUMSTANCES OF THE CASE SHOW THAT THE ASSESSEE HAS EXTENDED LOANS AND ADVANCES TO ITS ITA NO1141./MDS/2015 14 SUBSIDIARIES TO SUPPORT THE BUSINESS AND ON ACCOUN T OF COMMERCIAL EXPEDIENCY. THE SUBSIDIARIES COULD NOT R EPAY THE LOANS OR ADVANCES FOR THE REASON THAT THEY HAVE INCURRED HUGE FINANCIAL LOSSES AND HAVE GONE SICK. THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT SUBSIDIARY COMPANIES ARE UNDER LIQUIDATION PROCEEDI NGS AND THEREFORE LOANS ARE NOT RECOVERABLE. IT IS UNDERSTANDABLE THAT ASSESSEE WAS CONSTRAINED TO WRI TE OFF THE ADVANCES AS THE SAME WERE NOT RECOVERABLE O N ACCOUNT OF LOSSES SUFFERED BY THE SUBSIDIARIES AND IN SOME OF THE CASES ON ACCOUNT OF LIQUIDATION PROCEED INGS. THE ASSESSEE IS ENTITLED TO CLAIM THE SAME AS DEDUC TION. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF S.A.BUILDERS (SUPRA) HAS HELD THAT WHERE IT IS OBV IOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANC ES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSE SSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DE DUCTION OF INTEREST ON ITS BORROWED LOANS. IN THE INSTANT CA SE, IT IS AN ADMITTED FACT THAT THE LOANS ADVANCED TO THE SUB SIDIARY COMPANIES WERE UTILIZED BY THEM FOR THEIR BUSINESS REQUIREMENTS AND HAVE NOT BEEN UTILIZED FOR THE PER SONAL BENEFITS OF THE INDIVIDUALS/DIRECTORS. THEREFORE, T HE CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE OF INTEREST ON BORROWED FUNDS ADVANCED AS LOAN TO SUBSIDIARY COMPANIES BY THE ASSESSEE. 7. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMI TY IN THE ORDER PASSED BY THE CIT(A) AND UPHOLD THE SAME. THUS, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED AS DEVOID OF ANY MERIT. ITA NO1141./MDS/2015 15 6.1 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL CITE D SUPRA, WE ARE INCLINED TO REMIT THE ISSUE TO THE FILE OF THE AO F OR FRESH CONSIDERATION. 7. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON WEDNESDAY, THE 6 TH OF APRIL,2016 AT CHENNAI. SD/- SD/- ' # $ . % & ' ( DUVVURU RL REDDY ) ) ( ( ( ) * + ) ) ' CHANDRA POOJARI ', JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 6 TH APRIL,2016 . K S SUNDARAM. -.,, /0,10 /COPY TO: , 1. /APPELLANT 2. /RESPONDENT 3. , 2,'' /CIT(A) 4. , 2 /CIT 5. 034, 5 /DR 6. 4,6 /GF