Lucas TVS Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1824/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8456 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 16-06-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: SAROJ KUMAR PANDA
• Keywords: Business income; Earning of tax free income; Commercial expediency
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , . !' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.1824, 1825 & 1826/MDS./2016 / ASSESSMENT YEARS : 2009-10, 2010-11 & 2011-12 M/S.LUCAS TVS LTD., 11,PATTULOS ROAD, CHENNAI 600 002. VS. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-4(1), CHENNAI 600 034. [PAN AAACL 3763 E ] ( #$ / APPELLANT) ( %&#$ /RESPONDENT) / APPELLANT BY : MR.SAROJ KUMAR PANDA,ADVOCATE /RESPONDENT BY : MR.SHIVA SRINIVAS, JCIT, D.R / DATE OF HEARING : 06 - 0 9 - 201 6 !' / DATE OF PRONOUNCEMENT : 23 - 0 9 - 2016 ' / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE THREE APPEALS FILED BY THE ASSESSEE ARE DI RECTED AGAINST THE DIFFERENT ORDERS OF THE COMMISSIONER O F INCOME-TAX (APPEALS)-8, CHENNAI DATED 29.02.2016 PERTAINING TO ASSESSMENT YEARS 2009-10, 2010-11 & 2011-12. ITA NO. 1824 TO 1826 /MDS./2016 :- 2 -: 2. THE FIRST COMMON GROUND RAISED IN THE APPEALS O F THE ASSESSEE FOR ASSESSMENT YEARS 2009-10 & 2011-12 IS THAT THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE IN-HOUSE R&D FACILITIES HAS BE EN APPROVED BY THE GOVERNMENT FOR THE PURPOSES OF SEC.35(2AB) AND THES E EXPENSES HAVE ALSO BEEN ACCEPTED AS HAVING BEEN INCURRED IN THE APPROV ED R&D FACILITIES IN RESPECT OF PROJECTS IN CONNECTION WITH WHICH OTHER EXPENSES HAVE BEEN GRANTED WEIGHTED DEDUCTION. 3. THE FACTS OF THE ISSUE RELATED TO ITA NO.1824/MD S./2016 ARE THAT WHILE FRAMING THE ASSESSMENT , THE AO HAD DISALLOWED ` 37.35 LAKS BEING 50% OF WEIGHTED DEDUCTION CLAIMED IN RESPECT OF EXPENSES O F ` 75.47 LAKHS INCURRED IN THE IN-HOUSE R&D FACILITIES. WHEN THE IN-HOUSE R &D FACILITIES HAS BEEN APPROVED BY THE GOVERNMENT FOR THE PURPOSE OF SEC.3 5(2AB) OF THE ACT AND THESE EXPENSES HAVE ALSO BEEN ACCEPTED HAS INCURRED IN THE APPROVED R&D FACILITIES, IN RESPECT OF PROJECTS IN CONNECTION WI TH WHICH OTHER EXPENSES HAVE BEEN GRANTED WEIGHTED DEDUCTION. THE AO HAD NOT C ONSIDERED THE WEIGHTED DEDUCTION, SINCE THE DSIR HAS DENIED THE W EIGHTED DEDUCTION FOR THE R&D EXPENSES. 3.1 THE FACTS OF THE ISSUE RELATED TO ITA NO.1826/ MDS./2016 ARE THAT WHILE FRAMING THE ASSESSMENT , THE AO HAD DISALLOWE D ` 99.62 LAKS BEING 100% OF WEIGHTED DEDUCTION CLAIMED IN RESPECT OF EX PENSES OF ` 99.62 LAKHS INCURRED IN THE IN-HOUSE R&D FACILITIES. THE AO HA D NOT CONSIDERED THE WEIGHTED DEDUCTION, SINCE THE DSIR HAS DENIED THE W EIGHTED DEDUCTION FOR THE R&D EXPENSES. ITA NO. 1824 TO 1826 /MDS./2016 :- 3 -: 4. ON APPEAL PREFERRED BY THE ASSESSEE FOR BOTH TH E ASSESSMENT YEARS, LD.CIT(A) CONFIRMED THE DISALLOWANCE MADE U/ S.35(2AB) OF THE ACT. AGGRIEVED WITH THE ORDER OF LD.CIT(A), NOW THE ASSE SSEE IS IN APPEALS BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE AO ALLOWED DEDUCTION U/S.3 5(2AB) OF THE ACT CLAIMED BY THE ASSESSEE TO THE EXTENT OF DSIR APPRO VED THE EXPENSES AND THE AO DISALLOWED ONLY THAT PORTION OF AMOUNT CLAIM ED BY THE ASSESSEE IN RESPECT OF DSIR DENIED THE APPROVAL I.E. ` 37.35 LAKS FOR A.Y 2009-10 & ` 99.62 LAKHS FOR A.Y 2011-12. BEING SO, WE DO NOT F IND ANY INFIRMITY IN THE ORDER OF LD.CIT(A). HENCE, THE SAME IS CONFIRMED. THIS GROUND RAISED BY THE ASSESSEE STANDS REJECTED. 6. THE NEXT COMMON GROUND RAISED IN ALL THESE THEE APPEALS OF THE ASSESSEE IS THAT THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE U/S.14A R.W.RULES 8D OF THE INCOME TAX RULES, 1962. 7. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HA D RECEIVED AN AMOUNT OF ` 6,36,97,853/- FOR A.Y.2009-10, ` 3,60,37,549/- FOR A.Y.2010-11 & ` 5,79,48,302/- FOR A.Y.2011-12 AS DIVIDEND INCOME AND CLAIMED AS EXEMPT U/S.10(34) OF THE ACT. WHILE FRAMING THE ASSESSEE, THE AO CALCULATED THE INTEREST EXPENDITURE THAT CAN BE DISALLOWED AS PER RULE 8D(2) AND ATTRIBUTED 0.5% OF INVESTMENT AS AN EXPENDITURE INCURRED FOR T HE PURPOSE OF EARNING EXEMPTED INCOME UNDER RULE 8D(III). AGAINST THIS, T HE ASSESSEE CARRIED THE APPEALS BEFORE THE LD.CIT(A). ON APPEAL, THE LD.CIT (A) CONFIRMED THE ACTION OF THE AO. ITA NO. 1824 TO 1826 /MDS./2016 :- 4 -: 8. BEFORE US, LD.A.R SUBMITTED THAT SEC.14A CAN BE INVOKED ONLY IF THE AO IS NOT SATISFIED WITH 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. FURTHER, HE SUBMITTED THAT IN ALL THESE CASES, THE ASSESSEE HAD WORKED OUT THE EXPENDITURE, BUT LD.CIT (A) WITHOUT GIVING ANY REASON REJECTING THE CLAIM OF ASSESSEE. THEREFORE, THE AO CANNOT WORK OUT THE DISALLOWANCE U/S.14A R.W.R8D. LD.A.R SUBMITTE D THAT IN THE PRESENT CASE, THE INTEREST EXPENDITURE IS DIRECTLY ATTRIBUT ABLE FOR EARNING ITS BUSINESS INCOME AND HENCE DISALLOWANCE U/S.14A R.E.W 8D IS U NWARRANTED. FURTHER, LD.A.R SUBMITTED THAT FOR COMPUTING THE DISALLOWANC E U/S.14A R.W.R.8D ONLY THE INVESTMENTS YIELDING DIVIDEND INCOME SHOULD BE TAKEN INTO CONSIDERATION AND NOT THE TOTAL INVESTMENT. FURTHER, LD.A.R SUBMI TTED THAT THE INVESTMENTS MADE IN SUBSIDIARY/ASSOCIATE COMPANIES, EVEN IF THE Y HAVE YIELDED DIVIDEND INCOME, SHOULD BE CONSIDERED WHILE COMPUTING THE AV ERAGE VALUE OF INVESTMENTS AND PLACED RELIANCE IN THE FOLLOWING CA SE LAWS. I) CIT VS. HDFC BANK LTD., 89 CCH 0185 MUM. HC. II) COMPUTER AGE MANAGEMENT SERVICES (P) LTD., VS. ACIT IN ITA NO.1259 TO 1261/MDS./2014 III) EIH ACCOCIATED HOTELS LTD., VS. DCIT IN 2012 -TIOL-796-ITAT-MAD. 9. ON THE OTHER HAND, LD.D.R SUPPORTED THE ORDER O F REVENUE AUTHORITIES. LD.D.R RELIED ON THE ORDER OF CO-ORDINATE BENCH IN THE CASE OF SUN TV NETWORKS IN ITA NO.1340 & 1341/MDS./15 & 1578 TO 15 79/MDS,/15 DATED 31.10.2013 WHEREIN HELD THAT:- ITA NO. 1824 TO 1826 /MDS./2016 :- 5 -: 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN PLEA OF THE LD. A.R IS THAT INVESTMENT I S IN A SISTER CONCERN AND ASSOCIATED COMPANIES AND SUBSIDIARIES AND INTEREST PERTAINED TO BORROWINGS USED FOR EARNING EXEMPT INCOME FROM THE INVESTMENTS ONLY TO BE CONSIDERED AND HE SUBMITTED THAT THE INVESTMENTS IN SISTER CONCERNS AND THESE INVESTMENTS ARE MADE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. HE PLACED RELIANCE ON THE JUDGMENT OF DELHI HIGH COURT IN THE CASE OF CIT VS. BHARTI OVERSEAS PVT. LTD., DATED 17TH DECEMBER, 201 5 WHEREIN HELD THAT EXPENDITURE IN RELATION TO INCOME WHICH IS EXEMPT S HALL BE AGGREGATE OF EXPENDITURE ATTRIBUTABLE TO TAX EXEMPTED INCOME, AN D WHERE THERE IS COMMON EXPENDITURE, THAT CANNOT BE ATTRIBUTABLE TO EITHER TAX EXEMPT INCOME OR TAXABLE INCOME. HE ALSO SUBMITTED THAT IN TEREST ON BORROWINGS WHICH IS AVAILABLE FOR SPECIFIC PURPOSE CANNOT BE C ONSIDERED FOR DISALLOWANCE U/S.14A R.W.RULE 8D. IN OUR OPINION, T HE TRIBUNAL CONSIDERED THIS ISSUE IN THE CASE OF FARIDA SHOES PVT. LTD. IN ITA NOS.2102 & 2103/MDS./15 FOR ASSESSMENT YEARS 2011-12 & 2012-12 VIDE ORDER DATED 08.01.16 WHEREIN HELD THAT:- 5.1 COMING TO THE MERITS OF THE ISSUE REGARDING DISALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES, IN OUR OPINION, SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF ACIT V. M/S. BEST & CROMPTO N ENGINEERING LTD. IN ITA NO.1603/MDS/2012 DATED 16.7.2013, WHEREIN IT WAS OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE BUSINESS PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING DISALLOWANC E U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND TH E RELEVANT PORTION IS REPRODUCED AS BELOW: ITA NO. 1824 TO 1826 /MDS./2016 :- 6 -: 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 HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND DELETED THE INTEREST ON BAN K LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAK ING ANY INVESTMENTS HAVING TAX FREE INCOME. WHILE HOLDI NG SO, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD A S UNDER:- 5.2.1 HAVING HELD THAT PROVISIONS OF RULE 0D ARE A PPLICABLE, LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORR ECTLY QUANTIFIED. THE AO HAD CALCULATED THE DISALLOWANCE AT ` NIL, J 1,04,38,000/- AND J 26,87,000/- UNDER (I), (II) & ( III) OF RULE 80 (2)RESPECTIVELY. THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT, BECAUSE IT IS NIL. WITH REGARD TO THE SE COND COMPONENT BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AO HAS DETERMINED THE AMOUNT AT J 1,04,38,000/. THE AO HAS TAKEN INTO ACCOUNT THE ENTIRE INTEREST EXPENDIT URE OF J 5,79,46,000/- FOR COMPUTING THE ABOVE DISALLOWANCE. THE ID.AR, IN HIS SUBMISSION, HAS GIVEN THE BREAK-UP OF INTEREST WHICH INCLUDES (1) INTEREST ON BANK LOANS: J67,92,000/ - (2) INTEREST ON TERM LOANS J 3,82,11,000/ - AND (3) INTEREST ON OTHER ACCOUNTS: J 1,29,43,000/ -. IF LOANS HAVE BEEN SANCTIONED FOR SPECIFIC PROJECTS/EXPANSION AND HAVE BEEN UTILIZED TOWARDS THE SAME, THEN OBVIOUSLY THEY COUL D NOT HAVE 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 LO AN WAS GRANTED WITH A SPECIFIC REQUIREMENT THAT THE LOAN S HALL BE UTILIZED FOR PURCHASE OF IMPORTED MACHINERY WHILE I N THE CASE OF LOAN FROM FEDERAL BANK, IT IS SEEN THAT THE LOAN WAS TO BE UTILIZED FOR EXPANSION OF PROJECTS. SANCTION OF BOT H THESE LOANS PROHIBIT UTILIZATION OF FUNDS FOR PURPOSES OTHER TH AN FOR THE UTILIZATION FOR WHICH THEY ARE SANCTIONED. FROM THE LEDGER EXTRACT FOR THE YEAR ENDED 31.03.2008 FOR BOTH LOAN ACCOUNTS, IT IS SEEN THAT NO AMOUNT HAS BEEN UTILIZED FOR INV ESTMENT IN SUBSIDIARIES WHICH EARNS TAX-FREE INCOME. THE LOAN AMOUNTS WERE FULLY DISBURSED AND UTILIZED IN THE YEAR ENDED 31.03.2008 (A.Y. 2008-09) ITSELF. TAKING INTO ALL THE FACTS AS STATED ABOVE, I AM OF THE CONSIDERED OPINION THAT IF LOANS/BORROW ED AMOUNTS ARE GRANTED FOR SPECIFIC PROJECTS/EXPANSION AND NO AMOUNT FROM THE SAME HAS BEEN DIRECTLY UTILIZED FOR INVESTMENTS, THEN THE FIRST AND SECOND LIMB OF RULE 80 ATTRIBUTING THE INTEREST PAYMENTS TO THE INVESTMENT S WILL NOT BE APPLICABLE. ACCORDINGLY, INTEREST ON BANK LOAN A ND TERM ITA NO. 1824 TO 1826 /MDS./2016 :- 7 -: LOAN AMOUNTING TO J 67,92,000/- AND J 3,82,11,000/ - RESPECTIVELY ARE TO BE EXCLUDED FROM THE CALCULATIO N TO DETERMINE THE DISALLOWANCE UNDER RULE 8D(2)(II). TH E AO IS, THEREFORE, DIRECTED TO TAKE INTO ACCOUNT ONLY THE R EMAINING INTEREST ON OTHER ACCOUNTS AMOUNTING TO J 1,29, 43,000/- FOR COMPUTING THE PROPORTIONATE DISALLOWANCE UNDER RULE 80(2)(II). 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLOWANCE UND ER RULE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED THE BANK LOA N AND TERM LOAN FOR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSION OF PROJECTS AND THESE LOANS WERE SPECIFIC ALLY SANCTIONED FOR SPECIFIC PROJECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF INC OME TAX (APPEALS) HAS RIGHTLY EXCLUDED SUCH INTEREST FROM T HE PURVIEW OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(II) . 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO.LTD. (SUPRA) ALSO SUPPORT S THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). T HE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOANS 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 METHOD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERN ED. IT IS ONLY WITH REGARD TO THE COMPUTATION UNDER RUL E 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDL Y 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 COMMO N 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 INTEREST..WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SCHEME ITA NO. 1824 TO 1826 /MDS./2016 :- 8 -: OF RULE 8 D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECEIPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFICATI ON 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 DIRECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WH ILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITURE 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 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 J 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNED IS J 10,000. OUT OF THE BALANCE J 90,000, THE ASSESSEE HAS PAID INTEREST OF J80,000 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 J 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D (2)(II), ALLOCATION OF INTER EST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT WILL BE FOR J 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. DI RECT 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 INTERE ST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE J 18,000 ITA NO. 1824 TO 1826 /MDS./2016 :- 9 -: WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE J 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPE NSES, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO TAXABLE 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 TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN 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 AUTHORITIES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E, 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 ASPECT 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 INCOME, WHICH IS TO B E EXCLUDED FROM THE DEFINITION OF VARIABLE A IN FORMULA AS PER RULE 6D(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 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 ITA NO. 1824 TO 1826 /MDS./2016 :- 10 - : REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACT UAL 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 FORMU LA) 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 CANNO T 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 THER E IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATI ON PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERT AINLY 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 STA ND 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 TH E ACTUAL IMPLEMENTATION OF THE FORMULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, A S HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN THE 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 ANY 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 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). ITA NO. 1824 TO 1826 /MDS./2016 :- 11 - : 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROCEED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II ) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF DIREC T 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 PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THINGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSITY, CAPRICE OR IRRATIONALITY IN RULE 8D BEFORE HONBLE HIGH COURT, AND TAKE ANOTHER 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 WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FO R THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTICE. 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 GR OUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. 11. IN VIEW OF THE ABOVE DECISION, WE ARE OF THE O PINION THAT THE INTEREST ON BORROWING WHICH ARE MADE FOR SPECIFIC PURPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PURPOSE OF RULE 8D OF THE INCOME TAX RULES. FURTHER, INVESTMENTS IN SISTER CONCERNS OR SUBSIDIARIES WITH WHICH THE ASSESSEE IS HAVING BUSINESS TRANSACTIONS, THAT INVESTMENTS CANN OT BE CONSIDERED FOR THE PURPOSE OF APPLICABILITY OF RULE-8D. FOR THIS PROP OSITION WE RELY ON THE JUDGMENTS OF TRIBUNAL IN THE CASE OF SUN TV NETWOR KS IN ITA NO.1340 & 1341/MDS./15 & 1578 TO 1579/MDS/15 WHEREIN HELD THA T:- ITA NO. 1824 TO 1826 /MDS./2016 :- 12 - : 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EI THER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECO RD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE AVAILAB LE SHARE CAPITAL INCLUDING RESERVES AND SURPLUS WAS J2385.7 CRORES AS ON 31.03.2010. THE AVAILABLE SHARE CAPITAL IS J1970.4 CRORES AND RESERVES AND SURPLUS IS J 21,886.7 CRORES. THE INVESTMENTS MADE IN MUTUAL FUNDS INCLUDING SUBSIDIA RY COMPANIES ARE ONLY J 541.11 CRORES. THEREFORE, IT C ANNOT BE SAID THAT THE ASSESSEE HAS DIVERTED THE BORROWED FU NDS FOR MAKING ANY INVESTMENT EITHER IN THE SISTER CONCERNS OR IN THE MUTUAL FUNDS. WHEN THE ASSESSEE HAS SUFFICIENT SHAR E CAPITAL, RESERVES AND SURPLUS, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CANNOT BE ANY DISALLO WANCE TOWARDS THE INTEREST PAID ON THE BORROWED FUNDS UND ER SECTION 14A OF THE ACT. FOR THE PURPOSE OF DISALLOW ING INTEREST INCOME UNDER SECTION 14A READ WITH RULE 8D , THERE SHOULD BE NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT MADE BY THE ASSESSEE IN THE SHARE CAPITA L AND MUTUAL FUNDS. IN THE ABSENCE OF ANY NEXUS, THE PRES UMPTION IS THAT THE ASSESSEE HAS INVESTED THE AVAILABLE INT EREST-FREE FUNDS IN SHARE CAPITAL AND MUTUAL FUNDS. FURTHERMOR E, MAKING INVESTMENT IN SISTER CONCERNS IS FOR COMMERC IAL EXPEDIENCY IN VIEW OF THE JUDGMENT OF APEX COURT IN S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1. IT IS NOT TH E CASE OF THE REVENUE THAT THE SISTER CONCERN OR ANY OF THE D IRECTORS HAS MISUSED THE FUNDS INVESTED BY THE ASSESSEE. WHE N THE SISTER CONCERN USES THE FUNDS ONLY FOR BUSINESS PUR POSE, THERE WAS COMMERCIAL EXPEDIENCY FOR MAKING INVESTME NT. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THERE CANNOT BE ANY DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 . 13. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE T O UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. ACCORDINGLY, T HE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ENTIRE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED. 12. WE ALSO RELY IN THE CASE OF BEACH MINERS CO. PVT LT D. VS. ACIT IN ITA NO.2110/MDS./14 DATED 06.08.15 WHEREIN HELD THAT: 6.1. GROUND NO.3 DISALLOWANCE OF EXPENDITURE BY I NVOKING THE PROVISIONS OF SECTION 14A OF THE ACT FOR J 3,11,34, 630/- SINCE THE ASSESSEE HAD MADE INVESTMENTS OF J 71,55,33,570/- F OR EARNING EXEMPT INCOME. AT THE OUTSET, WE FIND THAT THERE IS NO MERIT FOR THE REVENUE TO MAKE ADDITION OF J 3,11,34,630/ - INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT BECAUSE THE INVESTMENT MADE OF J 71,55,33,570/-, BEARS NO COST IN THE FORM OF INTERE ST OR WHATSOEVER, SINCE THE FUNDS BY WHICH THE INVESTMENT IS MADE IS ASSESSEES OWN FUNDS. FURTHER, THESE INVESTMENTS AR E MADE ONLY WITH SISTER COMPANIES OF THE ASSESSEE AND NO COST C AN BE ITA NO. 1824 TO 1826 /MDS./2016 :- 13 - : ATTRIBUTED FOR THE MANAGEMENT OF SUCH FUNDS. THERE FORE, WE HEREBY DELETE THE ADDITION OF J 3,11,34,630/ - MADE BY THE LD. ASSESSING OFFICER INVOKING THE PROVISIONS OF SECTIO N 14A OF THE ACT. THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED IN IT S FAVOUR . 13. IN VIEW OF THE ABOVE JUDGMENTS, THE AO HAS TO CONSIDER THE ASSESSEES OWN FUND I.E. CAPITAL AND RESERVES AS AV AILABLE ON THE DATE OF INVESTMENT WHICH YIELDS EXEMPTED INCOME AND THEREAF TER HE SHALL APPLY THE FORMULA IN RULE 8D AND ALSO EXCLUDE INVESTMENTS IN SUBSIDIARIES AS HELD BY THE ABOVE ORDER OF CO-ORDINATE BENCH. WITH THIS OB SERVATION, WE REMIT THE ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION. HE NCE, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 14. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 23 RD SEPTEMBER, 2016, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 23 RD SEPTEMBER, 2016 K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF