The DCIT, Circle-1, Ahmedabad V. Adani Infrastructure Services Pvt.Ltd., Ahmedabad

ITA 1943/AHD/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9690 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 27-04-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 31-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 1 OF 10 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND S.S. GODARA JM] ITA NO.1943/AHD/2012 ASSESSMENT YEAR: 2009-10 INCOME TAX OFFICER, .....APPELLANT WARD 1(1), AHMEDABAD VS. ADANI INFRASTRUCTURE SERVICES PVT. LTD., ........ ........RESPONDENT ADANI HOUSE, NR. MITHAKHALI IX ROADS, NAVRANGPURA, AHMEDABAD. [PAN: AACCA 5063 C] C.O. NO.44/AHD/2013 (ARISING OUT OF ITA NO.1943/AHD/2012) ASSESSMENT YEAR: 2009-10 ADANI INFRASTRUCTURE SERVICES PVT. LTD., ...... .........APPELLANT ADANI HOUSE, NR. MITHAKHALI IX ROADS, NAVRANGPURA, AHMEDABAD. [PAN: AACCA 5063 C] VS. INCOME TAX OFFICER, ....RESPONDEN T WARD 1(1), AHMEDABAD APPEARANCES BY: SUBHASH BAINS , FOR THE REVENUE S.N. SOPARKAR, FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : APRIL 27, 2015 DATE OF PRONOUNCING THE ORDER : JULY 17,2015 O R D E R PER PRAMOD KUMAR: 1. THIS APPEAL FILED BY THE ASSESSING OFFICER, AS A LSO CROSS OBJECTION FILED BY THE ASSESSEE, ARE DIRECTED AGAINST THE ORDER DATED 11 TH JULY, 2012, PASSED BY THE LEARNED ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 2 OF 10 CIT(A) IN THE MATTER OF ASSESSMENT UNDER SECTION 14 3(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), FOR THE ASSESSMENT YEAR 2009-10. 2. IN THE APPEAL FILED BY THE ASSESSING OFFICER, TH E FOLLOWING GRIEVANCES ARE RAISED: 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FAC TS IN DELETING THE ADDITION OF RS.23.77 CRORES MADE U/S 14A(2) R.W.R. 8D(2)(II) DESPITE THE FACT THAT THE ASSESSEE HAD NO BUSINESS INCOME AND HAD NO T MAINTAINED SEPARATE ACCOUNTS FOR EARNING EXEMPT INCOME AND THE FUNDS WE RE COMPOSITE IN NATURE. THE TOTAL INCOME INCLUDES ONLY EXEMPT INCO ME (RS.79.38 CRORES FROM DIVIDEND AND SHARE OF PROFIT) AND INTEREST INC OME (GROSS RS.26.08 CRORES). 2. IT WAS ALSO FOUND THAT DURING THE YEAR THERE WAS FRESH INVESTMENTS/TRANSFER IN/OF SHARES AND INTEREST FREE ADVANCES OF RS.33.78 CRORES WERE GIVEN TO GROUP CONCERNS. THE ENTIRE IN TEREST EXPENSES WERE THUS, NOT DIRECTLY ATTRIBUTABLE TO EARNING ANY PART ICULAR INCOME AS ENVISAGED IN RULE 8D(2)(II). 3. THUS, SECTION 14A(2) R.W.R. 8D(2)(II) WAS RIGHTL Y INVOKED BY THE AO CONSIDERING THE INTRICATE FACTS OF THE CASE WHICH A RE THOROUGHLY DISCUSSED IN THE ASSESSMENT ORDER. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFF ICER TO THE EXTENT MENTIONED ABOVE SINCE THE ASSESSEE HAS FAILED TO D ISCLOSE HIS TRUE INCOME/BOOK PROFIT. 3. IN THE CROSS OBJECTION FILED BY THE ASSESSEE, TH E FOLLOWING GRIEVANCES ARE RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN UPHOLDING DISALLOWANCE U/S 14A FOR RS.20,1 5,150/- BEING OTHER EXPENSES DEBITED IN BOOKS OF ACCOUNT AND DISALLOWED AS PER RULE 8D(III). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, DISALLOWANCE OF PROPORTIONATE INTEREST EXPENDITURE OF RS.23,77,67,2 59/- MADE BY ASSESSING OFFICER AS PER RULE 8D(II) R.W.S. 14A IS UNCALLED F OR ON THE GROUND THAT APPELLANT HAS SUFFICIENT INTEREST FREE FUNDS AVAILA BLE WITH IT TO MAKE INVESTMENT IN SHARES/SECURITIES AND PARTNERSHIP FIR MS FROM WHICH EXEMPT INCOME IS EARNED. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, DISALLOWANCE OF PROPORTIONATE INTEREST EXPENDITURE MADE BY THE ASS ESSING OFFICER IS UNCALLED FOR EVEN ON THE GROUND THAT INTEREST INCOM E EARNED DURING THE YEAR AND TAXED AS INCOME FROM BUSINESS & PROFESSION IS MUCH MORE THAN INTEREST EXPENDITURE CLAIMED AS EXPENDITURE IN PROF IT & LOSS ACCOUNT. ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 3 OF 10 4. AS ALL THESE GRIEVANCES, RAISED IN THE APPEAL AS ALSO IN THE CROSS-OBJECTION, ARE INTERCONNECTED, WE WILL TAKE THEM UP TOGETHER. 5. BRIEFLY STATED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICE R NOTICED THAT THE ASSESSE HAS EARNED DIVIDEND INCOME OF RS 79,20,56,505, RECE IVED PROFIT FROM PARTNERSHIP FIRM AMOUNTING TO RS 18,38,067 AND RECE IVED INTEREST AMOUNTING TO RS 26,08,28,104. OUT OF THESE THREE ITEMS, SO FAR A S DIVIDEND INCOME AND PARTNERSHIP PROFITS ARE CONCERNED, THE SAME ARE NOT INCLUDIBLE IN INCOME LIABLE TO BE TAXED IN VIEW OF THE PROVISIONS OF SECTION 10 (36) AND 10(2A). AS FOR INTEREST RECEIPTS, IT WAS NOTED THAT THE ASSESSE SE T OFF THE SAME AGAINST THE INTEREST EXPENSES OF RS 25,77,86,144. THE ASSESSING OFFICER ALSO NOTED THAT THE INVESTMENT IN THE SHARES OF MUNDRA PORT & SPECIAL E CONOMIC ZONE LIMITED HAD GONE UP FROM 576.12 CRORES TO 933.27 CRORES, WHEREA S THE ASSESSE CEASED TO HOLD SHARES IN ADANI ENTERPRISES LIMITED WHICH WERE VALUED AT RS 701.12 CRORES IN THE BEGINNING OF THE YEAR. ON THE BASIS OF THE F ACTS SO NOTED, THE ASSESSING OFFICER PROCEEDED ON THE BASIS THAT ENTIRE BUSINESS ACTIVITY OF THE ASSESSE WAS CENTRED AROUND EARNING TAX EXEMPT INCOME FROM DIVID END AND SHARE OF PROFITS FROM THE PARTNERSHIP FIRM. HE ALSO NOTED THAT THE A SSESSE HAS INCURRED EXPENSES OF RS 25,77,86,144 FOR INTEREST, RS 6.93.000 FOR SA LARIES, RS 1,98,000 FOR PROFESSIONAL CHARGES AND RS 3,01,746. THE AO ALSO NOTED THAT THE ASSESSE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR EXEMP T AND TAXABLE INCOMES AND, THEREFORE, THE DISALLOWANCE UNDER SECTION 14A MUST BE COMPUTED BY TAKING INTO ACCOUNT ALL THESE EXPENSES INCLUDING INTEREST. THE ASSESSEES CONTENTION, THAT INTEREST EXPENDITURE WAS A BACK TO BACK TRANSACTION IN THE SENSE WHATEVER HAS BEEN SPENT AS INTEREST ON BORROWING FROM IDFC HAS B EEN RECOVERED FROM ADANI INFRASTRUCTURE & DEVELOPERS LTD (AIDL) AND WHATEVER BORROWING WAS MADE FROM IDFC HAS BEEN PASSED ON TO AIDL TOO, WAS BRUSHED ON THE GROUND THAT SINCE ALL THE FUNDS ARE ROUTED THROUGH A COMMON BANK ACCOUNT, WHICH IS USED FOR TAXABLE AS ALSO EXEMPT INCOMES, USAGE OF FUNDS CANNOT BE SE GREGATED. IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER PROCEEDED TO CO MPUTE DISALLOWANCE UNDER ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 4 OF 10 SECTION 14A R.W.R 8D WHICH INCLUDED DISALLOWANCE OF RS 23,77,67,259 IN RESPECT OF PROPORTIONATE INTEREST, UNDER RULE 8D(2)(II), EX PENSES WHICH IS THE ISSUE IN DISPUTE BEFORE US. THE DISALLOWANCE INCLUDED RS 7,2 6,15,653, UNDER RULE 8D2(III), BUT THEN SUBSEQUENTLY IT WAS RECTIFIED BY THE ASSESSING OFFICER HIMSELF AND WAS THUS REDUCED TO RS 20,15,150. THE MATTER RE STS THERE AND THERE IS NO CONTROVERSY ABOUT THE SAME. COMING BACK TO THE DISA LLOWANCE OF RS 23,77,67,259, WHEN THE MATTER WAS CARRIED IN APPEAL BEFORE THE CIT(A), HE DELETED THE SAME ON THE GROUND THAT THE INTEREST EX PENDITURE OF RS 25,77,86,144, OUT OF WHICH RS 23,77,67,259 WAS ALL OCATED TO TAX EXEMPT INCOME, WAS EXCLUSIVELY INCURRED FOR EARNING A TAXABLE INTE REST INCOME OF RS 25,77,86,144 INASMUCH AS INTEREST PAYMENT AND RECEI PT WAS A BACK TO BACK TRANSACTION. THE NET FIGURE WAS THUS NIL. ON THIS BASIS, THIS COMPONENT OF THE 14A DISALLOWANCE WAS DELETED. REVENUE IS AGGRIEVED OF THE RELIEF SO GRANTED BY THE CIT(A) AND IS IN APPEAL BEFORE US. THE ASSESSE HAS ALSO FILED A CROSS OBJECTION AGAINST THIS ORDER. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF T HE APPLICABLE LEGAL POSITION. 7. WE FIND THAT IN THE CASE OF MORGAN STANLEY INDIA SECURITIES LTD VS ACIT (ITA NOS 5072/MUM/2005 AND 6774/MUM/2008; ORDER DAT ED 13 TH APRIL 2011), A CO-ORDINATE BENCH OF THIS TRIBUNAL HAS HELD THAT FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A WHAT IS TO BE TAKEN INTO ACCOUNT IS NET AMOUNT DEBITED IN THE PROFIT AND LOSS ACCOUNT AND NOT THE GROSS INTEREST DEBITED TO THE PROFIT AND LOSS ACCOUNT. SAME WAS THE VIEW OF ANOTH ER COORDINATE BENCH IN THE CASE OF DCIT VS TRADE INVESTMENTS LTD (ITA NO. 1277 /KOL/2011; ORDER DATED 30 TH MARCH 2012). VIEWED THUS, THE ACTION OF THE CIT(A ) WAS FULLY JUSTIFIED IN TAKING INTO ACCOUNT ONLY THE NET FIGURE WHICH WAS N IL IN THIS CASE. ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 5 OF 10 8. THERE IS ANOTHER APPROACH TO THIS ISSUE WHICH AL SO LEADS TO THE SAME CONCLUSION. IN THE CASE OF ACIT VS CHAMPION COMMER CIAL CO LTD [(2012) 139 ITD 108 (KOL)], IT HAS BEEN HELD THAT UNDER RULE 8D (2)(II) WHAT CAN BE ALLOCATED AS EXPENSE INCURRED FOR EARNING TAX EXEMPT AND TAXA BLE INCOME IS THE NET FIGURE OF EXPENSES AFTER REDUCING EXPENSES INCURRED EXCLUS IVELY FOR EARNING TAX EXEMPT INCOME AS ALSO EXPENSES INCURRED EXCLUSIVELY FOR EA RNING TAXABLE INCOME. IN EFFECT THUS ONLY EXPENSES COMMON TO TAXABLE AND EXE MPT INCOME CAN BE ALLOCATED UNDER THIS RULE. WHILE HOLDING SO, THE CO ORDINATE BENCH HAS OBSERVED AS FOLLOWS: 9. THE NEXT ISSUE IS WHETHER THE COMPUTATION OF DIS ALLOWANCE, AS REWORKED BY THE LEARNED CIT(A), IS CORRECT. ON THE FACE OF IT, BASED ON A PLAIN READING OF RULE 8 D, THE COMPUTATION OF DISAL LOWANCE MAY BE VIEWED INCORRECT INASMUCH AS ONE OF THE VARIABLES I N FORMULA SECT OUT IN RULE 8 D (2)(II) SEEMS TO HAVE BEEN WRONGLY ADOP TED AS 'INTEREST PAID IN THE RELEVANT PREVIOUS YEAR WHICH CANNOT BE DIRECTLY RELATED TO ANY OF THE ASSET' IN THE PLACE OF 'AMOUNT OF INTERE ST PAID IN THE RELEVANT PREVIOUS YEAR, OTHER THAN INTEREST INCLUDED IN DIRE CT EXPENSES INCURRED FOR EARNING TAX EXEMPT INCOME', BUT, FOR THE REASON S WE WILL NOW SET OUT, IN OUR CONSIDERED VIEW, THIS ACTION OF THE CIT (A) IS, EVEN IF SOMEWHAT SERENDIPITOUSLY, IN ACCORDANCE WITH THE CO RRECT LEGAL POSITION. 10. WE FIND THAT IN TERMS OF THE PROVISIONS OF SECT ION 14 A (2), '(T)HE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MA Y BE PRESCRIBED...' AND RULE 8 D PRESCRIBES THIS METHOD AS FOLLOWS: METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN REL ATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. (1) .. (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWIN G AMOUNTS, NAMELY : (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 6 OF 10 (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTE D IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY :- A X 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, INCOM E FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSETS AS A PPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE 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 FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR .' (3) FOR THE PURPOSES OF THIS RULE, THE 'TOTAL ASSET S' SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METHO D SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERNED. IT IS ONLY WITH RE GARD TO THE COMPUTATION UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION AD MITTEDLY DEALS WITH A SITUATION IN WHICH 'THE ASSESSEE HAS INCURRED EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT'. CLEARLY, THEREFO RE, THIS SUB CLAUSE SEEKS TO ALLOCATE 'COMMON INTEREST EXPENSES' TO TAX ABLE INCOME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN W ORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS 'EXPEND ITURE BY WAY OF INTEREST.WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT' AND THE ONLY CATEGORIES OF INCOM E AND RECEIPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALL Y EXCLUSIVE CATEGORIES OF 'TAX EXEMPT INCOME AND RECEIPT' AND ' TAXABLE INCOME AND RECEIPT'. NO OTHER CLASSIFICATION IS GERMANE TO THE CONTEXT IN WHICH RULE ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 7 OF 10 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 EXPENDI TURE DIRECTLY 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 INCOME OR RECEIPT' I T ENDS UP ALLOCATING 'EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIREC TLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT,PLUS INTEREST WHIC H IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME' (EMPHASIS BY UNDERL INING 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 EXPENDITU RE IS RS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRI NG 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 I NCOME. 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 8 D (2) (I I), ALLOCATION OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WILL BE FOR RS 90,000 BECAUSE, AS PER FORMU LA 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 AN D 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 RS 18,000 WHEREAS ENTIRE CO MMON INTEREST EXPENDITURE WILL ONLY BE RS 10,000. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPENSES, INTEREST EXP ENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDED, INTERE ST EXPENSES DIRECTLY RELATABLE TO TAXABLE INCOME, EVEN IF ANY, ARE NOT E XCLUDED. ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 8 OF 10 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX R ULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PL AIN 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 AP PLICATION, AS WAS BEFORE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GOD REJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDI TY OF RULE 8 D WAS 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 AT TRIBUTABLE 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 EXEM PT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHICH IS TO BE EXCLUDED FROM THE DEFINITION OF VARI ABLE 'A' IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECAUSE IT IS O NLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLOCATED AS IND IRECTLY RELATABLE TO TAXABLE INCOME AND TAX EXEMPT INCOME, CAN BE COMPUT ED. THIS IS CLEAR FROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDS HIPS OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SU PRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED O N BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RAT IONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN ST ATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNG IBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORR OWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS . IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORT IONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT W ILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITUR E BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PART ICULAR 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 STATUT E OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRA TIONALITY. THERE IS CERTAINLY NO 'MADNESS IN THE METHOD'. ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 9 OF 10 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTI CULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2) (II), AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UPHELD BY H ON'BLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY O THER STAND ON THE ISSUE WITH REGARD TO THE ACTUAL IMPLEMENTATION OF T HE FORMULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPL ICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, AS HAS B EEN NOTED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE ( SUPRA), ' AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKE N (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INT EREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.)'. ACCORDINGLY, EVEN BY REVENU E'S OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEM PT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIR ED 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 PROC EED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II) IS RELAXED IN ACTUA L IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN C ONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENGE BEFORE HON'BL E HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRA L BOARD OF DIRECT TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTH ER EITHER BY INITIATING SUITABLE AMENDMENT TO RULE 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 UN DERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMO NSTRATING LACK OF 'PERVERSITY, CAPRICE OR IRRATIONALITY' IN RULE 8D B EFORE HON'BLE HIGH COURT, AND TAKE ANOTHER STAND WHEN IT COMES TO ACTU AL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVE N AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REP RESENTATIVE IS IN ACCORDANCE WITH THE STRICT WORDING OF RULE 8D(2)(II ), WE HAVE TO HOLD THAT, FOR THE REASONS SET OUT ABOVE, THIS RIGID STA ND CANNOT BE APPLIED IN PRACTICE. 9. IN THE LIGHT OF THE ABOVE ANALYSIS, THE INTEREST EXPENDITURE WILL HAVE TO BE EXCLUDED FROM THE EXPENSES TO BE ALLOCATED UNDER RU LE 8D(2)(II) FOR THE REASON THAT THE INTEREST EXPENDITURE IS NO WAY RELATABLE T O EXEMPT INCOME. THE ENTIRE ITA NO.1943/AHD/2012 AND C.O. NO.44/AHD/2013 ASSESSMENT YEAR: 2009-10 PAGE 10 OF 10 BORROWING BY THE ASSESSE, AS WE HAVE SEEN ON THE FA CTS OF THIS CASE, HAS BEEN PASSED ON THE AIDL AND ENTIRE INTEREST ON THIS BOR ROWING HAS BEEN RECEIVED FROM THE AIDL. IT IS COMPLETELY A BACK TO BACK TRAN SACTION AND THE MATERIAL ON RECORD CLEARLY DEMONSTRATES THAT. JUST BECAUSE IT I S ROUTED THROUGH THE SAME BANK ACCOUNT, IT CANNOT BE PRESUMED THAT THE MONEY IS OUT OF THE COMMON FUNDS. SUCH A PRESUMPTION, AS HAS BEEN STRENUOUSLY ARGUED BEFORE US BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WILL BE CONTRARY TO TH E CLEARLY ESTABLISHED FACTS ON RECORD. FOR THIS REASON ALSO, AND IN THE LIGHT OF THE COORDINATE BENCH DECISION IN THE CASE OF CHAMPION COMMERCIAL CO LTD (SUPRA), THE RELIEF GRANTED BY THE CIT(A) WAS QUITE JUSTIFIED. 10. AS FOR THE CROSS OBJECTION FILED BY THE ASSESSE , LEARNED COUNSEL DID NOT PRESS THE SAME. IT IS TREATED AS NOT PRESSED AND DI SMISSED AS SUCH. 11. IN THE RESULT, THE APPEAL AS ALSO THE CROSS OBJ ECTION ARE DISMISSED. PRONOUNCED IN THE OPEN COURT TODAY ON 17 TH DAY OF JULY, 2015 SD/- SD/- S. S. GODARA PRAMOD KUM AR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD, THE 17 TH DAY OF JULY, 2015 COPIES TO: (1) THE APPELLANT (2) THE RESPON DENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT/DEPUTY REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD