Appeal Details
Counselvise Citation
[2017] 130 COUNSELVISE.COM (IT) 8087 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 month(s) 30 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
25-01-2017
Appeal Filed By
Department
Bench Allotted
A
Assessment Year
2009-2010
Appeal Filed On
26-09-2016
Judgement Text
, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , ! ' . #$ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.2790/MDS./2016 / ASSESSMENT YEAR : 2009-10 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE II(14), 121,M.G.ROAD, CHENNAI 34. VS. M/S. KOTHARI SUGARS AND CHEMICALS LTD., KOTHARI BUILDINGS, NO.115,MAHATMA GANDHI SALAI, NUNGAMBAKAM, CHENNAI 34. PAN : AABCK 2495 F ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : SHRI SHIVA SRINIVAS, JCIT D.R /RESPONDENT BY : SHRI R.VIJAYARAGHAVAN,ADVOCATE / DATE OF HEARING : 26 - 12 - 2016 / DATE OF PRONOUNCEMENT : 25 - 01 - 2017 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-8,CHENNAI , DATED 30.06.2016 PERTAINING TO ASSESSMENT YEAR 2009-10. ITA NO.2790/16 :- 2 -: 2. THE MAIN GRIEVANCE OF THE REVENUE IN THIS APPEA L IS WITH REGARD TO DELETION OF DISALLOWANCE OF ` 74,83,404/- MADE UNDER SEC.14A READ WITH RULE 8D(2)(II) OF THE INCOME TAX RULES MADE BY THE LD. ASSESSING OFFICER. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A LIMITED COMPANY ENGAGED IN MANUFACTURE AND SALE OF SUGARS A ND CHEMICALS. IT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-1 0 ON 28.09.2009 DECLARING A LOSS OF ` 32,70,696/-. ASSESSMENT WAS COMPLETED UNDER SECTI ON 143(3) ON 29.12.2011 BY MAKING AN ADDITION OF ` 74,83,404/- BEING INTEREST PAID ON LOANS DISALLOWED U/S.14A OF THE AC T. THE ASSESSEE FILED AN APPEAL AGAINST THIS ORDER. ON APPEAL, THE COMMIS SIONER OF INCOME TAX(APPEALS) DELETED THE ADDITION MADE BY THE AO BY OBSERVING THAT ANY EXPENDITURE DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT CANNOT BE CONSIDERED FOR COMPUTATION UNDER CLAUSE (II) OF RULE 8D(2). THEREFORE, THE INTEREST AMOUNT OF ` 4,04,915/- CAN ONLY BE CONSIDERED FOR COMPUTING THE DISALLOWANCE UNDER RULE 8D(2)(II) AND BALANCE AMOUN T WAS DELETED FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO IN COME NOT INCLUDIBLE IN TOTAL INCOME. AGGRIEVED WITH THE ORDER OF LD.CIT(A) , THE REVENUE IS IN APPEAL BEFORE US. 2. BEFORE US, LD.D.R SUBMITTED THE FOLLOWING POINT S FOR OUR CONSIDERATION. A) THE CIT(A) ERRED IN DELETING THE DISALLOWANCE M ADE U/S.14A R.W.RULE 8D(2)(II), WHEN THE ASSESSEE WAS MAINTAINING MIXED BAG OF FUNDS AND FAILED ITA NO.2790/16 :- 3 -: TO SUBSTANTIATE THAT SUCH INVESTMENT IN ASSETS YIEL DING EXEMPT INCOME ARE OUT OF INTEREST FREE FUNDS. B) THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E BUSINESS OF THE ASSESSEE IS AN INDIVISIBLE ONE AND SEC.14A WAS SPECIFICALLY ENACTED TO DISALLOW THE EXPENDITURE RELATING TO EXEMPT INCOME EARNED IN AN INDIVISIBLE BUSINESS AND THAT RULE 8D PROVIDES THE MECHANISM TO QUANTIFY SUC H EXPENDITURE. C) THE CIT(A) FAILED TO APPRECIATE THAT THE APPORTI ONMENT OF DIRECT OR INDIRECT EXPENDITURE TOWARDS TAXABLE AND EXEMPT INCOME HAS B ECOME ACADEMIC IN VIEW OF RULE 8D WHICH PRESCRIBES MECHANISM FOR WORK ING OUT THE DISALLOWANCE U/S. 14A. THE ASSESSING OFFICER IS BOU ND TO ADOPT RULE 8D FOR MAKING DISALLOWANCES U/S. 14 A, WHERE HE IS NOT SAT ISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. D) THE CIT(A) ERRED IN DISREGARDING THE FACT THAT THE FUNDS UTILIZED BY THE ASSESSEE BEING MIXED FUNDS, THE INTEREST OF RS.5,45 ,71,000/- PAID BY THE ASSESSEE ON BORROWED FUNDS ,IS ALSO RELATABLE TO IN TEREST ON THE INVESTMENTS MADE . HENCE WHILE COMPUTING THE DISALLOWANCE U/S.1 4A READ WITH RULE 8D, THE AC HAS ADOPTED THE VALUE OF INTEREST EXPENSES A T RS.5,45,71,000/- FOR THE PURPOSES OF CLAUSE (II) OF RULE 8D(2). E) HAVING REGARD TO THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE EASE OF AVON CYCLES LTD V.CIT (2015) 53 TAXMANN .COM 297, WHEREIN IT IS HELD THAT WHEN FUNDS USED BY THE ASSESSEE BEING MIX ED FUNDS, INTEREST PAID ON BORROWED FUND WAS ALSO RELATABLE TO INTEREST ON INVESTMENT MADE IN TAX FREE FUNDS, THE CIT(A) OUGHT TO HAVE UPHELD THE DIS ALLOWANCE U/S.14A READ WITH RULE 8D(2)(II) MADE BY THE AC. 3. ON THE OTHER HAND, THE LD.A.R SUBMITTED THAT AN Y EXPENDITURE DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR OF INCOME O R RECEIPT CANNOT BE ITA NO.2790/16 :- 4 -: CONSIDERED FOR COMPUTATION UNDER CLAUSE (II) OF RUL E 8D(2) OF INCOME TAX RULES, 1962. ACCORDING TO HIM, THE INTEREST WHICH I S RELATING TO EARNING OF EXEMPTED INCOME IS AT ` 4,04,915/-, WHICH IS DISALLOWABLE UNDER RULE 8D(2)(II) OF THE RULES. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE MAIN CONTENTION OF LD.D.R IS THAT THE ASSESSEE FILED CERTAIN DETAILS WITH REGARD TO BORROWALS, WHI CH IS FOR THE PURPOSE OF BUSINESS AND THERE ARE CERTAIN EXPENDITURE INCU RRED WHICH IS ONLY FOR THE PURPOSE OF BUSINESS AND NOT FOR THE PURPOSE OF EARNING ANY EXEMPTED INCOME. THESE PARTICULARS ARE NOT MADE AV AILABLE TO THE AO. AS SUCH IT SHALL BE REMITTED TO THE FILE OF AO TO C ONSIDER THE SAME. THE LD.A.R SUBMITTED THAT SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF FARIDA SHOES PVT. LTD. WHEREIN THE TRIB UNAL OBSERVED THAT SPECIFIC INTEREST AND BORROWALS CANNOT BE CONSIDERE D FOR DISALLOWANCE UNDER SEC.14A READ WITH RULE 8D(2)(II) OF THE INCOME TAX RULES. ADMITTEDLY, SIMILAR ISSUE CAME FOR CONSIDERATION BE FORE THIS TRIBUNAL 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 AS FOLLOWS:- 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 TRIBU NAL IN THE CASE OF ACIT V. M/S. BEST & CROMPTON ENGINEERING LT D. IN ITA NO.1603/MDS/2012 DATED 16.7.2013, WHEREIN IT WA S OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE B USINESS ITA NO.2790/16 :- 5 -: PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COM PUTING DISALLOWANCE U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND THE RELEVANT PORTION IS REPRODUCED AS BELOW: 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, ` 1,04,38,000/- AND ` 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 ` 1,04,38,000/. THE AO HAS TAKEN INTO ACCOUNT THE ENTIRE INTEREST EXPENDIT URE OF `.5,79,46,000/- FOR COMPUTING THE ABOVE DISALLOWANC E. THE ID.AR, IN HIS SUBMISSION, HAS GIVEN THE BREAK-UP OF INTEREST WHICH INCLUDES (1) INTEREST ON BANK LOANS: ` 67,92 ,000/- (2) INTEREST ON TERM LOANS ` 3,82,11,000/- AND (3) INT EREST ON OTHER ACCOUNTS: ` 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 ITA NO.2790/16 :- 6 -: 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 LOAN AMOUNTING TO ` 67,92,000/- AND `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 ` 1,29,43,0 00/- 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 SU PPORTS THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS ). THE 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 ITA NO.2790/16 :- 7 -: 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 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 ` 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNED IS ` 10,000. OUT OF THE BALANCE ` 90,000, THE ASSESSEE HAS PAID INTEREST OF ` 80,000 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 ` 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 ` 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST ITA NO.2790/16 :- 8 -: 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 ` 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 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, ITA NO.2790/16 :- 9 -: 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 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 INTERES T 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 (F OR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF T HE 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 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 ITA NO.2790/16 :- 10 - : 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). 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. ITA NO.2790/16 :- 11 - : 5. IN VIEW OF THE ABOVE DECISION, WE ARE OF THE OP INION THAT THE INTEREST ON BORROWING WHICH ARE MADE FOR SPECIFIC P URPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANC E U/S.14A READ WITH RULE 8D OF THE INCOME TAX RULES AND WE ARE INC LINED TO REMIT THE ENTIRE ISSUE IN DISPUTE TO THE FILE OF AO FOR FRESH CONSIDERATION FOR THE PURPOSE OF DISALLOWANCE SEC.14A READ WITH RULE 8D(2)(II) OF THE INCOME TAX RULES AND ACCORDINGLY, REMITTED TO THE FILE OF AO FOR FRESH CONSIDERATION. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 25 TH JANUARY, 2017, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 25 TH JANUARY, 2017. K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF
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