M/s. M.C. Davar Holdings Pvt. Ltd., Mumbai V. The Deputy Commissioner of Income Tax, Circle-2(1)(2), Baroda

ITA 3408/AHD/2016

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5580 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2013-2014
• Appeal Filed On: 19-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A; 64; 10

Judgement Text

, MH MHMH MH * ** * IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD L LL LK KK KOZJH OZJH OZJH OZJH OLHE OLHE OLHE OLHE VGEN VGEN VGEN VGEN] YS[KK LNL; , ] YS[KK LNL; , ] YS[KK LNL; , ] YS[KK LNL; ,OA OAOA OA EK/ EK/EK/ EK/KQFERK KQFERK KQFERK KQFERK JKW; JKW;JKW; JKW;] ] ] ] U; U;U; U;KF KFKF KF;D LNL; DS LE{KA ;D LNL; DS LE{KA ;D LNL; DS LE{KA ;D LNL; DS LE{KA BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SMT MADHUMITA ROY, JUDICIAL MEMBER ./ I.T.A. NO. 3408/AHD/2016 ( / ASSESSMENT YEAR : 2013-14) M/S. M. C. DAVAR HOLDINGS PVT. LTD., 410, GATEWAY PLAZA, NEAR HIRANANDANI GARDENS, A.S. MARG, POWAI, MUMBAI-400 0176 / VS. DCIT, CIR 2(1)(2), BARODA. ./ ./ PAN/GIR NO. : AABCM 4238 Q ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : MS. URVASHI SODHAN, A.R. / RESPONDENT BY : SHRI LALIT P. JAIN, SR. D.R. / DATE OF HEARING 08/10/2018 !'# / DATE OF PRONOUNCEMENT 15/11/2018 $% / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)2, VADODARA [CIT(A) IN SHORT] VIDE APPEAL NO.CAB/(A)-2 /211/15-16 DATED 20.09.2016 ARISING IN THE MATTER OF ASSESSMENT ORDE R PASSED UNDER SEC.143(3) OF THE INCOME TAX ACT, 1961(HERE-IN-AFTE R REFERRED TO AS 'THE ACT') DATED 26.11.2015 RELEVANT TO ASSESSMENT YEAR (AY) 2013-14. ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 2 - 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE A RE AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) - 2, [CIT(A)J ERRED IN CONFIRMING THE DISALLOWANCE OF IN TEREST EXPENSES AT RS. 18,15,956 AS AGAINST RS.6,95,653 WO RKED OUT BY THE APPELLANT AS INTEREST EXPENDITURE ATTRIBUTABLE TO INCOME EXEMPT U/S 10 APPLYING PROVISIONS OF SECTION 14A R. W. RULE 8D(2)(II) AND THEREBY MAKING AN ADDITION OF RS. 11, 20,303. YOUR APPELLANT SUBMITS THAT THE ABOVE DISALLOWANCE IS WRONGLY MADE UNDER THE FACTS OF THE APPELLANT'S CASE AND TH E SAME OUGHT TO BE DELETED. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWA NCE OF EXPENSES AT RS. 2,71,704 AS AGAINST RS. 1,30,302 WO RKED OUT BY THE APPELLANT AS INTEREST EXPENDITURE ATTRIBUTABLE TO INCOME EXEMPT U/S 10 APPLYING PROVISIONS OF SECTION 14A R. W. RULE 8D(2)(III) AND THEREBY MAKING AN ADDITION OF RS. 1, 41,402. YOUR APPELLANT SUBMITS THAT THE ABOVE DISALLOWANCE IS WRONGLY MADE UNDER THE FACTS OF THE APPELLANT'S CASE AND TH E SAME OUGHT TO BE DELETED. 3. THE LEARNED CIT(A) ERRED IN CONCLUDING THAT LONG -TERM INVESTMENTS AMOUNTING TO RS. 2,08,24,270 ARE NOT MA DE OUT OF OWN FUNDS OF THE APPELLANT. YOUR APPELLANT SUBMITS THAT THE AFORESAID FINDING O F THE CIT(A) IS ERRONEOUS UNDER THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE. 4. THE LEARNED CIT(A) ERRED IN CONSIDERING STRATEGI C INVESTMENTS AT THE TIME OF COMPUTATION OF DISALLOWANCE U/S. 14A R. W. RULE 8D. YOUR APPELLANT SUBMITS THAT UNDER THE FACTS AND CIR CUMSTANCES OF THE APPELLANT'S CASE, STRATEGIC INVESTMENTS OUGHT T O BE EXCLUDED AT THE TIME OF WORKING OUT DISALLOWANCE UNDER SECTI ON 14A R.W, RULE 8D. ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 3 - 5. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER OF CONSIDERING INVESTMENTS AMOUNT ING TO RS. 4,59,503 IN FORM OF CASH & CASH EQUIVALENTS AT THE TIME OF WORKING OF DISALLOWANCE OF INTEREST EXPENDITURE BY APPLYING THE PROVISIONS OF SECTION 14A R.W. RULE 8D. YOUR APPELLANT SUBMITS THAT UNDER THE FACTS AND CIR CUMSTANCES OF YOUR APPELLANT'S CASE THE AFORESAID INVESTMENTS OUG HT TO BE EXCLUDED AT THE TIME OF WORKING OF DISALLOWANCE U/S . 14A R.W. RULE 8D. 6. WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT SU BMITS THAT THE DISALLOWANCE U/S.14A IS EXCESSIVE AND THE SAME OUGH T TO BE REDUCED SUBSTANTIALLY. 7. YOUR APPELLANT CRAVES LEAVES TO ADD TO, ALTER, A MEND OR VARY ALL OR ANY OF THE OF AFORESAID GROUNDS OF APPEAL AS THE Y/THEIR REPRESENTATIVE MAY DEEM FIT. 3. THE ASSESSEE HAS RAISED AS MANY AS SEVEN GROUNDS OF APPEAL BUT THE INTERCONNECTED ISSUE RAISED BY THE ASSESSEE IS AGAI NST THE DISALLOWANCE CONFIRMED BY THE LD. CIT(A) U/S 14A R.W.R. 8D OF TH E INCOME TAX ACT. 4. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF INVESTMENT A ND GRANTING OF LOANS AS NON-BANKING FINANCIAL CORPORATION. 4.1 THE ASSESSEE DURING THE YEAR HAS EARNED DIVIDEN D INCOME AND SHARE OF PROFIT FROM THE PARTNERSHIP FIRM OF RS. 2,05,09, 772/- AND 18,08,617/- RESPECTIVELY WHICH WERE CLAIMED AS EXEMPTED U/S 10( 34) AND 10(2A) OF THE ACT. ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 4 - 4.2 THE ASSESSEE AGAINST SUCH INCOME HAS MADE THE D ISALLOWANCE OF RS. 2,41,355/- U/S 14A OF THE ACT. 4.3 THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS ON THE DIRECTION OF THE AO FURNISHED THE WORKING OF THE DISALLOWANCE OF THE EXPENSES IN RELATION TO EXEMPTED INCOME UNDER THE PROVISION OF SECTION 14A R.W.R 8D OF THE ACT FOR RS.8,25,955/-. 4.4 THE ASSESSEE ALSO CLAIMED THAT THE INVESTMENT W AS MADE BY IT OUT OF ITS OWN FUND. THEREFORE, ALL THE INVESTMENTS CAN NOT BE CONSIDERED FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE OF EXPEN SES U/S14A. HOWEVER, THE AO DISREGARDED THE CONTENTION OF THE A SSESSEE BY OBSERVING THAT THE ASSESSEE FAILED TO JUSTIFY THE SOURCE OF F UND UTILIZED IN MAKING THE IMPUGNED INVESTMENT. ACCORDINGLY, THE AO INVOKED TH E PROVISION OF SECTION 14A R.W.R 8D OF THE ACT AND MADE THE FOLLOW ING DISALLOWANCES. SR NO. PARTICULARS AMOUNT I. DIRECT EXPENSES UNDER RULE 8D(2)(I) NIL II. INTEREST EXPENSES UNDER RULE 8D(2)(II) 18,15,956/- III. ADMINISTRATIVE EXPENSES UNDER RULE 8D(2)(III) 2, 71,074/- TOTAL 20,87,030/- IN VIEW OF ABOVE, THE AO HAS MADE THE DISALLOWANCES OF RS.18,45,695/- (20,87,030 2,41,335 AMOUNT ALREADY DISALLOWED) AN D ADDED TO THE TOTAL INCOME OF THE ASSESSEE. ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 5 - 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LD. C IT(A) WHO HAS PARTLY CONFIRMED THE ORDER OF AO BY OBSERVING AS UN DER: D) THE ARGUMENTS OF OWN FUNDS IN THE FORM OF SHARE CAP ITAL AN RESERVE SURPLUS HAVE BEEN ALSO CAREFULLY CONSIDERED AND IT IS NOTICED THAT THE APPELLANT COMPANY HAS INVESTED IN FIXED AS SETS AND LONG TERM LOAN AND ADVANCES AT RS.6.70 CRORES AND RS.32.67 CR ORES RESPECTIVELY. THUS THE INVESTMENT IN FIXED ASSETS AND LONG TERM L OAN AND ADVANCES TOTALING TO RS.39.37 CRORES EXCEEDED THE OWN FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL AND RESERVE & SURPLUS AMOUNTI NG TO RS.32.35 CRORES. UNDISPUTEDLY, THE APPELLANT COULD NOT PROVE UTILIZA TION OF OWN FUNDS FOR INVESTMENT IN THE ASSETS RESULTING INTO E XEMPTED INCOME. IT MAY ALSO BE NOTED THAT THE APPELLANT ITSELF HAS ADM ITTED REVISED DISALLOWANCE U/S 14A R.W. RULE 8D AT RS.8,25,955/-A ND HENCE IT EMERGES THAT THE FUNDS OF THE APPELLANT ARE MIXED FUND. THE HON'BLE ITAT CHANDIGARH IN THE CASE OF ANILKUMAR SINGHANIA VS ACIT (2014) 51 TAXMAAN.COM 98 HAS HELD THAT THE THEORY OF DISALLOWANCE U/S 14A R. W. RULE 8D ON PROPORTIONATE BASIS ITSELF IS BASED ON C ONCEPT OF MIXED FUNDS AND HENCE IN CASE OF MIXED FUND, DISALLOWANCE HAS TO BE MADE. HON'BLE HIGH COURT IN THE CASE OF AVON CYCLES LTD VS CIT (2015) 53 TAXMAAN.COM 297 (P&H), HAS ALSO HELD THAT IN CASE OF MIXED FUND, INTEREST PAID ON BORROWED FUND WAS ALSO RELATABLE T O INVESTMENT MADE IN TAX FREE ASSETS AND HENCE PROPORTIONATE DISALLOWANC E U/S 14A R.W. RULE 8D (2)(II) IS JUSTIFIED. THE RATIO LAID DOWN IN THE SE DECISIONS IS CLEARLY APPLICABLE IN THE CASE OF APPELLANT. BEING AGGRIEVED BY THE ORDER OF LD. CIT(A) ASSESSEE IS IN APPEAL BEFORE US. 6. THE LD. AR BEFORE US SUBMITTED THAT IN THE IDENT ICAL FACTS AND CIRCUMSTANCES THE HONBLE ITAT IN THE OWN CASE OF T HE ASSESSEE IN ITA NO.968/AHD/2014 & 974/AHD/2016 PERTAINING TO THE A. Y. 2010-11 AND 2012-13 HAD DECIDED THE ISSUE IN FAVOR OF THE ASSES SEE. ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 6 - 7. ON THE OTHER HAND LD. DR VEHEMENTLY SUPPORTED TH E ORDER OF AUTHORITIES BELOW. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. AT THE OUTSET, WE FIND THAT IN THE IDENTICAL FACTS AND CIRCUMSTANCES THE HONBLE ITAT IN THE OWN CASE OF T HE ASSESSEE HAS ALLOWED THE APPEAL IN ITA NO.974/AHD/2016 WHEREIN I T WAS HELD AS UNDER: '4. I HAVE CAREFULLY CONSIDERED THE FACTS ON RECORD AND SUBMISSION OF THE LD. AR. GROUND NO.1 PERTAINS TO DISALLOWANCE OF RS.3,80,764/- U/S 14A R.W. RIDE 8D. IN ADDITION TO THE DISALLOWANCE O F RS. 13,22,660/- ALREADY MADE BY THE APPELLANT. SINCE THE APPELLANT HAS MADE THE DISALLOWANCE OUT OF INTEREST EXPENDITURE AS PER THE PROVISIONS OF SECTION 14A R.W. RULE 8D. THE APPLICABILITY OF THIS RULE HA S BEEN CONCLUSIVELY ESTABLISHED. UNDISPUTEDLY, THE APPELLANT HAS NOT MA INTAINED SEPARATE SET OF ACCOUNTS FOR INVESTMENTS AND EARNING OF EXEM PTED INCOME. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE ID.AR HAS RAISED MAINLY T\VO CONTENTIONS THAT THE INVESTMENTS MADE IN CERTAIN CO MPANIES BEING A STRATEGIC INVESTMENT AMOUNTING TO RS.1,08,24,270/- SHOULD BE EXCLUDED FROM THE AVERAGE VALUE OF INVESTMENTS WHILE COMPUTI NG THE DISALLOWANCE AND SUCH INVESTMENTS WERE MADE OUT OF OWN FUNDS. ON PERUSAL OF THE DETAILS FURNISHED, I FIND THAT THERE IS NO DIRECT NEXUS BETWEEN THE INVESTMENTS AND NON-INTEREST BEARING FU NDS AND HENCE THIS ARGUMENT OF THE APPELLANT IS NOT ACCEPTABLE. FURTHE R, UNDER THE PROVISIONS OF SECTION 14A R.W. RULE 8D, THERE IS NO EXCEPTION PROVIDED FOR EXCLUSION OF THE STRATEGIC INVESTMENTS, IN FACT , ALL THE INVESTMENTS MADE BY THE APPELLANT COMPANY ARE RESULTING INTO DI VIDEND INCOME WHICH IS EXEMPTED FROM THE INCOME TAX AND HENCE IN MY CONSIDERED VIEW ALL THE INVESTMENTS RESULTING INTO EXEMPTED IN COME TO BE CONSIDERED FOR DISALLOWANCE AS PER RULE 8D. IT MAY ALSO BE NOTED THAT CIT(A)-III, BARODA VIDE HIS ORDER DATED 28.01.2014 CONTAINED IN APPEAL NO. CAB/III-2S4/2012-13 (2010-11) HAS CONFIRMED THE DISALLOWANCE OF INTEREST ON ALL THE INVESTMENTS FOR DETAILED REASON S MENTIONED IN PARAS ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 7 - 4.3 TO 4.3.5 OF THE ORDER. THEREFORE, IN VIEW OF TH E ABOVE FACTS, THE DISALLOWANCE MADE BY THE AO AT RS.3,80,764/- IN ADD ITION TO THE DISALLOWANCE ALREADY MADE BY THE APPELLANT, IS CONF IRMED. THUS, APPELLANT FAILS IN RESPECT OF GROUND NO. 1. 3. LEARNED AUTHORIZED REPRESENTATIVE VEHEMENTLY CON TENDS DURING THE COURSE OF HEARING THAT THE LOWER APPELLATE AUTHORIT Y HAS ERRED IN LAW AS WELL AS ON FACTS IN AFFIRMING THE IMPUGNED DISALLOW ANCE. THE ASSESSEE FILES BEFORE US A COORDINATE BENCH'S ORDER IN ITA N O.968/AND/2014 IN ITS OWN CASE FOR PRECEDING ASSESSMENT YEAR 2010-11 DECI DED ON 28.04.2017 AS FOLLOWS: '4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD, AND DULY CONSIDERED FACTS OF THE CASE IN TH E LIGHT OF THE APPLICABLE LEGAL POSITION. WE FIND THAT THERE IS NO DISPUTE THAT RULE 8D COMES INTO PLAY IN THIS CASE BUT ESSENTIALLY DISPUT E REVOLVES AROUND AS TO HOW MUCH PORTION OF INTEREST EXPENSES ARE TO BE DISALLOWED UNDER THAT RULE. IT IS ON THIS POINT THAT THERE ARE VARYI NG PERCEPTIONS. WHILE THE ASSESSEE HAS OFFERED DISALLOWANCE OF RS 7,70,830 (I N ADDITION TO 0.5% OF AVERAGE INVESTMENTS YIELDING TAX EXEMPT INCOME, WHI CH WORKS OUT TO RS.2,20,714) BY TAKING INTO ACCOUNT ONLY SUCH INVES TMENTS ON WHICH TAX EXEMPT INCOME WAS ACTUALLY EARNED, THE ASSESSING OF FICER HAS COMPUTED THIS PORTION OF DISALLOWANCE AT RS 13,86,103 BY TAK ING INTO ACCOUNT ENTIRE INVESTMENTS YIELDING TAX EXEMPT INCOME-IRRES PECTIVE OF WHETHER OR NOT THERE WAS ANY TAX EXEMPT INCOME IN THE RELEV ANT PREVIOUS YEAR OR NOT. LEARNED COUNSEL HAS, HOWEVER, GIVES A NEW TWIS T 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 IN COME AND THESE INVESTMENTS ARE CARRIED FORWARD FROM AN EARLIER POI NT 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 PA RT 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. ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 8 - 5. THE PLEA OF THE LEARNED COUNSEL IS INDEED WELL TAKEN, PARTICULARLY AS IT IS BEYOND ANY DOUBT OR CONTROVER SY THAT THE INTEREST FREE FUNDS AVAILABLE TO THE ASSESSEE WERE FAR IN EX CESS OF THE INVESTMENTS YIELDING TAX EXEMPT INCOME. WE FIND THAT FIRSTLY, I N VIEW OF THE FACT THAT THE ASSESSEE HAS INTEREST FREE FUNDS FAR IN EXCESS OF THE INVESTMENTS YIELDING TAX EXEMPT INCOME, A PRESUMPTION IS NECESS ARILY TO BE TAKEN THAT THE INVESTMENTS WERE MADE OUT OF INTEREST FREE FUNDS. THAT POSITION IS SUPPORTED BY HON'BLE BOMBAY HIGH COURT'S DECISIO N IN THE CASE OF CIT VS RELIANCE UTILITIES & POWER LTD [ (2009) 313 JTR 340 (BOM)], AND A SERIES OF THE ORDERS PASSED BY VARIOUS COORDI NATE BENCHES OF THIS TRIBUNAL HAVE APPLIED THE SAME IN SHE PRESENT CONTE XT AS WELL. AS A COROLLARY TO THIS PRESUMPTION, NO PART OF INTEREST PAYMENT CAN BE SAID TO BE ATTRIBUTABLE TO THE INVESTMENTS YIELDING TAX EXE MPT INCOME. IN SUCH A POSITION, SO FAR AS INTEREST DISALLOWANCE UNDER RUL E 8D IS CONCERNED, NO PART OF INTEREST EXPENSES CAN BE DISALLOWED UNDER S ECTION 8 D AT ALL. THIS PROPOSITION FINDS SUPPORT FROM A DECISION OF C OORDINATE BENCH IN THE CASE OF ACIT VS CHAMPION COMMERCIAL CO LTD [(20 12) 139 ITD 108 (KOL)J, WHICH NOW STANDS SPECIFICALLY APPROVED BY HON'BLE DELHI HIGH COURT IN THE CASE OF PCIT VS BHARTI OVERSEAS L IMITED 1(2015) 64 TAXINANN.COM 340 (DEL)]. IN THE SAID CASE, THE COOR DINATE BENCH, SPEAKING THROUGH ONE OF US, HAD OBSERVED AS FOLLOWS : 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METHO D SO FAR AS RULE 8D(2)(I) AND (HI) IS CONCERNED. IT IS ONLY WITH REG ARD TO THE COMPUTATION UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDLY DEA LS WITH A SITUATION IN WHICH 'THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABL E TO ANY PARTICULAR INCOME OR RECEIPT'. CLEARLY, THEREFORE, THIS SUB CL AUSE SEEKS TO ALLOCATE 'COMMON INTEREST EXPENSES' TO TAXABLE INCOME AND TA X 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 IN TERESTED WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT' AND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SCHEME OF RULE 8D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF 'TA X EXEMPT INCOME AND RECEIPT' AND 'TAXABLE INCOME AND RECEIPT'. NO OTHER CLASSIFICATION IS GERMANE TO THE CONTEXT IN WHICH RULE 8D IS SET OUT, NOR DOES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 9 - 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) A DMITTEDLY 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 WHICH I S DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME' [EMPHASIS SUPPLIED]. THIS INCONG RUITY 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 RESP ECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNE D IS RS. 10,000. OUT OF THE BALANCE RS. 90,000, THE ASSESSEE HAS PAID INTEREST OF RS. 80,000 FOR FACTORY BUILDING CONSTRU CTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS 'NOT DIRECTLY ATTRIBUTABLE TO ANY-PARTICUL AR 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, A S PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE A LLOCATED 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 INTEREST EXPENS ES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR'. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AN D LAX EXEMPT INCOME ARE IN THE RATIO OF 4:1, IN SUCH A CASE, THE INTEREST (UNALLOWABLE UNDER RULE 8D(2)(II) WILL BE RS. 18,00 0 WHEREAS ENTIRE COMMON 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 ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 10 - TO TAX EXEMPT INCOME ARE EXCLUDED, INTEREST EXPENSE S 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 R ULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PL AIN WORDS OF THE RULE 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RUL E 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. V. DY. CIT [2010] 328 ITR 81 / 194 TAXMAN 203 WHEN CONSTITUTIONAL VALIDITY OF RULE 8D WAS IN CHALLENGE , IS THAT 'IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONE D AND THE 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 EXAMPLE- ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT /MACHINERY ETC.)'. THEREFORE, IF IS NOT ONLY THE INTEREST DIRECTLY ATT RIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 8D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHICH IS TO BE EXCLUDED FROM THE DE FINITION OF VARIABLE 'A' IN FORMULA AS PER RULE 8D(2)(II), AND RIGHTLY S O, BECAUSE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLOCATED AS INDIRECTLY RELATABLE W TAXABLE INCOME AND TAX EXEMP T INCOME, CAN HE COMPUTED. THIS IS CLEAR FROM THE FOLLOWING OBSERVAT IONS 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 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 FUNGI BLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWE D FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONE D 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 ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 11 - WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR IN COME OR RECEIPT (FOR EXAMPLE-ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC. THE JUSTIFICATION THAT HAS BEE N OFFERED IN SUPPORT OF THE RATIONALE FOR R. 8D CANNOT BE REGARD ED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TES TS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS CO URT TO HOLD THAT THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERT AINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PART ICULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8D(2)( II), AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UPHELD BY HON'BL E 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 & BOYCE MFG . CO. LTD. (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 O R RECEIPT (FOR EXAMPLE- ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT /MACHINERY ETC.)'. ACCORDINGLY, EVEN BY REVENUE'S OWN ADMISSION, INTER EST 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 PRO CEED ON THE BASIS THAT RIGOUR OF RULE 8D(2)(II) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN C ONSTITUTIONAL VALIDITY OF RULE 8D WAS IN CHALLENGE BEFORE HON'BLE HIGH COU RT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FAR THE CENTRAL BO ARD OF DIRECT TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RULE 8D(2)(II) OR BY ADOPTING AN INTER PRETATION 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 AUTHO RITIES CANNOT LAKE ONE STAND WHEN DEMONSTRATING LACK OF 'PERVERSITY, C APRICE OR IRRATIONALITY' IN RULE 8D BEFORE HON'BLE HIGH COURT , AND TAKE ANOTHER ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 12 - 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 ACCOR DANCE WITH THE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD T HAT, FOR THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PR ACTICE. 6. CLEARLY, THEREFORE, NO INTEREST WAS WARRANTED O N ACCOUNT OF INTEREST COMPONENT. THE DISALLOWANCE OFFERED BY THE ASSESSEE WAS CERTAINLY MUCH MORE THAN ADEQUATE-PARTICULARLY AS THE FACTUAL ELEMENTS EMBEDDED IN LEARNED COUNSEL'S CONT ENTIONS ARE NOT EVEN DISPUTED BEFORE US. WE, THEREFORE, VACATE THE IMPUGNED DISALLOWANCE OF RS 7,23,166. THE ASSESSEE GETS THE RELIEF TO THIS EXTENT. ' 4. IT HAS THEREFORE COME ON RECORD THAT THE ABOVE CO-ORDINATE BENCH HAS ALREADY ADJUDICATED THE VERY ISSUE IN ASSESSEE' S FAVOUR. THIS FACTUAL POSITION HAS GONE UNREBUTTED FROM THE REVENUE SIDE. WE THEREFORE ADOPT JUDICIAL CONSISTENCY IN THE IMPUGNED ASSESSMENT YEA R AS WELL TO AFFIRM CIT(A)'S FINDINGS UNDER CHALLENGE. RESPECTFULLY, FOLLOWING THE SAME, WE REVERSE THE OR DER OF AUTHORITIES BELOW AND DIRECT THE AO TO DELETE THE ADDITION MADE BY HIM. HENCE THE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . THIS ORDER PRONOUNCED IN OPEN COURT ON 15/11/2018 SD/- SD/- E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; OLHE OLHE OLHE OLHE VGEN VGEN VGEN VGEN U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; YKS[KK LN YKS[KK LN YKS[KK LN YKS[KK LNL; L; L; L; (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 15/11/2018 ITA NO.3408/AHD/2016 M/S. M.C. DAVAR HOLDINGS PVT LTD. DCIT A.Y. 2013-14 - 13 - PRITI YADAV, SR.PS !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. & '( ) / CONCERNED CIT 4. ) () / THE CIT(A)-2, VADODARA. 5. ,-. //'( , '(# , 12$&$ / DR, ITAT, AHMEDABAD. 6. .34 5 / GUARD FILE. % & / BY ORDER, , / //TRUE COPY// '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD