Caress Beauty Care Products P. Ltd., CHENNAI V. ACIT, CHENNAI

ITA 757/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9611 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 09-04-2015
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTHJCIT
• Assessee Lawyers: T BANUSEKARC A
• Keywords: Earning of tax free income; Tax effect; Commercial expediency
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , ! . ' #$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.757 /MDS./2015 ( / ASSESSMENT YEAR :2009-10) M/S.CARESS BEAUTY CARE PRODUCTS PVT. LTD ., CLARION HOUSE, NO.S8, THIRU VI KA INDUSTRIAL ESTATE, GUINDY, CHENNAI 600 032. VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(4), CHENNAI. PAN AABCC 2016 N ( %& / APPELLANT ) ( '(%& / RESPONDENT ) ./ I.T.A.NO.808 /MDS./2015 ( / ASSESSMENT YEAR :2009-10) ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(4), CHENNAI. VS. M/S.CARESS BEAUTY CARE PRODUCTS PVT. LTD ., CLARION HOUSE, NO.S8, THIRU VI KA INDUSTRIAL ESTATE, GUINDY, CHENNAI 600 032. PAN AABCC 2016 N ( %& / APPELLANT ) ( '(%& / RESPONDENT ) ITA NOS.757 & 808/MDS/2015 2 ASSESSEE BY : MR.T.BANUSEKAR,C.A REVENUE BY : MR.A.V.SREEKANTH,JCIT, D.R / DATE OF HEARING : 18.02.2016 /DATE OF PRONOUNCEMENT : 06.04.2016 ) / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS CROSS APPEAL FILED BY THE ASSESSEE AND THE R EVENUE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIO NER OF INCOME TAX(A)-I, CHENNAI DATED 26.12.2014 PERTAINING TO T HE ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE IS IN APPEAL BEFORE US IS WITH RE GARD TO DISALLOWANCE OF ` 21,11,610/- AS AMOUNT EXPENDED TOWARDS EARNING OF EXEMPT INCOME U/S.14A. THE ASSESSEE HAS ALSO RA ISED FOLLOWING ADDITIONAL GROUNDS:- 2A. FOR THAT THE LD.CIT(A) FAILED TO APPRECIATE THA T INVESTMENT NOT YIELDING EXEMPT INCOME HAS TO BE EXCLUDED FOR T HE PURPOSE OF COMPUTING DISALLOWANCE UNDER LIMBS (II) AND (III) OF RULE 8D. ITA NOS.757 & 808/MDS/2015 3 2B. FOR THAT THE LD.CIT(A) FAILED TO APPRECIATE THA T WHEN BORROWED FUNDS WERE NOT USED FOR MAKING INVESTMENTS EARNING EXEMPT INCOME, INTEREST EXPENDITURE RELATIN G TO SUCH BORROWED FUNDS SHOULD BE EXCLUDED WHILE COMPUT ING DISALLOWANCE UNDER LIMB(II) OF RULE 8D. 2C. FOR THAT THE LD.CIT(A) FAILED TO APPRECIATE THA T THE PROVISIONS OF THE SECTION 14A WITH RULE 8D WERE NOT INVOCABLE WHERE THERE WAS NO EXEMPT INCOME. 2D. FOR THAT, WITHOUT PREJUDICE TO THE ABOVE, THE C IT(A) FAILED TO APPRECIATE THAT THE DISALLOWANCE U/S.14A OUGHT TO B E RESTRICTED TO 50% OF TOTAL EXEMPT INCOME. 2E. FOR THAT, WITHOUT PREJUDICE TO THE ABOVE, THE CIT(A) FAILED TO APPRECIATE THAT THE DISALLOWANCE U/S.14A CANNOT EXC EED EXEMPT INCOME. 3. THE ASSESSEE FILED A PETITION FOR ADMISSION OF ADDITIONAL GROUND. WE HAVE GONE THROUGH THE PETITION FILED FOR ADMISSI ON OF ADDITIONAL GROUNDS AND IT WAS DUE TO INADVERTENCE. IN OUR OPI NION, THE NON-FILING OF ADDITIONAL GROUND ALONG WITH THE MAIN GROUND IS AN UNINTENTIONAL. ITA NOS.757 & 808/MDS/2015 4 THE REASON ADVANCED BY THE ASSESSEE IS JUSTIFIED. ACCORDINGLY, THE ADDITIONAL GROUNDS ARE ADMITTED FOR ADJUDICATION. 4. THE FACTS OF THE CASE ARE THAT THE ASSESSEE CLA IMED EXEMPT INCOME ON ACCOUNT OF DIVIDEND AT ` 4,41,580/-. THE AO OBSERVED THAT THERE IS AN INTEREST EXPENDITURE, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO EARNING DIVIDEND AND THE ASSESSMENT WAS COMPLET ED BY THE AO BY APPLYING FORMULA AT ` 19,48,201/-. THEREAFTER, HE COMPUTED THE % OF THE AVERAGE OF THE VALUE OF INVESTMENTS, INC OME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME, AS APPEARED IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR AT I.E 0.5% OF ` 3,26,81,793/- = ` 1,63,409/- TOTALING OF ` 21,11,610/- AND THEREBY MADE DISALLOWANCE U/S.14A OF THE ACT. AGAINST THIS THE ASSESSEE WAS IN APPEAL BEFORE THE LD.CIT(A). ON APPEAL, THE LD.CIT(A) OBSERVED THAT SEC.14A R.W.RUL E 8D WAS APPLICABLE TO THE ASSESSEES CASE AS THE ASSESSMENT YEAR INVOLVED WAS 2009-10, SINCE THE RULE 8D CAME TO EFFECT FROM 24.03.2008. FURTHER, DISALLOWANCE OF INTEREST ON INVESTMENTS AS PER LIMB-(II) OF RULE-8D, THE AVAILABILITY OF OWN FUNDS IS NOT A SA TISFACTORY ITA NOS.757 & 808/MDS/2015 5 EXPLANATION IN VIEW OF THE DECISION OF THE JURISDI CTIONAL HIGH COURT IN THE CASE OF M/S.BEACH MINERALS CO. PVT. LTD., IN T. C (APPEAL) NO.681 OF 2013 VIDE ORDER DATED 02.12.2013 WHEREIN THE LO RDSHIPS SET ASIDE THE CASE FOR DENOVO ENQUIRY AS THE ASSESSEE HAS NOT GIVEN EXPLANATION IN THE MANNER KNOWN TO LAW AS REGARDS P AYMENT OF INTEREST (RELATABLE TO TAXABLE INCOME AND EXEMPT IN COME), HELD THAT:- 11. . THE MERE FACT OF THE AVAILABILITY OF 4 6 CRORES AND ODD BY ITSELF CANNOT BE TAKEN AS FURNISHING OF GOOD EXPLANATION AS REGARDS THE INVESTMENT. EVEN WITH T HE RESERVES & SURPLUS FIGURE QUOTED IN THE BALANCE-SHE ET, WE FEEL THAT THE ASSESSEE HAS THE RESPONSIBILITY OF EXPLAINING THE INTEREST EXPENDITURE OF 4.09 CRORES. FURTHER REGARDING RULE 8D(2), HE OBSERVED THAT THE DECISION IN THE CASE OF ESCORTS LTD., 102 TTJ 522, THE ITAT DELHI H AS CLEARLY HELD THAT INDIRECT MANAGEMENT AND ADMINISTRATION EXPENSE S QUALIFY FOR DISALLOWANCE U/S.14A AND THERE IS NO DECISION SO FA R BY ANY SIMILAR FORUM CONTRADICTING THE ABOVE FINDINGS. FURTHER, H E OBSERVED THAT ITA NOS.757 & 808/MDS/2015 6 SIMILAR VIEW WAS ALSO TAKEN BY ITAT CHENNAI IN THE CASE OF SOUTHERN PETROCHEMICAL INDUSTRIES IN 93 TTJ 161 AS UNDER:- WHETHER TO INVEST OR NOT TO INVEST AND WHETHER TO RETAIN THE INVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY S TRATEGIC DECISIONS WHICH THE MANAGEMENT IS CALLED UPON TO TA KE. THESE ARE MIND-BOGGLING DECISIONS AND TOP MANAGEMEN T IS INVOLVED IN TAKING THESE DECISIONS. THIS DECISIO N MAKING PROCESS IS VERY COMPLICATED AND REQUIRES VER Y CAREFUL ANALYSIS. MOREOVER, THE ASSESSEE HAS TO KEE P TRACK OF VARIOUS DIVIDEND INCOMES DECLARED BY THE INVESTEE COMPANIES AND ALSO TO KEEP TRACK OF THE DI VIDEND INCOME HAVING BEEN REGULARLY RECEIVED BY THE ASSESS EE. THIS ACTIVITY ITSELF CALLS FOR CONSIDERABLE MANAGEM ENT ATTENTION AND CANNOT BE LEFT TO A JUNIOR CLERK. ACCORDINGLY, THE LD.CIT(A) GIVE A DIRECTION TO THE LD. ASSESSING OFFICER TO REWORK THE DISALLOWANCE UNDER LIMB (II) BY TAKING INTO ACCOUNT THE SUGGESTIONS MADE AT PARA 4.2.4 OF CIT(A )S ORDER AND CONFIRMED THE DISALLOWANCE UNDER LIMB (III) BY THE AO. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. ITA NOS.757 & 808/MDS/2015 7 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MAIN GROUNDS & ADDITIONAL GROUNDS AND THE MATERIAL ON RECORD. TH E MAIN CONTENTION OF THE ASSESSEES COUNSEL IS THAT THE AO CONSIDERED THE INVESTMENTS YIELDING TAXABLE INCOME AND ALSO INVESTMENTS NOT YI ELDING TAXABLE INCOME TO APPLY THE FORMULA IN RULE 8D OF I.T RULES . ACCORDING TO HIM, THE AO ALSO INCLUDED THE INTEREST EXPENDITURE WHICH IS INCURRED FOR A SPECIFIC PURPOSE WHILE COMPUTING THE AMOUNT O F EXPENDITURE BY WAY OF INTEREST, OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR AND ALL THE COMP ONENTS IN RULE-8D BEING APPLIED WRONGLY, IT IS TO BE RECOMPUTED. 6. IN OUR OPINION, THERE IS MERIT IN THE PLEA OF THE ASSESSEE. THE INTEREST PAID BY THE ASSESSEE ON BORROWINGS, WHICH ARE USED FOR SPECIFIC PURPOSE CANNOT BE CONSIDERED FOR THE PURPO SE OF COMPUTING DISALLOWANCE U/S.14A R.W.RULE 8D. SIMILARLY INVEST MENTS, WHICH ARE YIELDING TAXABLE INCOME ALSO, CANNOT BE CONSIDERED WHILE APPLYING THE ( B ) IN THE FORMULA SPECIFIED IN RULE-8D. MORE SO , SIMILAR ISSUE WAS CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF ACIT VS. BEST & CROMPTON ENGINEERING LTD., IN ITA NO.1603/MDS./2012 VIDE ORDER DATED 16.07.2013 WHEREIN HELD THAT:- ITA NOS.757 & 808/MDS/2015 8 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF T HIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HA S BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOM E TAX (APPEALS) AND DELETED THE INTEREST ON BANK LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAKING ANY INVEST MENTS HAVING TAX FREE INCOME. WHILE HOLDING SO, THE COMMI SSIONER OF INCOME TAX (APPEALS) HELD AS UNDER:- 5.2.1 HAVING HELD THAT PROVISIONS OF RULE 80 ARE APPLICABLE, LET US NOW EXAMINE WHETHER THE AMOUNT H AS BEEN CORRECTLY QUANTIFIED. THE AO HAD CALCULATED TH E DISALLOWANCE AT ` NIL, ` 1,04,38,000/- AND ` 26,87 ,000/- UNDER (I), (II) & (III) OF RULE 80 (2) RESPECTIVEL Y. THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT, BECAUSE I T IS NIL. WITH REGARD TO THE SECOND COMPONENT BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECT LY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, T HE AO HAS DETERMINED THE AMOUNT AT RS.1,04,38,000/. THE A O HAS TAKEN INTO ACCOUNT THE ENTIRE INTEREST EXPENDI TURE OF RS.5,79,46,000/- FOR COMPUTING THE ABOVE DISALLOWAN CE. THE ID.AR, IN HIS SUBMISSION, HAS GIVEN THE BREAK-U P OF INTEREST WHICH INCLUDES (1) INTEREST ON BANK LOANS : RS.67,92,000/- (2) INTEREST ON TERM LOANS RS.3,82,11,000/- AND (3) INTEREST ON OTHER ACCOUNT S: RS.1,29,43,000/-. IF LOANS HAVE BEEN SANCTIONED FOR SPECIFIC PROJECTS/EXPANSION AND HAVE BEEN UTILIZED TOWARDS THE SAME, THEN OBVIOUSLY THEY COULD NOT HA VE BEEN UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX -FREE INCOMES. FROM THE COPY OF THE SANCTION LETTERS FROM STATE BANK OF BIKANER & JAIPUR IT CAN BE SEEN THAT THE LOAN WAS GRANTED WITH A SPECIFIC REQUIREMENT THAT T HE LOAN SHALL BE UTILIZED FOR PURCHASE OF IMPORTED ITA NOS.757 & 808/MDS/2015 9 MACHINERY WHILE IN THE CASE OF LOAN FROM FEDERAL B ANK, IT IS SEEN THAT THE LOAN WAS TO BE UTILIZED FOR EXP ANSION OF PROJECTS. SANCTION OF BOTH THESE LOANS PROHIBIT UTI LIZATION OF FUNDS FOR PURPOSES OTHER THAN FOR THE UTILIZATIO N FOR WHICH THEY ARE SANCTIONED. FROM THE LEDGER EXTRACT FOR THE YEAR ENDED 31.03.2008 FOR BOTH LOAN ACCOUNTS, I T IS SEEN THAT NO AMOUNT HAS BEEN UTILIZED FOR INVESTMEN T IN SUBSIDIARIES WHICH EARNS TAX-FREE INCOME. THE LOAN AMOUNTS WERE FULLY DISBURSED AND UTILIZED IN THE YE AR ENDED 31.03.2008 (A.Y. 2008-09) ITSELF. TAKING INTO ALL THE FACTS AS STATED ABOVE, I AM OF THE CONSIDERED O PINION THAT IF LOANS/BORROWED AMOUNTS ARE GRANTED FOR SPEC IFIC PROJECTS/EXPANSION AND NO AMOUNT FROM THE SAME HAS BEEN DIRECTLY UTILIZED FOR INVESTMENTS, THEN THE F IRST AND SECOND LIMB OF RULE 80 ATTRIBUTING THE INTEREST PAY MENTS TO THE INVESTMENTS WILL NOT BE APPLICABLE. ACCORDIN GLY, INTEREST ON BANK LOAN AND TERM LOAN AMOUNTING TO RS.67,92,000/- AND RS.3,82, 11,000/- RESPECTIVELY ARE TO BE EXCLUDED FROM THE CALCULATION TO DETERMINE TH E DISALLOWANCE UNDER RULE 8D(2)(II). THE AO IS, THERE FORE, DIRECTED TO TAKE INTO ACCOUNT ONLY THE REMAINING I NTEREST ON OTHER ACCOUNTS AMOUNTING TO RS.1 ,29,43,000/- FO R COMPUTING THE PROPORTIONATE DISALLOWANCE UNDER RUL E 80 (2)(II). 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INC OME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TE RM LOANS FROM THE CALCULATION OF DISALLOWANCE UNDER RULE 8D( 2)(II) AS THE ASSESSEE HAS UTILIZED THE BANK LOAN AND TERM LOAN F OR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSIO N OF PROJECTS AND THESE LOANS WERE SPECIFICALLY SANCTION ED FOR ITA NOS.757 & 808/MDS/2015 10 SPECIFIC PROJECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANC ES, WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS R IGHTLY EXCLUDED SUCH INTEREST FROM THE PURVIEW OF COMPUTAT ION OF DISALLOWANCE UNDER RULE 8D(2)(II). 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNA L IN THE CASE OF CHAMPION COMMERCIAL CO.LTD. (SUPRA) ALSO SUPPORT S THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). T HE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOAN S WERE UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SUCH LOANS, WHETHER SUCH INTEREST IS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)( II), THE TRIBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED . WHILE HOLDING SO, IT HAS HELD AS UNDER:- 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METH OD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERNED. IT IS ONLY WITH REGARD TO THE COMPUTATION UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDLY DEALS WITH A SITUATION IN WHICH THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT . CLEARLY, THEREFORE, THIS SUB CLAUSE S EEKS TO ALLOCATE COMMON INTEREST EXPENSES TO TAXABLE INCO ME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY TH E PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS EXPENDITURE BY WAY OF INTEREST..WH ICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCO ME OR RECEIPT AND THE ONLY CATEGORIES OF INCOME AND RECE IPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALL Y EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECE IPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFI CATION IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DOES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. ITA NOS.757 & 808/MDS/2015 11 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DI RECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WHILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITU RE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BYUNDERLINING SUPPLIED BY US). THIS INCONGRUITY WIL L BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAM PLE: IN THE CASE OF A & CO LTD, TOTAL INTEREST EXPENDITURE IS RS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESP ECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNE D IS RS 10,000. OUT OF THE BALANCE RS 90,000, THE ASSESS EE HAS PAID INTEREST OF RS 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE I NCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATT RIBUTABLE TO ANY PARTICULAR RECEIPT OR INCOME IS THUS ONLY R S 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8 D (2)(II), ALLOCATION OF INTEREST WHICH IS NOT DIRECT LY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WI LL BE FOR RS 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I .E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND TAXABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUN T OF INTEREST INCLUDED IN CLAUSE (I) [ I.E. DIRECT INTER EST EXPENSES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO T AXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4: 1. IN SUCH A CASE, THE INTEREST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE RS 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE ` 10,000/-. ITA NOS.757 & 808/MDS/2015 12 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPENSE S, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME AR E EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO T AXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER TH AN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2 )(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITI ES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (3 28 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WA S IN CHALLENGE, IS THAT IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN ( AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPEC T OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INC OME, WHICH IS TO BE EXCLUDED FROM THE DEFINITION OF VARI ABLE A IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, B ECAUSE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH A RE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INC OME AND TAX EXEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR F ROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED O N BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE ITA NOS.757 & 808/MDS/2015 13 WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN TH E FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR R. 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTI CULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT I N RULE 8 D(2)(II), AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UPHELD BY HONBLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO THE ACTUAL IMPLEMENTATION OF THE FOR MULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II ) IS THAT, AS HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN T HE CASE OF GODREJ AND BOYCE (SUPRA), AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN ( AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ITA NOS.757 & 808/MDS/2015 14 ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTA BLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM COMPUTATIO N OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROC EED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II) IS REL AXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAV ING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RU LE 8 D WAS IN CHALLENGE BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BO ARD OF DIRECT TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RU LE 8D(2)(II) OR BY ADOPTING AN INTERPRETATION AS PER P LAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THI NGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSITY, CAPRICE OR IRRAT IONALITY IN RULE 8D BEFORE HONBLE HIGH COURT, AND TAKE ANOT HER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH THE STRICT WOR DING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FOR THE REASO NS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTI CE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING T HE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOS E OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE G ROUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. ITA NOS.757 & 808/MDS/2015 15 14. THE LAST ISSUE IN THE GROUNDS OF APPEAL OF THE REVENUE IS THAT THE COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN DELETING THE DISALLOWANCE OF ADVANCES MADE TO SUBSIDIARY COMPANIES WRITTEN OFF. 15. THE DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 16. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT T HE ISSUE IN APPEAL HAD ARISEN IN THE ASSESSMENT YEAR 2004-05 A LSO AND ON IDENTICAL FACTS, THE CO-ORDINATE BENCH OF THIS T RIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN ITA NO.1673 & 1674/MDS/2008 DATED 03.5.2012. COPY OF THE ORDER I S PLACED ON RECORD. 17. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT DISALLOWED THE CLAIM OF THE ASSESSEE FOR WRITE OFF OF ADVANCES TO ITS SUBSIDIARY COMPANIES ON THE GROU ND THAT THE ASSESSEE FAILED TO SUBSTANTIATE THAT THE ADVANC ES HAVE BEEN MADE IN THE COURSE OF NORMAL BUSINESS. THE COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE FOLLOWING THE ORDER OF HIS PREDECESSOR IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05 WHERE SIMILAR CLAIM FOR WRITE OFF OF BAD ADVANCES MADE TO SUBSIDIARY COMPANIES WRITTEN OFF HAS BEEN ALLOWED. WE FIND TH AT THE CO- ORDINATE BENCH OF THIS TRIBUNAL SUSTAINED THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) FOR THE ASSESS MENT YEAR 2004-05 ON THE ISSUE OF WRITE OFF OF ADVANCES TO SUBSIDIARY COMPANIES HOLDING AS UNDER:- 6. WE HAVE HEARD THE PARTIES AND HAVE PERUSED TH E ORDERS PASSED BY THE CIT(A) AS WELL AS THE ASSESSIN G OFFICER. WE HAVE ALSO GONE THROUGH THE JUDGEMENTS C ITED BY THE RESPECTIVE PARTIES. IT IS AN ADMITTED FACT T HAT LOAN WAS ADVANCED BY THE ASSESSEE COMPANY TO THE SUBSIDIARIES. THE ASSESSING OFFICER IN HIS ASSESSME NT ORDER DATED 23.3.2006 HAS STATED THAT ONE OF THE ITA NOS.757 & 808/MDS/2015 16 SUBSIDIARY COMPANIES HAS PAID INTEREST TO THE TUNE OF ` 9,19,270/- TO THE ASSESSEE. THE OTHER SUBSIDIARY COMPANIES TO WHOM LOAN HAS BEEN ADVANCED, THEY HAVE FILED APPLICATION BEFORE BIFR AS THEY HAVE GONE SIC K. AS PER THE CONDITIONS LAID DOWN BY THE BIFR NO INTERES T CAN BE CHARGED BY HOLDING COMPANY ON ITS SUBSIDIARY. TH E FACTS AND CIRCUMSTANCES OF THE CASE SHOW THAT THE ASSESSEE HAS EXTENDED LOANS AND ADVANCES TO ITS SUBSIDIARIES TO SUPPORT THE BUSINESS AND ON ACCOUN T OF COMMERCIAL EXPEDIENCY. THE SUBSIDIARIES COULD NOT R EPAY THE LOANS OR ADVANCES FOR THE REASON THAT THEY HAVE INCURRED HUGE FINANCIAL LOSSES AND HAVE GONE SICK. THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT SUBSIDIARY COMPANIES ARE UNDER LIQUIDATION PROCEEDI NGS AND THEREFORE LOANS ARE NOT RECOVERABLE. IT IS UNDERSTANDABLE THAT ASSESSEE WAS CONSTRAINED TO WRI TE OFF THE ADVANCES AS THE SAME WERE NOT RECOVERABLE O N ACCOUNT OF LOSSES SUFFERED BY THE SUBSIDIARIES AND IN SOME OF THE CASES ON ACCOUNT OF LIQUIDATION PROCEED INGS. THE ASSESSEE IS ENTITLED TO CLAIM THE SAME AS DEDUC TION. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF S.A.BUILDERS (SUPRA) HAS HELD THAT WHERE IT IS OBV IOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANC ES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSE SSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DE DUCTION OF INTEREST ON ITS BORROWED LOANS. IN THE INSTANT CA SE, IT IS AN ADMITTED FACT THAT THE LOANS ADVANCED TO THE SUB SIDIARY COMPANIES WERE UTILIZED BY THEM FOR THEIR BUSINESS REQUIREMENTS AND HAVE NOT BEEN UTILIZED FOR THE PER SONAL BENEFITS OF THE INDIVIDUALS/DIRECTORS. THEREFORE, T HE CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE OF INTEREST ON BORROWED FUNDS ADVANCED AS LOAN TO SUBSIDIARY COMPANIES BY THE ASSESSEE. ITA NOS.757 & 808/MDS/2015 17 7. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMI TY IN THE ORDER PASSED BY THE CIT(A) AND UPHOLD THE SAME. THUS, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED AS DEVOID OF ANY MERIT. 6.1 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL CITE D SUPRA, WE ARE INCLINED TO REMIT THE ISSUE TO THE FILE OF THE AO F OR FRESH CONSIDERATION. REVENUES APPEAL (808/MDS./15) 6. ON HEARING THE LD. DEPARTMENTAL REPRESENTATIVE, WE FIND THAT THE TAX EFFECT IN THIS CASE IS LESS THAN ` 10 LAKHS. THE CBDT IN ITS CIRCULAR NO.21/2015 DATED 10.12.2015 INSTRUCTED ITS OFFICERS TO WITHDRAW ALL THE APPEALS PENDING BEFORE THE ITAT WH ERE THE TAX EFFECT IS LESS THAN ` 10 LAKHS. THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THIS CIRCULAR OF CBDT IS BINDING ON THE OFFICERS OF THE DEPARTMENT. THEREFORE, THE REVENUE CANNOT PROCEED FURTHER IN TH IS APPEAL. ACCORDINGLY, THE REVENUES APPEAL FOR ASSESSMENT YE AR 2009-10 STANDS DISMISSED. ITA NOS.757 & 808/MDS/2015 18 7. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF REVENUE IS D ISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 6 TH OF APRIL,2016 AT CHENNAI. SD/- SD/- ( . ) (G.PAVAN KUMAR) ( ( ) ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 6 TH APRIL,2016. K S SUNDARAM. #$% &'( )$( /COPY TO: 1. *+ /APPELLANT 2. &, *+ /RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. (./ &0 /DR 6. /1 2 /GF