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TMI Blog2012 (4) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... ; The ld CITG(A) erred in ignoring your appellant's plea that the entire average investment of Rs. 1,84,50,588 was out of partners' own capital of Rs. 2,47,58,004 and thus no part of the interest paid by your appellant on business borrowings was attributable to such investment and as such the ratio of Reliance Utilities & Power Ltd (313 ITR 340) Bombay High Court, would be applicable to this case and no part of the interest paid on such borrowings for the purpose of business would be disallowable. 3. Having conceded that as per the test laid down in the Godrej's case (supra), the disallowance, if any, for the AY 2007-08 should be on reasonable basis, the ld CIT(A) erred in rejecting the claim of test of reasonability as advanced by your appellant. 4. The ld CIT(A) erred in invoking the ratio of the decision of the Hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody (115 ITR 519) while rejecting your appellant's claims in as much as the facts of both the cases are fully distinguishable." 3. Briefly stated, the relevant material facts are as follows. The assessee is engaged in the business as dealer in ball bearings and engineering items. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the decrease on account of revaluation of assets." 4. Learned CIT(A) then proceeded to justify the above formula by observing as follows: "The logic and rationale of taking 0.5% of the average value of the Investments - income from which does not or shall not form part of the total income is because the appellant will have certain variable expenses and certain other expenses for managing this portfolio/investment and when the accounts are composite and appellant cannot itself segregate the various expenses which can be attributed to the exempt income and those to the taxable income then the only reasonable method to determine the expenses incurred in relation to the exempt income can be by apportionment - so the apportionment has been done at 0.5% of the average value of the investment- income from which does not or shall not form part of the total income because normally in similar schemes undertaken by Portfolio Managers and the like the total expenses charged by such Portfolio Managers are in the range of 2 to 3% which also includes their profit element of 1 to 11/2% - which has to be excluded while doing such apportionment in appellant's case and then the balance that rema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be applied now to the present appeal in view of the decision of the Hon'ble Bombay High Court in Godrej & Boyce and Hon'ble Supreme Court in CIT v. Rajendra Prasad Mody 115 ITR 519 (SC) and therefore the disallowance of the expenditure in relation to the exempt income has to be for both direct and indirect expenses and for which the reasonable method has to take into consideration the average value of the investment - income from which is exempt or shall be exempt this is in consonance with the observations of the Hon'ble Supreme Court in the case CIT v. Rajeridra Prasad Moody 115 ITR 519 (SC) and based upon which the estimation of 0.5% of the average value investments - income from which is exempt or shall be exempt - has been done. This is because merely because in one year there is no exempt income because the dividends etc. are not declared but the investments are there - then can it be said that there has been no expenditure in relation to the exempt income since there is no exempt income in that year although the investments are there which will give rise to the exempt income. Hence, the estimation of expenditure has to be done with the value of investments and not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under the Act" and that "the Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record". Undoubtedly, such expenses are required to take into account 'direct expenses' as also 'indirect expenses', but then the disallowance has to be on a reasonable basis consistent with all the relevant facts and circumstances of the case. The elaborate formulae which has been adopted for making the disallowance is precisely what rule 8 D mandates, and, effectively thus, he was applied rule 8 D for assessment prior to assessment years 2008-09 as well - something directly contrary to the decision of Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd's case (supra). The very approach adopted by the CIT(A) is unreasonable, contrary to legal position, and without regard to the specific facts of the case. There is no finding whatsoever about the expenses incurred directly or indirectly for the purpose of earning the tax exempt income. On the contrary, it is an undisputed position that as against average investment of Rs 1,84,50,588, p ..... 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