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TMI Blog2015 (12) TMI 1423X X X X Extracts X X X X X X X X Extracts X X X X ..... However, as rightly pointed out by the ITAT, since the Assessee did not challenge the order of the CIT (A) to the extent it restricted the disallowance, that part of the order of the CIT (A) remained. The point concerning Rule 8D (2) (iii) does not appear to have been urged by the Revenue before the ITAT and therefore not considered by it. In any event that does not affect the interpretation of Rule 8D (2) (ii) which was the only issue considered by the ITAT in the impugned order. For the aforementioned reasons, the impugned order of the ITAT does not call for any interference - Decided in against revenue. - ITA No. 802/2015 - - - Dated:- 17-12-2015 - S. Muralidhar And Rajiv Shakdher, JJ. For the Appellant : Mr. P. Roy Chaudhari, Senior Standing counsel with Ms. Lakshmi Gurung and Mr. Ishant Goswami, Advs For the Respondent : Mr. Arvind Kumar, Adv JUDGMENT Dr. S. Muralidhar, J. 1. This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 ('Act') is directed against the order dated 23rd March 2015 passed by the Income Tax Appellate Tribunal ('ITAT') in ITA No. 460/Del/2013. 2. The question sought to be urged before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself, the disallowance of ₹ 2,79,02,402 was added to the taxable income of the Assessee. 6. The Assessee then appealed to the CIT (A). It was contended by the Assessee that Rule 8D would apply only if the AO, having regard to the accounts of the Assessee of a previous year, was not satisfied with the correctness of the claim of expenditure made by the Assessee. According to the Assessee there was no such recording of satisfaction to justify the invoking of Rule 8D. It was pointed out that the AO had disallowed against exempt income of ₹ 68,44,790, a sum of ₹ 41,37,781 as expense attributable under Section 14A of the Act, and that this mismatch of the disallowance and non-taxable income indicated that it was unreal and had no nexus to the exempt income. It was submitted that The application of Rule 8D should not be such that it becomes incongruent. It cannot disallow expenses which relate to taxable Income . Reliance was placed on the decisions of this Court in Maxopp Investment Ltd. v. CIT (2012) 347 ITR 272 (Del) and the Punjab Haryana High Court in CIT v. Hero Cycles Ltd., 323 ITR 518 (P .H) . Reference was also made to the decision of the Bombay High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 8D (2) (iii) thereby deleting the disallowance of ₹ 41,37,781 made by the AO under the said clause. 10. Mr. Arvind Kumar, learned counsel for the Assessee, submitted that on a collective reading of Section 14A of the Act and Rule 8D of the Rules, it is plain that if the variable 'A' under Rule 8D(2)(ii) is interpreted to include interest expense directly relatable to earning taxable income, then in effect it would result in disallowance of a certain portion of otherwise permissible deduction under the Act. This would be contrary to the very purpose and object of Section 14A of the Act. According to him if Rule 8 D (ii) is read with Section 14 A of the Act, then the only possible interpretation was that adopted by the ITAT. He further submitted that although the Assessee was not in appeal before the ITAT, or before this Court, he would still like to urge the issue concerning the AO not having recorded any satisfaction about untenablility of the claim of the Assessee as to what constituted the legitimate expenditure incurred for earning the exempt income. 11. As regards the last submission of learned counsel for the Assessee, this Court is not inclined to entert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment, 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 assets 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. 14. As far as Rule 8D (2) (i) is concerned, the AO has necessarily to record that he is not satisfied with the correctness of the claim of the expenditure made by the Assessee in relation to the income which does not form part of the total income. That this requirement is mandatory is now well settled in view of the decision of this Court in Maxopp Investment (supra). For Rule 8 D (2) (ii) to apply there has to be some expenditure by way of interest which is not directly attributable to any particular income or receipt. If there is no such expenditure, as has been found factually by the ITAT in the present case, then the question of applying the formula thereunder will not arise. 15. Nevertheless, the ITAT has had to interpret Rule 8D (2) (ii) since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Section 14A of (1) and (2) of the Act. 18. The following illustration provided by the ITAT in Champion Commercial (supra) demonstrates the incongruity: 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 interest which is not directly attributable to any particular income or receipt will be for ₹ 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the scope of its jurisdiction and powers. 21. In the case in hand, in Note 4 of the computation of income submitted by the Assessee, the total interest debited to the profit and loss account was ₹ 5,52,83,131. There was an entry regarding interest on loans given to two entities. After accounting for the other interest expenditure, the Assessee computed the total interest expenditure which was allowable as ₹ 83,90,178. In the computation drawn up by the Assessee, the entire interest expenditure was incurred for earning either taxable income or exempt income. There was no interest amount which was not directly attributable to either the tax exempt or taxable income. The ITAT, therefore, correctly observed in the present case no portion of interest really survives for allocation under Rule 8D (2) (ii) . However, as rightly pointed out by the ITAT, since the Assessee did not challenge the order of the CIT (A) to the extent it restricted the disallowance, that part of the order of the CIT (A) remained. 22. The point concerning Rule 8D (2) (iii) does not appear to have been urged by the Revenue before the ITAT and therefore not considered by it. In any event tha ..... 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