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TMI Blog2015 (3) TMI 1113X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessment year 2008-09. 2. Grievance raised by the Assessing Officer is as follows :- "1. Whether the Ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 2,75,99,750/- made u/s 14A. a) The Ld. CIT(A) has erred in law and on facts that Rule 8D is applicable from A.Y. 2008-09. Further, disallowance of administrative expenses and interest expenses on earning of dividend income claimed exempt is also held/permitted by the Hon'ble Supreme Court in the case of CIT vs. United General Trust, 200 ITR 488 (SC). b) It is a legal issue and department is in appeal which is pending before various appellate authorities and since Rule 8D w.e.f. 24.03.2008 gives the method for determining amount of expenditure in relation to income which do not form part of income. 3. The material facts of the case are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned dividend income of ₹ 89,02,540/- out of which ₹ 68,44,790/- have been claimed as exempt under Secton10(34)of the Act but the assessee has offered only ₹ 6,84,479/-, being 10% of the dividend receipts of tax exempt dividends ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of exempt income of ₹ 68,44,790/- which is an absurdity. However, during appeal proceedings the issue has been discussed in detail by the undersigned and it has been found that actually the amount of interest attributable to the earning of dividend income should have been taken at proportion of ₹ 83 lacs for the purpose of applying Rule 8D (as submitted by the appellant noted above) and not ₹ 5,52,83,131/- as adopted by the AO. Adopting the figure of ₹ 83 lacs; for the purpose of Rule 8D the disallowance works out to ₹ 37,11,031/- as against ₹ 6,84,479/- offered by the appellant. Therefore the disallowance is confirmed to the extent of ₹ 30,26,552/- only i.e. (37,11,031 - 6,84,479). The ground of appeal is partly allowed." 5. The Assessing Officer is aggrieved of the partial relief so granted by the ld. CIT(A) and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. As can be clearly discerned from the computation of disallowance by the Assessing Officer, the short point of dispute in the present case is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is not directly attributable to any particular income or receipt" it ends up a llocating "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 Rs .10,000. However, in terms of the formula in rule 8 D (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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.)…………… 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 particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional ..... X X X X Extracts X X X X X X X X Extracts X X X X
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