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TMI Blog2017 (9) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... arise in number of other cases, we had issued notice for final disposal to the respondent assessee for consideration of the following substantial question of law : Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of ₹ 1,06,56,837/for A.Y.2008-09 made by the Assessing Officer u/s 14A of the Act ? 2. The issues involved are identical in both the tax appeals. We have therefore, heard them together. We may record facts from Tax Appeal No.409/2017. The respondent assessee is a company registered under the Companies Act. For the assessment year 2008-2009, the assessee had filed the return of income on 30.9.2008 declaring loss of ₹ 5.63 crores (rounded off). The return was taken in scrutiny by the Assessing Officer. During such scrutiny, the Assessing Officer noted that the assessee had shown dividend income of ₹ 25.26 lacs (rounded off) from the investment made by it in the shares and securities which was claimed as an exempt income. In context of disallowance of expenditure to earn such income in terms of section 14A of the Income Tax Act( the Act for short), the Assessing Officer called upon the assessee to furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stage of the Tribunal, it has been concluded that the assessee had made investments for earning income which did not form part of the assessee's total income and that for disallowance under section 14A of the Act, formula provided under Rule 8D was required to be invoked in the present case. The assessee had paid interest of ₹ 7.01 crores on the borrowings made and had also earned taxable interest to the tune of ₹ 6.83 crores from InterCorporate Deposits and other similar investments. Short question is, for the computation of disallowance under Rule 8D, should the net figure of ₹ 7.01 crores be reckoned as assessee's interest expenditure or the difference between the interest paid i.e. ₹ 7.01 crores and the interest received i.e. ₹ 6.83 crores? 6. In this context, learned counsel Shri Bhatt for the Revenue submitted that Rule 8D of the Rules provide for a complete formula for computing disallowance under section 14A of the Act. Once this formula is invoked, there would thereafter be no possibility of any adjustment or tinkering with the formula. He drew our attention to the judgment of the Supreme Court in case of Indian Molasses Co. Priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l pointed out that relying on the said decision of Supreme Court in case of ACG Associated Capsules Pvt. Ltd. (supra), in case of Commissioner of Incometax v. Nirma Ltd. reported in (2014) 367 ITR 12(Guj), in context of deduction under sections 80I, 80IA and 80HH of the Act while excluding the income from sale of scrap, waste, etc., interest and other incomes, the Court held that it would be the net income which would be excluded and not the gross income. Our attention was also drawn to the judgment of Punjab and Haryana High Court in case of Commissioner of Incometax v. Hero Cycles Ltd. reported in (2010) 323 ITR 518 (P H), in which it was held that when there was no nexus between the expenditure incurred and the exempt income generated, disallowance under section 14A of the Act would not be permissible. 8. To resolve the controversy, we may refer to the statutory provisions applicable. Section 14A of the Act, pertains to expenditure incurred in relation to income not includible in total income. Subsection (1) of section 14A provides that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the same language as is used in subsection( 2) of section 14A and further provides that in such a situation the expenditure to be disallowed would be determined as per the provisions contained in subrule( 2). The expenditure in relation to income not forming part of the total income would be aggregate of the three computations provided in clauses (i), (ii) and (iii) of subrule( 2). Under clause (i) would come the amount of expenditure directly relating to income which does not form part of the total income. Clause(ii) provides for a formula to be applied where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt. Under clause(iii) an adhoc disallowance of an amount equal to onehalf percent of the average of the value of investment not forming part of total income would be further disallowed in addition to those mentioned in clauses (i) and (ii) of subrule( 2) of Rule 8D. 10. Formula under clause(ii) of subrule( 2) of Rule 8D is A X B/C, where 'A' represents the amount of expenditure by way of interest other than the amount of interest included in clause(i) incurred durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax. It is true that investment made by the assessee out of such borrowed funds will continue to be factored in denominator in the formula provided in clause(ii) of subrule( 2) since factor 'C' which forms the denominator refers to average of total assets of assessee as on the first and the last day of the previous year. However, ignoring taxable interest earned by the assessee for the purpose of ascertaining the amount of expenditure incurred by the assessee by way of interest, would amount to distorting the factor 'A' provided by the legislature in clause(ii) of subrule( 2) of Rule 8D. It may be possible for variety of reasons that in a given financial year the assessee might have earned interest income which is higher than the interest paid on the borrowed funds. This may be because assessee's investments may have earned interest at rates higher than the interest rate paid by the assessee on the borrowings or may also be because assessee's investment in earning interest may be higher in value than the assessee's borrowings, inviting interest. In such a situation, essentially, the assessee would have earned more interest than the interest paid. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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