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TMI Blog2017 (9) TMI 1891X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to assessment year 2012-13. 2. The Revenue has raised the following grounds for our adjudication. 1. The order. of the learned CIT(A) is contrary to law and facts and circumstances of the case. 2.1 The ld.CIT(A) erred in directing the AO to re-compute the disallowance under Rule 8D after excluding the appellant investment in subsidiary/associated companies though the assessee is in receipt of dividend income from the investment in subsidiary companies and claimed the same as exempted income. 2.2 The learned CIT(A) failed to appreciate that Rule 8D(2) does not differentiate between strategic investments and investments in subsidiary/associate companies with other investments and the word used in the rule is only uvalue of Investment' and hence the investment in subsidiary company shall be included for calculation of disallowance under Rule 8D(2). 2.3 The learned CIT(A) erred in directing the AO to consider the assessee's own funds i.e. capital reserves available on the date of investment which yields exempted income without giving any clear finding that the assessee has invested its own fund. 2.4 The learned CIT(A) ought to have seen that the assessee company has never ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal relied on by the assessee's counsel. This issue has been considered elaborately by the Commissioner of Income Tax(Appeals) and deleted the interest on bank loan and term loans which were not utilized for making any investments having tax free income. While holding so, the Commissioner of Income Tax (Appeals) held as under:- "5.2.1 Having held that provisions of rule 0D are applicable, let us now examine whether the amount has been correctly quantified. The AO had calculated the disallowance at Rs. Nil, ₹ 1,04,38,000/- and ₹ 26,87,000/- under (i), (ii) & (iii) of rule 80 (2)respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at ₹ 1,04,38,000/. The AO has taken into account the entire interest expenditure of Rs. .5,79,46,000/- for computing the above disallowance. The Id.AR, in his submission, has given the break-Up of interest which includes (1) interest on bank loans: ₹ 67,92,000/- (2) interest on term loans ₹ 3,82,11,000/- and (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputation of disallowance under Rule 8D(2)(ii). 12. The decision of Calcutta Bench of this Tribunal in the case of Champion Commercial Co.Ltd. (supra) also supports the view of the Commissioner of Income Tax (Appeals). The Tribunal had considered a situation when the loans 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 method 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 particular income or receipt" . Clearly, therefore, this sub clause seeks to allocate 'common interest expenses' to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under rule 8 D(2)(ii) will be ₹ 18,000 whereas entire common interest expenditure will only be ₹ 10,000/-. 13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable 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 than 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 authorities about its application, as was before Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (328 ITR 81) when constitutional validity of rule 8 D was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court in the 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 any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)". Accordingly, even by revenue's own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8 D (2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8 D was in challenge before Hon'ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexus between the borrowed funds and investment made by the assessee in the share capital and mutual funds. In the absence of any nexus, the presumption is that the assessee has invested the available interest-free funds in share capital and mutual funds. Furthermore, making investment in sister concerns is for commercial expediency in view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. It is not the case of the Revenue that the sister concern or any of the Directors has misused the funds invested by the assessee. When the sister concern uses the funds only for business purpose, there was commercial expediency for making investment. Therefore, this Tribunal is of the considered opinion that there cannot be any disallowance under Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962. 13. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside. The entire addition made by the Assessing Officer is deleted." 10.1 We also rely in the case of Beach Miners Co. Pvt Ltd. Vs. ACIT in ITA No.2110/Mds./14 dated 06.08.15 wherein held that: "6. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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