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TMI Blog2022 (1) TMI 140X X X X Extracts X X X X X X X X Extracts X X X X ..... , but also directly relatable to taxable income which has to be excluded from the definition of variable A in the formula as per Rule 8D(2)(ii) and rightly so, because it is only then that common interest expenses which are to be allocated as indirectly relatable to taxable income and tax exempt income can be computed. When assessee is paying interest on borrowings and the assessee is not able to show that investment in shares are out of internal accruals or non-interest bearing funds, and in the light in the case of Dhanuka Sons [ 2011 (4) TMI 861 - CALCUTTA HIGH COURT ] disallowance under section 14 A can indeed be made. Thus, interest expenses directly attributable to tax exempt income is also directly attributable to taxable income are required to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii). In the present case, wherein the assessee does not offer any disallowance under Rule 8D(2)(ii) in respect of exempt income, then the provisions of section 14A(2) r.w. Rule 8D(2) can be invoked u/s.14A(3) of the Act by the AO and there is no necessity of recording further satisfaction by the AO - when the assessee itself fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hypothetical one and consequently erroneous and not sustainable in law. 7. The appellant craves leave to add, alter, modify or amend and delete any of the above grounds of appeal. 8. For the above and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may by allowed and relief may be granted as prayed for the advancement of substantial cause of justice. 3. The facts of the issue are that the assessee in the assessment year under consideration earned exempt income of ₹ 7,70,76,407. On this count, the AO invoked the provisions of section 14A r.w. Rule 8D(2)(iii) and worked out the disallowance at 0.5% of the average amount of tax exempt investments at ₹ 60,30,758. Against this, the assessee went in appeal before the CIT(Appeals). The CIT(Appeals) confirmed the disallowance. Against this, the assessee is in appeal before us. 4. The ld. AR submitted that section 14A r.w. Rule 8D cannot be applied automatically and the AO is required to conduct an examination of the accounts of the assessee and arrive at an objective satisfaction with regard to the correctness of expenditure claimed or that the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Assessing Officer cannot blindly resort to Rule 8D of the Rules and that where the Assessee claims that no expenditure is incurred, the Assessing Officer must proceed to collect material and evidence to determine the expenditure incurred by the assessee. 8. It is submitted that the disallowance made under section 14A of the Act is that of expenditure in relation to income not forming part of total income. Where the Assessing Officer does not, after examination of the books of account, derive negative satisfaction with regard to the claim of the Assessee that no such expenditure has actually been incurred, then making a disallowance amounts to disallowing expenditure that has in fact been incurred in relation to income which form part of total income. The expenditure purported to be disallowed under section 14A is the expenditure in relation to income not forming part of total income. The words in relation to indicate that such an expenditure must have direct and proximate connection with the income not forming part of total income. 9. Reliance is placed on the following decisions where it has been held that if the investment is made out of own funds, disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. 12. According to the ld. AR, only the actual expenses incurred to earn exempt income could be disallowed. Thus since the AO has failed to carry out procedure as prescribed under section 14A of the Act the disallowance made is thus not on proper footing and requires to be deleted. 13. On the other hand, the ld. DR submitted that Rule 8D(2)(iii) is applicable for the assessment year under consideration. Accordingly the AO applied the formula prescribed in the said Rule for the purpose of computation of expenditure incurred in earning the exempt income and the AO has no discretionary power to alter the said rule. He supported the orders of lower authorities. 14. We have heard both the parties and perused the material on record. In the present case, the AO applied section 14A r.w. Rule 8D(2)(iii) for determining the amount of expenditure in relation to income not includible in the total income. in terms of the provisions of section 14A(2), the Assessing Officer shall determine the amount of expenditure incurred in relation to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionary power to tinker that formula so as to meet the needs of the assessee. We do not find any merit in the arguments of the ld. AR. 16. One more argument of the ld. AR is that the AO failed to conduct examination of books of account and derive satisfaction in the negative on the claim of the assessee that no expenditure has been incurred towards earning any exempt income and the disallowance is not sustainable. 17. The computation under Rule 8D(2)(iii) 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. Therefore, this sub-clause seeks to allocate common interest expenses to taxable income and tax the exempt income. In other words, going by the plain words of Rule 8D(2)(iii), what is sought to be allocated is expenditure by way of interest .. which is not directly attributable to any particular income or receipt and the only categories of income and receipt so far as scheme of Rule 8D is concerned, are mutually exclusive categories of tax exempt income and receipt and taxable income and receipt . However, the definition of va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken (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.) .. The justification that has been offered in support of the rationale for rule 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'. 19. When the above is the proposition of law upheld by the Bombay High Court, it cannot be open to either the revenue authorities or the assessee to take any other stand on this issue of actual implementation of the formula set out in Rule 8D(2)(ii), which has been noted by the Bombay High Court in the above judgment as follows:- 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 (f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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