ACIT vs. Champion Commercial Co Ltd (ITAT Kolkata)
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 validity is upheld by Hon’ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon’ble 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).
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 present , in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of ‘perversity, caprice or irrationality’ in rule 8D before Hon’ble High Court, and take another stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice.
Coming to the facts of this case, we find that learned CIT(A) has not given categorical findings in respect of factual aspects of specific utilization of borrowings on which interest was paid, and he has simply accepted the assessee’s contention that out of a total interest expenditure of Rs 41,84,249, a sum of Rs 36,42,935 was paid with respect to borrowing for the purposes of trading in chemicals, and the common interest expenses to be allocated was thus only Rs 5,41,313. Neither these details were before the Assessing Officer, nor has the CIT(A) sought any remand report on the same.
In our considered view, therefore, the right course of action will be that while we uphold the action of the CIT(A) in principle, assuming that it was based on principle discussed earlier in this order that quantum of allocated common interest expenses were reduced, we remit the matter to the file of the Assessing Officer for adjudication de novo in the light of the legal position discussed above. We make it clear that common interest expenses which are to be allocated in terms of the formula under rule 8D(2)(ii) will only be such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts, nor are directly attributable to borrowings specifically used for taxable incomes or receipts. With these directions, the matter stands restored to the file of the Assessing Officer.
The plea raised by the Assessing Officer is thus rejected in principle but the matter is remitted to the file of the Assessing Officer for verification of factual elements in the terms indicated above.