Commissioner of Income-tax v. Taikisha Engineering India Ltd
[Citation -2014-LL-1125]

Citation 2014-LL-1125
Appellant Name Commissioner of Income-tax
Respondent Name Taikisha Engineering India Ltd.
Court HC
Date of Order 25/11/2014
Judgment View Judgment
Keyword Tags disallowance of interest • reasonable opportunity • computation of income • interest expenditure • condition precedent • long-term capital • returned income • current account • tax-free income • interest income • sister concern • share capital • interest paid • capital gain • cash credit • mutual fund
Bot Summary: The assessee having interest-free funds far in excess of the amount invested in mutual funds, no disallowance could be made under section 14A because the interest expenditure was incurred in respect of the borrowing in cash credit limits utilised for normal business purposes of the assessee and no part of the borrowed funds has been utilised by the assessee for making investment in the mutual funds. Under sub-section of section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e., rule 8D of the Rules. Rule 8D of the Rules, again for the sake of convenience, is reproduced below: 8D. Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- the correctness of the claim of expenditure made by the assessee; or the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule. If we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. The said rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with the correctness of the claim of expenditure made by the assessee; or the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule of rule 8D. We may observe that rule 8D(1) places the provisions of section 14A(2) and in the correct perspective. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules.


JUDGMENT judgment of court was delivered by Sanjiv Khanna J.-These two appeals by Revenue under section 260A of Income-tax Act, 1961 ("the Act" for short) relate to assessment years 2008-09 and 2009-10. issue raised by Revenue in these appeals pertains to section 14A of Act and rule 8D of Income-tax Rules, 1962 ("the Rules" for short) and disallowance of expenditure relating to exempt income. For assessment year 2008-09, respondent assessee had filed return declaring total taxable income of Rs. 31,14,68,297 and exempt income of Rs. 2,46,81,747. assessee had voluntarily disallowed expenditure of Rs. 1,15,000 under section 14A of Act, calculation for which were submitted before Assessing Officer by way of letter dated November 2, 2010. Assessing Officer considered reply and noted that voluntary disallowance did not fulfil requirements of section 14A of Act read with rule 8D of Rules. No other reason was indicated. decision of Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. CIT [2010] 328 ITR 81 (Bom) and principles enunciated and enumerated in said decision were quoted. Assessing Officer recomputed disallowance by applying rule 8D of Rules and quantified disallowance at Rs. 42,59,540. As assessee had himself disallowed amount of Rs. 1,15,000, balance amount of Rs. 41,44,540 was added and returned income enhanced. For assessment year 2009-10, assessee had filed return declaring income of Rs. 8,98,19,429 and had voluntarily disallowed Rs. 2,76,194 under section 14A of Act. Assessing Officer noticed that assessee had earned exempt dividend income to tune of Rs. 17,43,782 and had declared long-term capital gains, which was not taxable. Assessing Officer recorded that he had considered reply to justify disallowance of Rs. 2,76,194 but without any further elucidation held that disallowance did not fulfil requirements of section 14A of Act read with rule 8D of Rules. Disallowance by applying rule 8D of Rules was computed at Rs. 5,36,393. As assessee had disallowed Rs. 2,76,194 in computation of income, difference of Rs. 2,60,199 was added and returned income enhanced. Appeals were disposed of by common order dated March 26, 2012, by Commissioner of Income-tax (Appeals) ("the CIT(A)", for short), who deleted addition after referring to following part of written submissions filed by assessee in relation to assessment year 2008-09: "Investment in mutual fund is made from current account in HDFC Bank in which no interest is incurred. Investments were made out of surplus funds. assessee deposited funds amounting to Rs. 28,71,30,569 generated on sale of mutual fund during financial year 2007-08 and funds amounting to Rs. 15,59,58,985 were used for acquiring investment which results into net surplus of Rs. 13,11,71,584. In support of this we have already filed details of funds realised on sale of mutual funds and deposited along with details funds utilised for investment in current of HDFC Bank. Also copy of bank statement showing these transactions is already filed. assessee having interest-free funds far in excess of amount invested in mutual funds, no disallowance could be made under section 14A because interest expenditure was incurred in respect of borrowing in cash credit limits utilised for normal business purposes of assessee and no part of borrowed funds has been utilised by assessee for making investment in mutual funds. Rather on account of capital gain on sale of mutual funds, company generated surplus funds." He observed that assessee had share capital of Rs. 60,00,000 and reserve and surplus funds of Rs. 53.19 crores as on March 31, 2008, and share capital of Rs. 60,00,000 and reserve and surplus funds of Rs. 41.49 crores as on March 31, 2007. Therefore, no interest bearing funds had been used for making investments, which had yielded tax-free income like dividends. In respect of assessment year 2009-10, similar findings were recorded by Commissioner of Income-tax (Appeals), who observed that direct expenditure incurred by respondent-assessee was Rs. 643.26 as demat charges and in respect of interest income, he referred to following explanation of assessee: "Interest clause (ii) Investment in mutual fund is made from current account in HDFC Bank in which no interest is incurred. Investments were made out of surplus/own funds deposit earlier. assessee deposited funds in HDFC current account amounting to Rs. 10,67,15,425 generated on sale of mutual fund during period October 7, March, 2008, and April, 2008. Dividend amounting to Rs. 57,90,120 received during financial year 2007-08 also invested. total surplus/own funds available are Rs. 11,25,05,545 utilised by assessee for making investment in assessment year 2009-10. Details are enclosed exhibit 3. Photocopy of bank statement for exhibit 3 for period October 1, 2007, to April 8, 2008, is enclosed showing funds deposited marked, vide exhibit 4. Photocopy of bank statement for exhibit 2 for financial year 2008-09 is enclosed showing investment made marked, vide exhibit 5. As explained above, no interest bearing funds were used by assessee for investment. Interest bearing funds were used by assessee for doing normal business of company. assessee used surplus/own funds for investment in mutual funds. As assessee have interest-free funds far in excess of amount invested in mutual funds. Therefore, no disallowance could be made under clause (ii) of section 14A because of interest expenditure was incurred directly attributable to business purpose. No part of borrowed funds has been utilised by assessee for making investment in mutual funds. 14.2 authorised representative relied on following case law: - CIT v. Ms. Sushma Kapoor [2009] 319 ITR 299 (Delhi); - Maruti Udyog Ltd. v. Deputy CIT [2005] 92 TTJ 987 (Delhi); - Voltas Ltd. v. Asst. CIT [2009] 125 TTJ 601 (Mumbai); - Dishman Pharmaceuticals Ltd. v. Deputy CIT [2011] 45 SOT 37 (Ahd) (URO). 15. I have gone through assessment order and detailed written submissions. Assessing Officer worked out disallowance of Rs. 5,36,393 under rule Assessing Officer worked out disallowance of Rs. 5,36,393 under rule 8D(2)(ii). authorised representative has explained that no borrowed funds were utilised for making investment. issue has been examined in earlier years and found that no disallowance is called for under rule 8D(2)(ii). It is further seen that disallowance under rule 8D(2)(iii) worked out to Rs. 2,76,194 which was forgotten to be added by mistake. authorised representative has no objection for disallowing of Rs. 2,76,914 which he has accepted in assessment proceedings. Relief 5,36,393 Confirmed 2,76,914 Accordingly, ground No. 1 is partly allowed." Income-tax Appellate Tribunal ("the Tribunal", for short) by common order dated September 27, 2013, has dismissed appeals filed by Revenue. Rule 8D of Rules it was held applicable and issue related to computation under sub-rule (2) and three sub-clauses. Reference was made to clause (ii) of sub-rule (2) of rule 8D of Rules and it has been held: "2.4.... Only clause (ii) is involved in present appeal. Assessing Officer considered total interest paid by assessee for allocating sum of Rs. 36.76 lakhs to investments yielding exempt income. At threshold it needs to be determined as to whether any interest expenditure can be attributed to securities on which such exempt income was earned. question of disallowance of such interest under section 14A would arise only if some expenditure is said to have been incurred in relation to investment in such securities. In this regard, it is observed that assessee made total investment of Rs. 6.33 crores in shares or securities resulting into exempt income. As against that shareholder funds stood at Rs. 53.79 crores at end of year. Thus, it is evident that amount invested in such shares or securities is far in excess of shareholder's funds." Reference was made to decision of Delhi High Court in CIT v. Tin Box Co. [2003] 260 ITR 637 (Delhi) to hold that when assessee had sufficient funds and non-interest funds were advanced to sister concern, no disallowance was justified. Further, Bombay High Court in CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) had similarly held that when sufficient non-interest funds were available for investment then no disallowance of interest should be made. Bombay High Court had placed reliance on decision of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC) to effect that if assessee had sufficient non-interest funds, then investment made in shares and securities resulting in exempt income should not lead to disallowance of interest expenditure, as there was no question of attributing any interest to such investments. Lastly, reference was made to decision of Gujarat High Court in CIT v. Suzlon Energy Ltd. [2013] 354 ITR 630 (Guj), to same effect. Having heard counsel for parties, we feel that respondentassessee is entitled to succeed on somewhat different grounds and reasons, than those elucidated by Tribunal. Section 14A of Act is relevant and reproduced below: "14A. (1) For purposes of computing total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act. (2) Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed, if Assessing Officer, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. (3) provisions of sub-section (2) shall also apply in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under this Act: Provided that nothing contained in this section shall empower Assessing Officer either to reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154, for any assessment year beginning on or before 1st day of April, 2001." Section 14A of Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under Act. Under sub-section (2) of section 14A of Act, Assessing Officer is required to examine accounts of assessee and only when he is not satisfied with correctness of claim of assessee in respect of expenditure in relation to exempt income, Assessing Officer can determine amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e., rule 8D of Rules (quoted and elucidated below). Therefore, Assessing Officer at first instance must examine disallowance made by assessee or claim of assessee that no expenditure was incurred to earn exempt income. If and only if Assessing Officer is not satisfied on this count after making reference to accounts, that he is entitled to adopt method as prescribed, i.e., rule 8D of Rules. Thus, rule 8D is not attracted and applicable to all assessees who have exempt income and it is not compulsory and necessary that assessee must voluntarily compute disallowance as per rule 8D of Rules. Where disallowance or nil disallowance made by assessee is found to be unsatisfactory on examination of accounts, Assessing Officer is entitled and authorised to compute deduction under rule 8D of Rules. This pre-condition and stipulation, as noticed below, is also mandated in sub-rule (1) of rule 8D of Rules. Rule 8D of Rules, again for sake of convenience, is reproduced below: 8D. (1) Where Assessing Officer, having regard to accounts of assessee of previous year, is not satisfied with- (a) correctness of claim of expenditure made by assessee; or (b) claim made by assessee that no expenditure has been incurred, in relation to income which does not form part of total income under Act for such previous year, he shall determine amount of expenditure in relation to such income in accordance with provisions of sub-rule (2). (2) expenditure in relation to income which does not form part of total income shall be aggregate of following amounts, namely:- (i) amount of expenditure directly relating to income which does not form part of total income; (ii) in case where assessee has incurred expenditure by way of interest during previous year which is not directly attributable to any particular income or receipt, amount computed in accordance with following formula, namely:- x (B/C) Where = amount of expenditure by way of interest other than amount of interest included in clause (i) incurred during previous year; B = average of value of investment, income from which does not or shall not form part of total income, as appearing in balance-sheet of assessee, on first day and last day of previous year; C = average of total assets as appearing in balance-sheet of assessee, on first day and last day of previous year; (iii) amount equal to one-half per cent. of average of value of investment, income from which does not or shall not form part of total income, as appearing in balance-sheet of assessee, on first day and last day of previous year. (3) For purposes of this rule, the'total assets' shall mean, total assets as appearing in balance-sheet excluding increase on account of revaluation of assets but including decrease on account of revaluation of assets." Sub-rule (1) categorically and significantly states that Assessing Officer having regard to account of assessee and on not being satisfied with correctness of claim of expenditure made by assessee or claim that no expenditure was incurred in relation to income which does not form part of total income under Act, can go on to determine disallowance under sub- rule (2) to rule 8D of Rules. Sub-rule (2) will not come into operation until and unless specific pre-condition in subrule (1) is satisfied. Thus, section 14A(2) of Act and rule 8D(1) in unison and affirmatively record that computation or disallowance made by assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to accounts, and only and when explanation/claim of assessee is not satisfactory, computation under sub-rule (2) to rule 8D of Rules is to be made. We need not, therefore, go on to sub-rule (2) to rule 8D of Rules until and unless Assessing Officer has first recorded satisfaction, which is mandated by sub-section (2) of section 14A of Act and subrule (1) of rule 8D of Rules. view and legal ratio expressed above is not being elucidated for first time. Delhi High Court in Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi), has observed (page 290): "Scope of sub-sections (2) and (3) of section 14A Sub-section (2) of section 14A of said Act provides manner in which Assessing Officer is to determine amount of expenditure incurred in relation to income which does not form part of total income. However, if we examine provision carefully, we would find that Assessing Officer is required to determine amount of such expenditure only if Assessing Officer, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under said Act. In other words, requirement of Assessing Officer embarking upon determination of amount of expenditure incurred in relation to exempt income would be triggered only if Assessing Officer returns finding that he is not satisfied with correctness of claim of assessee in respect of such expenditure. Therefore, condition precedent for Assessing Officer entering upon determination of amount of expenditure incurred in relation to exempt income is that Assessing Officer must record that he is not satisfied with correctness of claim of assessee in respect of such expenditure. Sub-section (3) is nothing but offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where assessee claims that no expenditure has been incurred in relation to income which does not form part of total income under said Act. In other words, sub-section (2) deals with cases where assessee specifies positive amount of expenditure in relation to income which does not form part of total income under said Act and sub-section (3) applies to cases where assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, Assessing Officer, if satisfied with correctness of claim of assessee in respect of such expenditure or no expenditure, as case may be, cannot embark upon determination of amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of said Act. It is only if Assessing Officer is not satisfied with correctness of claim of assessee, in both cases, that Assessing Officer gets jurisdiction to determine amount of expenditure incurred in relation to such income which does not form part of total income under said Act in accordance with prescribed method. prescribed method being method stipulated in rule 8D of said Rules. While rejecting claim of assessee with regard to expenditure or no expenditure, as case may be, in relation to exempt income, Assessing Officer would have to indicate cogent reasons for same. Rule 8D As we have already noticed, sub-section (2) of section 14A of said Act refers to method of determination of amount of expenditure incurred in relation to exempt income. expression used is-'such method as may be prescribed'. We have already mentioned above that by virtue of Notification No. 45 of 2008, dated March 24, 2008, Central Board of Direct Taxes introduced rule 8D in said Rules. said rule 8D also makes it clear that where Assessing Officer, having regard to accounts of assessee of previous year, is not satisfied with (a) correctness of claim of expenditure made by assessee; or (b) claim made by assessee that no expenditure has been incurred in relation to income which does not form part of total income under said Act for such previous year, Assessing Officer shall determine amount of expenditure in relation to such income in accordance with the amount of expenditure in relation to such income in accordance with provisions of sub-rule (2) of rule 8D. We may observe that rule 8D(1) places provisions of section 14A(2) and (3) in correct perspective. As we have already seen, while discussing provisions of sub-sections (2) and (3) of section 14A, condition precedent for Assessing Officer to himself determine amount of expenditure is that he must record his dissatisfaction with correctness of claim of expenditure made by assessee or that no expenditure has been incurred. It is only when this condition precedent is satisfied that Assessing Officer is required to determine amount of expenditure in relation to income not includable in total income in manner indicated in sub-rule (2) of rule 8D of said Rules. It is, therefore, clear that determination of amount of expenditure in relation to exempt income under rule 8D would only come into play when Assessing Officer rejects claim of assessee in this regard. If one examines sub-rule (2) of rule 8D, we find that method for determining expenditure in relation to exempt income has three components. first component being amount of expenditure directly relating to income which does not form part of total income. second component being computed on basis of formula given therein in case where assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. formula essentially apportions amount of expenditure by way of interest (other than amount of interest included in clause (i)) incurred during previous year in ratio of average value of investment, income from which does not or shall not form part of total income, to average of total assets of assessee. third component is artificial figure-one half per cent. of average value of investment, income from which does not or shall not form part of total income, as appearing in balance-sheets of assessee, on first day and last day of previous year. It is aggregate of these three components which would constitute expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A of said Act. It is, therefore, clear that in terms of said rule, amount of expenditure in relation to exempt income has two aspects-(a) direct and (b) indirect. direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. indirect expenditure, where it is by way of interest, is computed through principle of apportionment, as indicated above. And, in cases where indirect expenditure is not by way of interest, rule of thumb figure of one half per cent. of average value of investment, income from which does not or shall not form part of total income, is taken." Even earlier Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom) had referred to section 14(2) of Act and observed (page 100): "Under sub-section (2), Assessing Officer is required to determine amount of expenditure incurred by assessee in relation to such income which does not form part of total income under Act in accordance with such method as may be prescribed. method, having regard to meaning of expression'prescribed' in section 2(33), must be prescribed by rules made under Act. What merits emphasis is that jurisdiction of Assessing Officer to determine expenditure incurred in relation to such income which does not form part of total income, in accordance with prescribed method, arises if Assessing Officer is not satisfied with correctness of claim of assessee in respect of expenditure which assessee claims to have incurred in relation to income which does not part of total income. Moreover, satisfaction of Assessing Officer has to be arrived at, having regard to accounts of assessee. Hence, sub-section (2) does not ipso facto enable Assessing Officer to apply method prescribed by rules straightaway without considering whether claim made by assessee in respect of expenditure incurred in relation to income which does not form part of total income is correct. Assessing Officer must, in first instance, determine whether claim of assessee in that regard is correct and determination must be made having regard to accounts of assessee. satisfaction of Assessing Officer must be arrived at on objective basis. It is only when Assessing Officer is not satisfied with claim of assessee, that Legislature directs him to follow method that may be prescribed. In situation where accounts of assessee furnish objective basis for Assessing Officer to arrive at satisfaction in regard to correctness of claim of assessee of expenditure which has been incurred in relation to claim of assessee of expenditure which has been incurred in relation to income which does not form part of total income, there would be no warrant for taking recourse to method prescribed by rules. For, it is only in event of Assessing Officer not being so satisfied that recourse to prescribed method is mandated by law. Subsection (3) of section 14A provides for application of sub-section (2) also to situation where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under Act. Under proviso, it has been stipulated that nothing in section will empower Assessing Officer, for assessment year beginning on or before April 1, 2001, either to reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154." Equally illuminating are following observations in Godrej and Boyce Mfg. Co. Ltd. (supra) (page 117 of 328 ITR): "However, if assessee does not maintain separate accounts, it would be necessary for Assessing Officer to determine proportion of expenditure incurred in relation to dividend business (i.e., earning exempt income). It is for exactly such situations that machinery/method for computing proportion of expenditure incurred in relation to dividend business has been provided by way of section 14A(2)/(3) and rule 8D." More important and relevant for us are observations in Godrej and Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction being recorded by Assessing Officer with reference to accounts under section 14(2) of Act and rule 8D(1) of Rules. It was observed (page 120 of 328 ITR): "Parliament has provided adequate safeguard to invocation of power to determine expenditure incurred in relation to earning of non- taxable income by adoption of prescribed method. invocation of power is made conditional on objective satisfaction of Assessing Officer in regard to correctness of claim of assessee, having regard to accounts of assessee. When statute postulates satisfaction of Assessing Officer 'Courts will not readily defer to conclusiveness of executive authority's opinion as to existence of matter of law or fact upon which validity of exercise of power is predicated'. (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249). decision by Assessing Officer has to be arrived at in good faith on relevant considerations. Assessing Officer must furnish to assessee reasonable opportunity to show cause on correctness of claim made by him. In event that Assessing Officer is not satisfied with correctness of claim made by assessee, he must record reasons for his conclusion. These safeguards which are implicit in requirements of fairness and fair procedure under article 14 must be observed by Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated essential requirements of sub-section (2) of section 14A before Assessing Officer proceeds to apply method prescribed under sub-rule (2)." It is in this context we feel that findings recorded by Commissioner of Income-tax (Appeals) and Tribunal are appropriate and relevant. clear findings are that assessee had sufficient funds for making investments in shares and mutual funds. said findings coupled with failure of Assessing Officer to hold and record his satisfaction clinches issue in favour of respondent-assessee and against Revenue. self or voluntary deductions made by assessee were not rejected and held to be unsatisfactory, on examination of accounts. judgments in Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) would be relevant if satisfaction of Assessing Officer is in issue, and such question of satisfaction is with reference to accounts. However, decisions relied upon by Tribunal in case of Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) could not be now applicable, if we apply and compute disallowance under rule 8D of Rules. said rule in sub-rule (2) specifically prescribes mode and method for computing disallowance under section 14A of Act. Thus, computing disallowance under section 14A of Act. Thus, interpretation of clause (ii) to sub-rule (2) of rule 8D of Rules by Commissioner of Income-tax (Appeals) and Tribunal is not sustainable. said clause expressly states that where assessee has incurred expenditure by way of interest in previous year and interest paid is not directly attributable to any particular income or receipt then formula prescribed would apply. Under clause (ii) of rule 8D(2) of Rules, Assessing Officer is required to examine whether assessee has incurred expenditure by way of interest in previous year and, secondly, whether interest paid was directly attributable to particular income or receipt. In case interest paid was directly attributable to any particular income or receipt, then interest on loan amount to this extent or in entirety, as case may be, has to be excluded for making computation as per formula prescribed. Pertinently, amount to be disallowed as expenditure relatable to exempt income, under sub rule (2) is aggregate of amount under clause (i), clause (ii) and clause (iii). Clause (i) relates to direct expenditure relating to income forming part of total income and under clause (iii) amount equal to 0.5 per cent. of average amount of value of investment, appearing in balance-sheet on first day and last day of assessee has to be disallowed. However, in present case, we need not refer to sub-rule (2) of rule 8D of Rules as conditions mentioned in sub-section (2) of section 14A of Act read with sub-rule (1) of rule 8D of Rules were not satisfied and Assessing Officer erred in invoking sub-rule (2), without elucidating and explaining why voluntary disallowance made by assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in present case by Assessing Officer, before he invoked sub-rule (2) of rule 8D of Rules and made re-computation. Therefore, respondent- assessee would succeed and appeals should be dismissed. appeals are accordingly dismissed with no order as to costs. *** Commissioner of Income-tax v. Taikisha Engineering India Ltd.
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