IN INCOME TAX APPELLATE TRIBUNAL BENCH : CHENNAI BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER I.T.A.No.1824, 1825 & 1826/Mds./2016 Assessment years : 2009-10, 2010-11 & 2011-12 M/s.Lucas TVS Ltd., Vs. Deputy Commissioner of Income 11,Pattulos Road, Tax, Chennai 600 002. Corporate Circle-4(1), Chennai 600 034. [PAN AAACL 3763 E ] (Appellant) (Respondent) Appellant by : Mr.Saroj Kumar Panda,Advocate Respondent by : Mr.Shiva Srinivas, JCIT, D.R Date of Hearing : 06-09-2016 Date of Pronouncement : 23-09-2016 ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER These three appeals filed by Assessee are directed against different orders of Commissioner of Income-tax (Appeals)-8, Chennai dated 29.02.2016 pertaining to assessment years 2009-10, 2010-11 & 2011-12. :- 2 -: ITA No. 1824 to 1826 /Mds./2016 2. first common ground raised in appeals of assessee for assessment years 2009-10 & 2011-12 is that CIT(A) ought to have appreciated that in-house R&D facilities has been approved by Government for purposes of sec.35(2AB) and these expenses have also been accepted as having been incurred in approved R&D facilities in respect of projects in connection with which other expenses have been granted weighted deduction. 3. facts of issue related to ITA No.1824/Mds./2016 are that while framing assessment , AO had disallowed `37.35 laks being 50% of weighted deduction claimed in respect of expenses of `75.47 lakhs incurred in in-house R&D facilities. When in-house R&D facilities has been approved by Government for purpose of sec.35(2AB) of Act and these expenses have also been accepted has incurred in approved R&D facilities, in respect of projects in connection with which other expenses have been granted weighted deduction. AO had not considered weighted deduction, since DSIR has denied weighted deduction for R&D expenses. 3.1 facts of issue related to ITA No.1826/Mds./2016 are that while framing assessment , AO had disallowed `99.62 laks being 100% of weighted deduction claimed in respect of expenses of `99.62 lakhs incurred in in-house R&D facilities. AO had not considered weighted deduction, since DSIR has denied weighted deduction for R&D expenses. :- 3 -: ITA No. 1824 to 1826 /Mds./2016 4. On appeal preferred by assessee for both assessment years, Ld.CIT(A) confirmed disallowance made u/s.35(2AB) of Act. Aggrieved with order of Ld.CIT(A), now assessee is in appeals before us. 5. We have heard both parties and perused material on record. We find that AO allowed deduction u/s.35(2AB) of Act claimed by assessee to extent of DSIR approved expenses and AO disallowed only that portion of amount claimed by assessee in respect of DSIR denied approval i.e. `37.35 laks for A.Y 2009-10 & `99.62 lakhs for A.Y 2011-12. Being so, we do not find any infirmity in order of Ld.CIT(A). Hence, same is confirmed. This ground raised by assessee stands rejected. 6. next common ground raised in all these thee appeals of assessee is that CIT(A) erred in confirming disallowance u/s.14A r.w.Rules 8D of Income Tax Rules, 1962. 7. facts of issue are that assessee had received amount of `6,36,97,853/- for A.Y.2009-10, `3,60,37,549/- for A.Y.2010-11 & `5,79,48,302/- for A.Y.2011-12 as dividend income and claimed as exempt u/s.10(34) of Act. While framing assessee, AO calculated interest expenditure that can be disallowed as per rule 8D(2) and attributed 0.5% of investment as expenditure incurred for purpose of earning exempted income under Rule 8D(iii). Against this, assessee carried appeals before Ld.CIT(A). On appeal, Ld.CIT(A) confirmed action of AO. :- 4 -: ITA No. 1824 to 1826 /Mds./2016 8. Before us, ld.A.R submitted that Sec.14A can be invoked only if AO 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. Further, he submitted that in all these cases, assessee had worked out expenditure, but Ld.CIT(A) without giving any reason rejecting claim of assessee. Therefore, AO cannot work out disallowance u/s.14A r.w.r8D. ld.A.R submitted that in present case, interest expenditure is directly attributable for earning its business income and hence disallowance u/s.14A r.e.w 8D is unwarranted. Further, ld.A.R submitted that for computing disallowance u/s.14A r.w.r.8D only investments yielding dividend income should be taken into consideration and not total investment. Further, ld.A.R submitted that investments made in subsidiary/associate companies, even if they have yielded dividend income, should be considered while computing average value of investments and placed reliance in following case laws. i) CIT Vs. HDFC Bank Ltd., 89 CCH 0185 Mum. HC. ii) Computer Age Management Services (P) Ltd., Vs. ACIT in ITA No.1259 to 1261/Mds./2014 iii) EIH Accociated Hotels Ltd., Vs. DCIT in 2012-TIOL-796-ITAT-MAD. 9. On other hand, ld.D.R supported order of Revenue authorities. Ld.D.R relied on order of co-ordinate Bench in case of Sun TV Networks in ITA No.1340 & 1341/Mds./15 & 1578 to 1579/Mds,/15 dated 31.10.2013 wherein held that:- :- 5 -: ITA No. 1824 to 1826 /Mds./2016 10. We have heard both parties and perused material on record. main plea of ld. A.R is that investment is in sister concern and associated companies and subsidiaries and interest pertained to borrowings used for earning exempt income from investments only to be considered and he submitted that investments in sister concerns and these investments are made on account of commercial expediency. He placed reliance on judgment of Delhi High Court in case of CIT Vs. Bharti Overseas Pvt. Ltd., dated 17th December, 2015 wherein held that expenditure in relation to income which is exempt shall be aggregate of expenditure attributable to tax exempted income, and where there is common expenditure, that cannot be attributable to either tax exempt income or taxable income. He also submitted that interest on borrowings which is available for specific purpose cannot be considered for disallowance u/s.14A r.w.Rule 8D. In our opinion, Tribunal considered this issue in case of Farida Shoes Pvt. Ltd. in ITA Nos.2102 & 2103/Mds./15 for assessment years 2011-12 & 2012-12 vide order dated 08.01.16 wherein held that:- 5.1 Coming to merits of issue regarding disallowance u/s.14A r.w. Rule 8D of I.T.Rules, in our opinion, similar issue was considered by this Tribunal in case of ACIT v. M/s. Best & Crompton Engineering Ltd. in ITA No.1603/Mds/2012 dated 16.7.2013, wherein it was observed that interest on borrowings used for business purpose cannot be considered for purpose of computing disallowance u/s.14A r.w. Rule 8D(2)(ii) of IT Rules and relevant portion is reproduced as below: :- 6 -: ITA No. 1824 to 1826 /Mds./2016 10. Heard both sides. Perused orders of lower authorities and decision of Calcutta Bench of this Tribunal relied on by assessee s counsel. This issue has been considered elaborately by Commissioner of Income Tax(Appeals) and deleted interest on bank loan and term loans which were not utilized for making any investments having tax free income. While holding so, 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 amount has been correctly quantified. AO had calculated disallowance at ` Nil, 1,04,38,000/- and 26,87,000/- under (i), (ii) & (iii) of rule 80 (2)respectively. There is no dispute regarding first component, because it is Nil. With regard to second component being expenditure by way of interest which is not directly attributable to any particular income or receipt, AO has determined amount at 1,04,38,000/. AO has taken into account entire interest expenditure of 5,79,46,000/- for computing above disallowance. Id.AR, in his submission, has given 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) interest on other accounts: 1,29,43,000/-. If loans have been sanctioned for specific projects/expansion and have been utilized towards same, then obviously they could not have been utilized for making any investments having tax-free incomes. From copy of sanction letters from State Bank of Bikaner & Jaipur it can be seen that loan was granted with specific requirement that loan shall be utilized for purchase of imported machinery while in case of loan from Federal Bank, it is seen that loan was to be utilized for expansion of projects. Sanction of both these loans prohibit utilization of funds for purposes other than for utilization for which they are sanctioned. From ledger extract for year ended 31.03.2008 for both loan accounts, it is seen that no amount has been utilized for investment in subsidiaries which earns tax-free income. loan amounts were fully disbursed and utilized in year ended 31.03.2008 (A.Y. 2008-09) itself. Taking into all facts as stated above, I am of considered opinion that if loans/borrowed amounts are granted for specific projects/expansion and no amount from same has been directly utilized for investments, then first and second limb of rule 80 attributing interest payments to investments will not be applicable. Accordingly, interest on bank loan and term :- 7 -: ITA No. 1824 to 1826 /Mds./2016 loan amounting to 67,92,000/- and 3,82,11,000/- respectively are to be excluded from calculation to determine disallowance under rule 8D(2)(ii). AO is, therefore, directed to take into account only remaining interest on other accounts amounting to 1,29,43,000/- for computing proportionate disallowance under rule 80(2)(ii). 11. On going through order of Commissioner of Income Tax (Appeals), we find that Commissioner of Income Tax (Appeals) excluded interest on bank loan and term loans from calculation of disallowance under Rule 8D(2)(ii) as assessee has utilized bank loan and term loan for purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for specific project and such loans were also used for purpose for which they were sanctioned. In circumstances, we find that Commissioner of Income Tax (Appeals) has rightly excluded such interest from purview of computation of disallowance under Rule 8D(2)(ii). 12. decision of Calcutta Bench of this Tribunal in case of Champion Commercial Co.Ltd. (supra) also supports view of Commissioner of Income Tax (Appeals). Tribunal had considered situation when loans were utilized for purchase of machineries, interest arising out of such loans, whether such interest is to be excluded for purpose of computing disallowance under Rule 8D(2)(ii), 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 computation under rule 8D(2)(ii) that Assessing Officer and CIT(A) have different approaches. This provision admittedly deals with situation in which assessee has incurred expenditure by way of interest during 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 plain wordings of rule 8D(2)(ii) what is sought to be allocated is expenditure by way of interest ..which is not directly attributable to any particular income or receipt and only categories of income and receipt, so far as scheme :- 8 -: ITA No. 1824 to 1826 /Mds./2016 of rule 8 D is concerned, are mutually exclusive categories of tax exempt income and receipt and taxable income and receipt . No other classification is germane to context in which rule 8 D is set out, nor does scheme of Section 14 leave any ambiguity about it. 12. Ironically, however, definition of variable embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate expenditure by way of interest, which is not directly attributable to any particular income or receipt it ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income (emphasis by underlining supplied by us). This incongruity will be more glaring with help of following simple example: In case of & Co Ltd, total interest expenditure is 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is 10,000. Out of balance 90,000, assessee has paid interest of 80,000 for factory building construction which clearly relates to taxable income. interest expenditure which is not directly attributable to any particular receipt or income is thus only 10,000. However, in terms of formula in rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for 90,000 because, as per formula value of (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be = amount of expenditure by way of interest other than amount of interest included in clause (i) [ i.e. direct interest expenses for tax exempt income] incurred during previous year . Let us say assets relating to taxable income and tax exempt income are in ratio of 4:1. In such case, interest disallowable under rule 8 D(2)(ii) will be 18,000 :- 9 -: ITA No. 1824 to 1826 /Mds./2016 whereas entire common interest expenditure will only be 10,000/-. 13. incongruity arises because, as 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. question then arises whether we can tinker with formula prescribed under rule 8D(2)(ii) of Income Tax Rules, or construe it any other manner other than what is supported by plain words of rule 8 D (2)(ii). 15. We find that notwithstanding rigid words of Rule 8D(2)(ii), stand taken by revenue authorities about its application, as was before Hon ble Bombay High Court in 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 interest on borrowed funds that would be apportioned and amount of expenditure by way of interest that will be taken (as 'A' in formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example any aspect of assessee's business such as plant/machinery etc.) . Therefore, it is not only interest directly attributable to tax exempt income, i.e. under rule 6D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from definition of variable in formula as per rule 6D(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. This is clear from following observations made by Their Lordships of Hon ble Bombay High Court in case of Godrej & Boyce (supra): 60. In affidavit-in-reply that has been filed on behalf of Revenue explanation has been provided of rationale underlying r. 8D. In written submissions which have been filed by Addl. Solicitor General it has been stated, with :- 10 -: ITA No. 1824 to 1826 /Mds./2016 reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate actual quantum of borrowed funds that have been used for making tax-free investments. It is only interest on borrowed funds that would be apportioned and amount of expenditure by way of interest that will be taken (as 'A' in formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example any aspect of assessee's business such as plant/machinery etc.) justification that has been offered in support of rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying tests formulated by Supreme Court it is not possible for this Court to hold that there is writ on statute or on subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in method'. 16. Once revenue authorities have taken particular stand about applicability of formula set out in rule 8 D(2)(ii), and based on such stand constitutional validity is upheld by Hon ble High Court, it cannot be open to revenue authorities to take any other stand on issue with regard to actual implementation of formula in case of any assessee. Viewed thus, correct application of formula set out in rule 8D(2)(ii) is that, as has been noted by Hon ble Bombay High Court in case of Godrej and Boyce (supra), amount of expenditure by way of interest that will be taken (as 'A' in formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example any aspect of 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). :- 11 -: ITA No. 1824 to 1826 /Mds./2016 17. To above extent, therefore, we have to proceed on 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 same. Ideally, it is for Central Board of Direct Taxes to make position clear one way or other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting interpretation as per plain words of said rule, but even on 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 rule in real life situations. Therefore, even as we are alive to fact that stand of learned Departmental Representative is in accordance with strict wording of rule 8D(2)(ii), we have to hold that, for reasons set out above, this rigid stand cannot be applied in practice. 13. In view of decision of Calcutta Bench of this Tribunal cited above, we uphold order of Commissioner of Income Tax (Appeals) in excluding interest on bank loan and term loans for purpose of computing disallowance under Rule 8D(2)(ii). grounds raised by Revenue are rejected on this issue. 11. In view of above decision, we are of opinion that interest on borrowing which are made for specific purpose of business cannot be considered for purpose of Rule 8D of Income Tax Rules. Further, investments in sister concerns or subsidiaries with which assessee is having business transactions, that investments cannot be considered for purpose of applicability of Rule-8D. For this proposition we rely on judgments of Tribunal in case of Sun TV Networks in ITA No.1340 & 1341/Mds./15 & 1578 to 1579/Mds/15 wherein held that:- :- 12 -: ITA No. 1824 to 1826 /Mds./2016 12. We have considered rival submissions on either side and perused relevant material available on record. main contention of assessee is that available share capital including reserves and surplus was 2385.7 Crores as on 31.03.2010. available share capital is 1970.4 Crores and Reserves and surplus is 21,886.7 Crores. investments made in mutual funds including subsidiary companies are only 541.11 Crores. Therefore, it cannot be said that assessee has diverted borrowed funds for making any investment either in sister concerns or in mutual funds. When assessee has sufficient share capital, reserves and surplus, this Tribunal is of considered opinion that there cannot be any disallowance towards interest paid on borrowed funds under Section 14A of Act. For purpose of disallowing interest income under Section 14A read with Rule 8D, there should be nexus between borrowed funds and investment made by assessee in share capital and mutual funds. In absence of any nexus, presumption is that assessee has invested available interest-free funds in share capital and mutual funds. Furthermore, making investment in sister concerns is for commercial expediency in view of judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. It is not case of Revenue that sister concern or any of Directors has misused funds invested by assessee. When sister concern uses funds only for business purpose, there was commercial expediency for making investment. Therefore, this Tribunal is of considered opinion that there cannot be any disallowance under Section 14A of Act read with Rule 8D of Income-tax Rules, 1962. 13. In view of above, this Tribunal is unable to uphold orders of lower authorities. Accordingly, orders of lower authorities are set aside. entire addition made by Assessing Officer is deleted. 12. We also rely in case of Beach Miners Co. Pvt Ltd. Vs. ACIT in ITA No.2110/Mds./14 dated 06.08.15 wherein held that: 6.1. Ground No.3 Disallowance of expenditure by invoking provisions of section 14A of Act for 3,11,34,630/- since assessee had made investments of 71,55,33,570/- for earning exempt income. At outset, we find that there is no merit for Revenue to make addition of 3,11,34,630/- invoking provisions of section 14A of Act because investment made of 71,55,33,570/-, bears no cost in form of interest or whatsoever, since funds by which investment is made is assessee s own funds. Further, these investments are made only with sister companies of assessee and no cost can be :- 13 -: ITA No. 1824 to 1826 /Mds./2016 attributed for management of such funds. Therefore, we hereby delete addition of 3,11,34,630/- made by Ld. Assessing Officer invoking provisions of section 14A of Act. This ground raised by assessee is allowed in its favour. 13. In view of above judgments, AO has to consider assessee s own fund i.e. capital and reserves as available on date of investment which yields exempted income and thereafter he shall apply Formula in Rule 8D and also exclude investments in subsidiaries as held by above order of Co-ordinate Bench. With this observation, we remit issue to file of AO for fresh consideration. Hence, this ground is allowed for statistical purposes. 14. In result, all appeals of Assessee are partly allowed for statistical purposes. Order pronounced on 23rd September, 2016, at Chennai. Sd/- Sd/- (G.PAVAN KUMAR) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 23rd September, 2016 K S Sundaram Copy to: 1. Appellant 3. CIT(A) 5. DR 2. Respondent 4. CIT 6. GF M/s. Lucas TVS Ltd. v. Deputy Commissioner of Income-tax, Corporate Circle-4(1), Chennai