Introduction
5. As
mentioned in para 1.3 of Part-I of this write-up [January, 2019 Issue of BCAJ],
the Apex Court dealt with the main issue of applicability of section 14A in
cases where the shares were purchased by the assessee for acquiring/retaining
controlling interest or as stock-in-trade and in the process, it has dealt with
some other issues in the context of these provisions. As further mentioned in
para 3 of Part-I of this write-up, the Delhi High Court in MaxOpp Investments
Ltd’s case for the Assessment Year 2002-2003 [(2012) -347 ITR 272] took
the view that for the purpose of determining the applicability of section 14A,
it is not relevant whether the assessee has made investments for the purpose of
acquiring/retaining controlling interest as the dividend income is exempt. As
such, according to the Delhi High Court, dominant purpose for acquiring shares
is not relevant in this context. On the other hand, as mentioned in para 4 of
Part-I of this write-up, the Punjab & Haryana High Court, in State Bank of
Patiala’s case for the Assessment Year 2008-2009 [(2017) – 391 ITR 218], took
the contrary view in a case where the shares/securities were held by the assessee
as stock-in-trade. The Apex Court in batch of cases [MaxOpp Investments Ltd
vs. CIT and other cases (2018) 402 ITR 640 (SC)] has brought out the facts,
observations and findings of the Delhi High Court in MaxOpp Investments Ltd’s
case and of the Punjab & Haryana High Court in State Bank of Patiala’s case
primarily to decide the main issue [Ref paras 3.1 to 3.3 and paras 4.1 to 4.3
of Part-I of this write-up].
Is dominant purpose relevant ?
6.1 After
noting the divergent views emerged from the High Courts on this issue and the
reasoning given by the High Courts in support of these conflicting opinions,
the Court proceeded to consider this main issue as to whether the purpose of
making investment yielding Exempt Income is relevant for the purpose of applying
the provisions of section 14A and arguments of both the sides in that respect.
6.2 The
Court, to begin with, referred to statutory scheme contained in the provisions
of section 14A and Rule 8D and noted that the same should be kept in mind to
examine the divergent views expressed in the judgments of the above referred
High Courts. Further, the Court also
referred to the views expressed by the Karnataka High Court in CCI Ltd’s
case and in both the judgments of the Calcutta High Court, in G.K.K. Capital’s
case and in Dhanuka & Sons’ case, referred to in para 4.4 of Part-I of this
write-up.
6.3 The
Court then briefly recapitulated the main
arguments canvassed on behalf of the Assessees that: the holdings of
investments in group companies representing controlling interest amounts to
carrying on business as held in various cases; the character of dividend income
from such investments in shares continues to be business income though, by
virtue of the mandatory prescription in section 56 of the Act, such dividend
income is assessable under the head ‘Income from Other Sources’; interest paid
on funds borrowed for such investments is for the purpose of business and not
for earning dividend income and conversely, interest paid on such borrowed
funds does not represent expenditure incurred for earning dividend income and
was not allowable u/s. 57(iii) (prior to introduction of section 14A).
6.3.1 Based
on the above principles, it was, inter–alia, contended on behalf
of the assessee that when the shares were acquired, as part of promoter
holding, for the purpose of acquiring controlling interest in the
investee-company, the dominant object is to keep the controlling interest and
not to earn dividend and even when the dividend is not declared, the Assessee would
not liquidate such shares. As such, no expenditure was incurred ‘in relation
to‘ Exempt Income as contemplated in section 14A as the mandate and requirement
of section 14A requires a direct and proximate nexus between the expenditure
and the Exempt income to attract section 14A. It was further contended that
even if contextual/ purposive interpretation is to be given, that also requires
direct and proximate connection between the expenditure and the Exempt Income.
The section requires that only expenditure actually incurred ‘in relation to’
Exempt Income is to be disallowed so as to remove the double benefit to the
assessee.
6.3.2 On
behalf of the Revenue, it was, inter-alia, contended that the view taken
by the Delhi High Court is correct and the objective behind these provisions
manifestly pointed out that the expenditure incurred in respect of Exempt
Income earned has to be disallowed. For this, the reliance was also placed on
the Apex Court’s judgment in Walfort’s case [referred to in para 3.3 of Part-I
of this write-up]. According to the counsel for the Revenue, otherwise the
assessee will get double benefit. Firstly,
in the form of exemption in respect of income and secondly, by getting
deduction of expenses against other taxable income as well. Therefore, the
expression ‘in relation to’ had to be given expansive meaning in order to
achieve the object of the provision. It was also pointed out that the literal
meaning of section 14A also indicates towards that and that was equally the
purpose of insertion of the provisions as brought out in Explanatory
Memorandum.
6.4 After
considering the contentions raised on behalf of both the sides, the Court
proceeded to consider the main issue and observed as under (pg 665):
“In the
first instance, it needs to be recognized that as per section 14A(1) of the
Act, deduction of that expenditure is not to be allowed which has been incurred
by the assessee “in relation to income which does not form part of the total
income under this Act”. Axiomatically, it is that expenditure alone which has
been incurred in relation to the income which is not includible in total income
that has to be disallowed. If an expenditure incurred has no causal connection
with the exempted income, then such an expenditure would obviously be treated
as not related to the income that is exempted from tax, and such expenditure
would be allowed as business expenditure. To put it differently, such
expenditure would then be considered as incurred in respect of other income
which is to be treated as part of the total income.”
6.4.1 After bringing out the effect of
section14A(1), the Court also stated that there is no quarrel in assigning the
above meaning to section 14A and , in fact, all the High Courts including the
Delhi High Court & Punjab & Haryana High Court have agreed on this
interpretation. Having observed this, the Court focused on the real issue with
regard to interpretation of the expression ‘in relation to’ and observed as
under (pg 665) :
“……The
entire dispute is as to what interpretations to be given to the words ”in
relation to” in the given scenario, viz., where the dividend income on the
shares is earned, though the dominant purpose for subscribing in those shares
of the investee-company was not to earn dividend. We have two scenarios in
these sets of appeals. In one group of cases the main purpose for investing in
shares was to gain control over the investee-company. Other cases are those
where the shares of investee-company were held by the assessees as
stock-in-trade (i.e. as a business activity) and not as investment to earn
dividends. In this context, it is to be examined as to whether the expenditure
was incurred, in respective scenarios, in relation to the dividend income or not. ”
6.5 After
bringing out the real issue on hand and by drawing support from the views
expressed by the Apex Court in Walfort’s case, the Court took the view that for
this purpose the dominant purpose test is not relevant and held as under (pgs
665/666):
“Having
clarified the aforesaid position, the first and foremost issue that falls for
consideration is as to whether the dominant purpose test, which is pressed into
service by the assessee would apply while interpreting section 14A of the Act
or we have to go by the theory of apportionment. We are of the opinion that the
dominant purpose for which the investment into shares is made by an assessee
may not be relevant. No doubt, the assessee like MaxOpp Investments Limited may
have made the investment in order to gain control of the investee-company.
However, that does not appear to be a relevant factor in determining the issue
at hand. The fact remains that such dividend income is non-taxable. In this
scenario, if expenditure is incurred on earning the dividend income, that much
of the expenditure which is attributable to the dividend income has to be
disallowed and cannot be treated as business expenditure. Keeping this objective behind section14A of
the Act in mind, the said provision has to be interpreted, particularly, the
words “in relation to” that does not form part of total income. Considered in
this hue, the principle of apportionment of expenses comes in to play as that
is the principle which is engrained in section 14A of
the Act…..”
6.5.1 In the above context, while disagreeing with
the view expressed by the Punjab & Haryana High Court in State Bank of
Patiala’s case, the Court agreed with the view taken by the Delhi High Court in
the MaxOpp Investments Ltd’s case and held as under (pg 666):
“The Delhi
High Court, therefore, correctly observed that prior to introduction of section
14A of the Act, the law was that when an assessee had a composite and
indivisible business which had elements of both taxable and non-taxable income,
the entire expenditure in respect of the said business was deductible and, in
such a case, the principle of apportionment of the expenditure relating to the
non-taxable did not apply. The principle of apportionment was made available
only where the business was divisible. It is to find a cure to the aforesaid
problem that the Legislature has not only inserted section 14A by the Finance
(Amendment) Act, 2001 but also made It retrospective, i.e., 1962 when the
Income-tax Act itself came into force. The aforesaid intent was expressed
loudly and clearly in the Memorandum Explaining the Provisions of the Finance
Bill, 2001.We, thus, agree with the view taken by the Delhi High Court, and are
not inclined to accept the opinion of the Punjab and Haryana High Court which
went by dominant purpose theory. The aforesaid reasoning would be applicable in
cases where shares are held as investment in the investee-company, may be for
the purpose of having controlling interest therein. On that reasoning, appeals
of MaxOpp Investment Limited as well as similar cases where shares were
purchased by the assessees to have controlling interest in the investee-company
have to fail and are, therefore, dismissed.”
6.6 The
Court then dealt with another aspect of the main issue that when the shares are
held as stock-in-trade. In this context the Court noted CBDT Circular No 18 dtd
2/11/2015 [referred to in para 4.3(a) of
Part-I of this write-up] wherein the Board has clarified that income from
investments made by a banking concern is attributable to business of banking
and is taxable as business income. In this Circular, the Board has gone by the
judgment of the Apex Court in the case of Nawanshahar’s case which was dealing
with the claim of the bank u/s. 80P
which was relied on by the Punjab &
Haryana High Court in State Bank of Patiala’s case. In this context, the Court
observed as under (pg 667):
“ Form this, the Punjab and Haryana High Court pointed out that this
circular carves out a distinction
between “stock-in-trade” and “ investment” and provides that if the motive
behind purchase and sale of shares is to earn profit, then the same would be
treated as trading profit and if the object is to derive income by way of
dividend then the profit would be said to have accrued from investment. To this
extent, the High court may be correct. At the same time, we do not agree with
the test of dominant intention applied by the Punjab and Haryana High Court,
which we have already discarded. In that event, the question is as to on what
basis those cases are to be decided where the shares of other
companies are purchased by the assessees as “ stock-in-trade” and not as
“investment”. We proceed to discuss this aspect hereinafter.”
6.6.1 While
finally deciding the above issue against the assessee to the effect that even
in such cases Sec. 14A will apply as the
purpose of acquisition of shares is not relevant, the Court held as under (pgs
667/668):
“ In those
cases, where shares are held as stock-in-trade, the main purpose is to trade in
those shares and earn profits therefrom. However, we are not concerned with
those profits which would naturally be treated as “income” under the head
“Profits and gains from business and profession”. What happens is that, in the
process, when the shares are held as “stock-in-trade”, certain dividend is also
earned, though incidentally, which is also an income. However, by virtue of
section 10(34) of the Act, this dividend income is not to be included in the
total income and is exempt from tax. This triggers the applicability of section
14A of the Act which is based on the theory of apportionment of expenditure
between taxable and non-taxable income as held in Walfort Share and Stock
Brokers P. Ltd. case. Therefore, to that extent, depending upon the facts of
each case, the expenditure incurred in acquiring those shares will have to be
apportioned.”
Other
Issues
7.1 The
Court then dealt with the facts emerging from State Bank of Patiala’s case
[referred to in para 4.2 of Part-I of this write-up] wherein the AO had
restricted the disallowance to the amount of Exempt Income [Rs.12.20 Crore] by
applying formula contained in Rule 8D and the CIT (A) had enhanced the amount
of disallowance to the entire amount of allocated expenditure [Rs.40.72 Crore]
beyond Exempt Income. In this context, the Court observed as under (pg 668):
“ … In spite of this exercise of apportionment of expenditure carried out
by the Assessing Officer, the Commissioner of Income-tax (Appeals) disallowed
the entire deduction of expenditure. That view of the Commissioner of
Income-tax (Appeals) was clearly untenable and rightly set aside by the
Income-tax Appellant Tribunal. Therefore, on facts, the Punjab and Haryana High
Court has arrived at a correct conclusion by affirming the view of the
Income-tax Appellate Tribunal, though we are not subscribing to the theory of
dominant intention applied by the High Court…”
7.1.1 While
disagreeing with the views of Punjab & Haryana High Court in State Bank of
Patiala’s case on the theory of dominant purpose test, the Court further stated
as under (pg 668):
”… It is
to be kept in mind that in those cases where shares are held as
stock-in-trade”, it becomes a business activity of the assessee to deal in
those shares as a business proposition. Whether dividend is earned or not
becomes immaterial. In fact, it would be a quirk of fate that when the
investee-company declared dividend, those shares are held by the assessee,
though the assessee has to ultimately trade those shares by selling them to
earn profits. The situation here is, therefore, different from the case like
MaxOpp Investment Ltd. where the assessee would continue to hold those shares
as it wants to retain control over the investee-company. In that case, whenever
dividend is declared by the investee-company that would necessarily be earned
by the assessee and the assessee alone. Therefore, even at the time of
investing into those shares, the assessee knows that it may generate dividend
income as well and as and when such dividend income is generated that would be
earned by the assessee. In contrast, where the shares are held as
stock-in-trade, this may not be necessarily a situation. The main purpose is to
liquidate those shares whenever the share price goes up in order to earn
profits. In the result, the appeals filed by the Revenue challenging the
judgment of the Punjab and Haryana High Court in State Bank of Patiala also
fail, though law in this respect has been clarified hereinabove. ”
7.2 The Court
then dealt with the effect of section 14A(2) and Rule 8D. In this context, it
may be noted that various the High Courts (including Delhi High Court in MaxOpp
Investments Ltd’s case) have taken a view that before applying Rule 8D to
determine the quantum of disallowance, the AO needs to record his satisfaction
with regard to incorrectness of the quantum of expenditure incurred in relation
to Exempt Income determined by the assessee. Effectively, section 14A(2)
provides that if the assessee has determined the amount of such expenditure
(which may be disallowed) then the AO cannot take resort to Rule 8D for
determination of such expenditure unless the AO, having regards to the accounts
of the assessee, is not satisfied about the quantum of disallowance determined
by the assessee and record reasons for the same. In short, the Rule 8D cannot
be regarded as mandatory for all cases attracting section 14A(1). In this
context, the following observations of the Court are relevant (pgs 668/669):
“…we also
make it clear that before applying the theory of apportionment, the Assessing
Officer needs to record satisfaction that having regard to the kind of the
assessee, suo motu disallowance under section 14A was not correct. It will be
in those cases where the assessee in his return has himself apportioned but the
Assessing Officer was not accepting the said apportionment. In that
eventuality, it will have to record its satisfaction to this effect. Further,
while recording such a satisfaction, the nature of the loan taken by the
assessee for purchasing the shares/making the investment in shares is to be
examined by the Assessing Officer.”
7.3 As
mentioned earlier, there were number of appeals before the Apex Court. One of
them was filed by Avon Cycles Ltd (Civil appeal No 1423 of 2015) in
which the issue was with regard to disallowance of interest under Rule
8D(2)(ii) in a case where mixed funds were utilised by the assessee for
investment in shares. In this context, the ITAT had held as under (pg 669):
“…Admittedly
the assessee had paid total interest of Rs. 2.92 crores out of which interest
paid on term loan raised for specific purpose totals of Rs. 1.70 crores and
balance interest paid by the assessee is Rs. 1.21 crores. The funds utilised by
the assessee being mixed funds and in view of the provisions of rule 8D(2)(ii)
of the Income-tax Rules the disallowance is confirmed at Rs. 10,49,851. We find
no merit in the ad hoc disallowance made by the Commissioner of Income-tax
(Appeals) at Rs. 5,00,000. Consequently, the ground of appeal raised by the
Revenue is partly allowed and the ground raised by the assessee in
cross-objection is allowed.”
7.3.1 The High Court had taken a view that the above
being finding other facts, no substantial question of
law arises.
7.3.2 This
appeal was dismissed by the Apex Court with following observations (pg 669):
“ After
going through the records and applying the principle of apportionment, which is
held to be applicable in such cases, we do not find any merit in Civil Appeal
No. 1423 of 2015, which is accordingly dismissed”
7.4 It may also be noted that in the Bombay
High Court judgment (Nagpur Bench) in the case of Jamnalal Sons Pvt. Ltd. [
(2018) 11 ITR –OL 385] , it appears that the Tribunal had deleted
disallowance of interest expenditure made u/s 14A read with Rule 8D on the
grounds that the assessee had interest free funds available which are far in
excess of the amount invested in shares on which dividend was earned [apart
from other fact that the interest income was also much more than the interest
expenditure]. For this, Tribunal had relied on the judgment of the Bombay High
Court in the case of Reliance Utilities & Power Ltd [(2009) 313 ITR 340]
wherein the Court has held that in such cases, it can be presumed that the
investments were made from the interest free funds. In this case [Jamnalal
& sons’ case], the Revenue had contended before the High Court that the
Punjab & Haryana High Court in Avon Cycles Ltd’s case [referred to in para
7.3 above] has taken a different view from the one taken in Reliance Utilities’
case and also pointed out that appeal of the assessee against this Punjab &
Haryana High Court judgment has been admitted by the Apex Court and is pending.
After considering this, the Bombay High Court has dismissed the appeal of the
Revenue and decided the issue in favour of the assessee for which it also noted
that in the case of HDFC Bank Ltd [(2014) 366 ITR 565], this Court has
reiterated the view taken in Reliance Utilities’ case. One of the appeals filed
before the Apex Court in the MaxOpp Investment Ltd’s case by the Revenue was
also against this Bombay High Court judgment in Jamnalal Sons Pvt Ltd’s case
[Civil Appeal No.2793 of 2018 – Diary No 41203 of 2017] and this appeal of the
Revenue is allowed by the Apex Court.
7.5 Few
appeals filed by the Revenue against the assessee involved the issue as to
retrospective applicability of Rule 8D. In this context, the Court stated that
the said Rule is prospective and will apply only from Assessment Year 2008-2009.
This has already been held by the Apex Court in the case of CIT vs. Essar
technologies Ltd. [(2018) 401 ITR 445]. This was also the view emerging
from the judgment of the Apex Court in the case of Godrej & Boyce
Manufacturing Ltd. (2017) 394 ITR 449 [Godrej’s case].
CONCLUSION
8.1 In
view of the above judgment of the Apex Court, now it is settled that for the
purpose of determining applicability of section 14A, the dominant purpose test
is not relevant. As such, irrespective of the purpose for which shares are
acquired [i.e. whether for acquiring controlling interest or even for business
activity(to be held as stock-in-trade), provisions of section 14A are
applicable. It is unfortunate that a very sound and rational distinction drawn
by the Punjab and Haryana High Court in the State Bank of Patiala’s case
[referred to in para 4.3 of Part-I of this write-up], in the context of shares
held as stock-in-trade, did not appeal the Apex Court in deciding this issue.
8.1.1 It
appears that in a case where shares are held as stock-in-trade and during the
relevant previous year, no dividend income (Exempt Income) is earned therefrom
by the Assessee, the provisions of section 14A should not apply. In this
context, the observations of the Apex Court referred to in paras 6.6, 6.6.1,
7.1, and 7.1.1 above may be useful.
8.1.2 Section
14A deals with disallowance of expenditure incurred in relation to Exempt
Income. Therefore, expenditure which is admittedly incurred in relation to
taxable Income [e.g. interest on Term Loan taken and utilised for acquiring
Plant & Machinery meant for manufacturing activity yielding profit which is
not exempt] should be kept outside the purview of disallowance u/s. 14A. As
such, the same should not be considered for the quantification of the amount of
such disallowance . For this, useful reference may be made to the observations
of the Apex Court referred to in para 6.4 above.
8.2 Once
the provisions of section 14A(1) are applicable and the quantum of expenditure
in relation to Exempt Income is required to be determined as provided in
section 14A(2), the method prescribed in Rule 8D for determining such quantum
may become relevant. However, if the assessee has suo motu determined the
amount of disallowance u/s 14A then in such cases, the AO cannot invoke Rule 8D
for determining the quantum of such expenditure without recording the reasoned
satisfaction [as contemplated in section14A (2)] that the amount of suo motu
disallowance made by the assessee is not correct. This was the view expressed
by various High Courts including Delhi High Court in MaxOpp Investment Ltd’s
case and Bombay High Court judgment in Ultra Tech Ltd [(2018) 407 ITR 560-
Special Leave Petition [SLP] dismissed (2018) 406 ITR (St) 12]. This view
also gets support from the observations in the judgment of the Apex Court in
Godrej’s case. This position now gets settled on account of the view expressed
by the Apex Court referred to in para 7.2 above. However, from the view
expressed by the Apex Court, this position may apply only in cases where assessee
in his Return of Income has suo motu apportioned some expenditure
towards the earning of Exempt Income but the AO is not satisfied with the same.
Therefore, practically, it is advisable for the assessees to suo motu
determine the quantum of such disallowance properly so as to avoid
applicability of Rule 8D when working under Rule 8D is adverse to the Assessee.
As such, the application of the Rule 8D is strictly not mandatory.
8.2.1 The
above view of the Apex Court, in practice, may raise some further issues,
especially where the Assessee has taken a stand that no such expenditure is
incurred as the observations of the Apex Court are in the context of section
14A(2) and there is no reference to section 14A(3) which refers to the claim of
Nil expenditure and provide that even in such cases, section 14A(2) applies. It
seems that, in such cases, the assessee has to first demonstrate that no such
expenditure is factually incurred.
8.3 Considering
the facts of State Bank of Patiala’s case and on account of the view expressed
by the Apex Court referred to in para 7.1 above, in cases where the AO has
restricted the amount of disallowance u/s 14A to the amount of Exempt Income
earned during the year while applying Rule 8D, it would not be possible for the
CIT(A) to enhance the amount of such disallowance beyond the amount of Exempt
Income. In this context, it is worth noting that in the case of the same
assessee (State Bank of Patiala), the Punjab & Haryana High Court [for
Assessment Year 2010-2011 – ITA No 359/2017 dated 14/11/17] appear to have
taken similar view [in the context of order passed by the AO as a result of
order of CIT u/s. 263] by relying on decision in case of same assessee for
other years [i.e Assesstment Year 2009-2010 (2017) 393 ITR 476 and the one
referred to in para 7.1 above]. This judgment of the Punjab & Haryana High
Court dated 14/11/17 in case of the same assessee also subsequently came-up
before the Apex Court in which the SLP is dismissed by the Apex Court by an
order dated 8/10/18 stating that ‘the SLP is dismissed both on the ground of
delay as well as on merits.’ We may clarify that the mere rejection of SLP by
non-speaking order of the Apex Court against the High Court judgment does not
by itself tantamount to confirmation of the judgment of the High Court and
declaration of law by the Apex Court on the issue involved. For implications of
dismissal of SLP, reference may be made to our analysis of the Apex Court
Judgment under the title ‘Impact of rejection of SLP’ in this column in
December, 2000 issue of this Journal.
8.3.1 In the above context, in cases where the AO
himself has not restricted the amount of disallowance, some further issues
could arise.
8.3.2 Currently,
a debate continues on the issue as to applicability of section 14A in cases
where no Exempt Income is earned by the assessee during the relevant previous
year. Decisions are available on both the sides. It is for consideration
whether the position with regard to restricting the amount of disallowance to
the Exempt Income referred to in para 8.3 above could support the case of the
assessee to contend that if there is no Exempt Income, the provisions of
section 14A should not apply. In this context, it may be noted that the Amritsar
Bench of Tribunal in the case of Lally Motors India Pvt. Ltd [(2018) 170 ITD
370] has taken adverse view after considering major decisions on both the
sides and also relying on the judgment of the Apex Court [but without
specifically referring to this point arising from the view expressed by the
Apex Court referred to in para 7.1 above] in MaxOpp Investments Ltd’s case. Of
course, if the shares are held as stock-in-trade, the issue should be governed
by the position mentioned in para 8.1.1 above.
8.4 Another
issue which is under debate on applicability of section 14A in cases where the
assessee has larger amount of owned funds as well as other interest-free funds
available as compared to the amount invested in shares etc., yielding Exempt
Income. In such a scenario, the courts have effectively confirmed a view that
if the interest-free funds available with an assessee are more than amount
invested in such shares etc. and at the same time, if the assessee has also
borrowed funds on interest, it can be presumed that the investments were made
from the available interest-free funds [Ref HDFC Bank Ltd (2014) 366 ITR 505
(Bom), Max India Ltd. (2017) 398 ITR 209 (P & H), Microlabs Ltd (2016) 383
ITR 490 [Kar HC], Gujarat State Fertilizers & Chemicals Ltd (2018) 409 ITR
378 (GHC), etc.] In this context, recently, in another case of Gujarat
State Financial Services Ltd [ITA Nos 1252/1253/1255 of 2018], the Revenue
contended that in view of the judgment of the Apex Court in MaxOpp Investments
Ltd’s case [considered in this write-up], the legal position is that whenever
the assessee has two sources of funds, interest bearing and non-interest
bearing and also has made investments yielding Exempt Income, disallowance u/s.
14A will have to be made if the issue is to be considered after introduction of
Rule 8D. According to the Revenue, one of the issues decided in MaxOpp
Investment Ltd’s case was this one while dealing with the appeal filed by Avon
Cycle Ltd [referred to in para 7.3 above] in which the issue was with regard to
disallowance under Rule 8D in a case where mixed funds were utilised by the
assessee for such investments.
8.4.1 The Gujarat High Court [vide order dtd
15/10/2018], while dealing with the above issue raised by the Revenue,
explained the effect of the judgment of Apex Court in MaxOpp Ltd’s case in this
respect and took the view that this judgment of the Apex Court does not lay
down a proposition that the requirement of Rule 8D(1) of the satisfaction to be
arrived at by the AO before applying the formula given in Rule 8D(2) is done
away with. In other words, according to Gujarat High Court, this judgment of
the Apex Court does not lay down a proposition that the moment it is
demonstrated that the assessee had availed of mixed funds [i.e. interest-free
as well interest bearing funds] and utilised them for making such investments,
the applicability of section 14A read with Rule 8D(2) would be automatic. This
may be useful in cases where Tribunal has given a finding by applying the
presumption of use of interest-free funds in making such investment. In this
context, it is worth noting that the fact of allowing appeal against the Bombay
High Court judgment by the Apex Court in case of Jamnalal & Sons Pvt Ltd.
[referred to in para 7.4 above] was not considered in this case.
8.4.2 As mentioned in para 1.1.1 of Part-I of this
write-up, the Rule 8D is amended and, under the amended Rule, the earlier
provisions contained in Rule 8D (2)(ii) providing for disallowance of
proportionate amount of interest expenditure in cases where the mixed funds are
used for making investments is deleted w. e. f 2/6/2016. Therefore, the issues
relating to applicability of that part of the Rule 8D and determining quantum
thereof under that portion of the Rule and large number of decisions dealing
with the same may not be relevant in the post amendment era for that purpose,
though, of course, the same should continue to be relevant for other purposes.
8.5 The position is now settled that Rule 8D is prospective as
mentioned in para 7.4 above. This should also apply to amendment in the Rule 8D
w. e. f 2/6/2016 referred to in para 8.4.2 above.
