Thursday, October 16, 2014

ITAT interprets Formula under Rule 8D for allocating common interest exp.


In the instant case the dispute arose between assessee and revenue in respect of computation mechanism provided under Rule 8D(2)(ii).

The Tribunal held as under:

1)Rule 8D(2)(ii) seeks to allocate 'common interest expenses' to taxable income and tax exempt income. However, the definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous as it specifically excludes interest expenditure directly related to tax exempt income, yet it does not exclude interest expenditure directly related to taxable income.

2)Resultantly, while rule 8D(2)(ii) 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.

3)The incongruity arose due to the wordings of rule 8D(2)(ii), as it provided that out of total interest expenses, only interest expenses directly relatable to tax exempt income were excludible, and interest expenses directly relatable to taxable income were not excludible.

4)Therefore, common interest expenditure could be computed only when interest directly attributable to tax exempt income, i.e., under rule 8D(2)(i), and interest directly relatable to taxable income, were excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii). - GEOJIT INVESTMENT SERVICES LTD. V. ACIT [2014] 50 150 (Cochin - Trib.)

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