But the rule addresses but one facet of the problem — common interest on borrowings made for carrying on both exempted and non-exempted activities — seriously and comprehensively. Its formula apportioning such interest on the basis of the average investments made in the respective activities cannot be challenged by anyone given the fact that in business funds are after all fungible and defy back-to-back relationship.

Curiously, the rule tamely and irrationally settles for one-half per cent of the average investment in the exempted activity as being attributable to the exempted income by way of common expenses other than interest which apparently includes common salary, common rent, etc.

To wit, suppose the aggregate of common salary and common rent incurred by a sugar company having its own plantation is let us say Rs 40 lakh and the average investments in agriculture and manufacturing activities are Rs 10 crore and Rs 20 crore respectively. One could have understood if the formula had been premised on the share of respective investments but what beats one is it goes off at a tangent and settles for one-half per cent as being relatable to the exempted activity.

Thus what the department has secured for itself after a lot of huffing and puffing is a disallowance of Rs 5 lakh determined not on logical consideration but on the touchstone of a crude and irrational norm.

If the courts fought shy of getting involved in the nitty-gritty of apportionment, the CBDT has fared no better by lumping all common expenses other than interest into one category and prescribing a one-size-fits-all anti-climactic formula for it.

The formula besides being ham-handed in common with most of the peremptory dispensations leaves itself to challenge — for example, had the average investments in the above example been Rs 100 crore and Rs 200 crore respectively, the share of common expenses of agricultural activity would have been one-half per cent of Rs 100 crore, that is, Rs 50 lakh, while by company’s own admission and records, the aggregate itself is only Rs 40 lakh.

One also does not know whether Rule 14A applies to computation of book profits in the context of Minimum Alternative Tax (MAT). In the absence of a specific provision in Section 14A, diehard and intrepid tax planners say that its scope cannot be extended to computation of book-profits for imposing MAT.

Thus this sugar company would be perfectly justified in deducting the entire common expenses from the book profits of the sugar manufacturing division even though it would be constrained to obey Section 14A while computing its taxable income under the Income-Tax Act. Section 14A or Section 115JB, dealing with MAT or both, must be amended to extend the writ of the former to the latter as well.

Exemption vs deduction

It was held in CIT vs Tamil Nadu Silk Producers Federation Ltd (2006 103 TTJ Chennai) that Section 14A speaking as it does of common expenses relating exempted income, does not apply to income that are deductible under Chapter VI-A . The Tribunal it is respectfully submitted took a narrow view when it drew an invidious distinction between income that is exempt under Chapter III and income that is deductible under Chapter VI-A.

What it said boils down to this: If a unit is located in an SEZ, its common expenses would not be completely deductible while calculating its taxable income whereas if it has set up a unit in a backward State, thus becoming eligible to deduction from Gross Total Income of its income from this unit vide Section 80-IA, the common expenses would be completely deductible.

This view is not warranted either in law or in equity. To be sure, Section 14A itself does not train its guns only on income exempt under Chapter III. Instead it trains its guns on “income not forming part of total income” which expression includes both categories of income outside the pale of tax.