DRS Labs (India) Pvt.Ltd., Hyd, Secunderabad V. ITO, Ward-17(1), Hyd, Hyderabad

ITA 1211/HYD/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6048 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 14-09-2016
• Court: TRIBUNAL
• Department Lawyers: V SREEKAR
• Assessee Lawyers: M V ANIL KUMAR
• Keywords: Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 1211/HYD/2016 ASSESSMENT YEAR: 2012-13 DRS LABS (INDIA) PRIVATE LIMITED, SECUNDERABAD [PAN: AADCD0069Q] VS INCOME TAX OFFICER, WARD-17(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI M.V. ANIL KUMAR, AR FOR REVENUE : SHRI V. SREEKAR, DR DATE OF HEARING : 15-03-2017 DATE OF PRONOUNCEMENT : 22-03-2017 O R D E R THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E COMMISSIONER OF INCOME TAX (APPEALS)-5, HYDERABAD D ATED 30-06-2016. THE ISSUE IN THIS APPEAL IS WITH REFERENC E TO DISALLOWANCE MADE U/S. 14A R.W.R. 8D. 2. ASSESSING OFFICER (AO) HAS NOTICED THAT ASSESSEE HA S INVESTED MONEY IN THE EQUITY SHARES OF ONE M/S. COMBAT DRUGS LTD., TO THE TUNE OF RS. 3,22,40,000/-. HE ALSO NOTICED THAT ASSESSE E HAS CLAIMED FINANCE COST TO THE TUNE OF RS. 20,14,653/- I N THE P&L A/C. INVOKING THE PROVISIONS OF SECTION 14A, AO DISALLOWED PROPORTIONATE INTEREST TO AN EXTENT OF RS. 6,67,992/- UNDER RULE 8D(2)(II) AND AN AMOUNT OF RS. 1,44,445/- UNDER RULE 8D(2)(III). I.T.A. NO. 1211/HYD/2016 DRS LABS (INDIA) PRIVATE LIMITED :- 2 - : BEING 0.5% OF AVERAGE INVESTMENT. THUS, AN AMOUNT OF RS. 8,12,437/- WAS DISALLOWED U/S. 14A OF THE ACT. 3. IT WAS THE CONTENTION BEFORE THE LD.CIT(A) THAT INTEREST WAS CLAIMED ON THE FUNDS WHICH WERE UTILISED IN THE BUSINE SS OF ASSESSEE AND NO PART OF AMOUNT WAS DIVERTED FOR INVES TMENT IN THE SHARES. IT WAS FURTHER SUBMITTED THAT THERE IS NO INCOME DURING THE YEAR AND ACCORDINGLY, PROVISIONS OF SECTION 14A A RE NOT APPLICABLE. LD.CIT(A) HOWEVER, CONFIRMED THE ORDER OF THE AO BY ELABORATELY DISCUSSING THE PROVISIONS AND CASE LAW. ASSESSEE IS AGGRIEVED AND RAISED THE GROUNDS. 4. IT WAS THE SUBMISSION OF LD. COUNSEL THAT THE FINANCE CHARGES AND INTEREST CLAIM ARE DIRECTLY RELATED TO THE BUSINESS OF TRADING IN TRUCKS AND AO AS WELL AS CIT(A) OUGHT NOT HAVE DISALLO WED INTEREST OF RS. 6,67,992/- INVOKING RULE 8D(2)(II) OF IT RUL ES. IT WAS FURTHER SUBMITTED THAT IN THE ABSENCE OF ANY INCOME BEING CLAIME D AS EXEMPT OR INCLUDED IN TOTAL INCOME, DISALLOWANCE U/S. 14A IS NOT WARRANTED. LD. COUNSEL REFERRED TO THE BALANCE SHEET P LACED ON RECORD TO SUBMIT THAT ALL THE FUNDS WERE BORROWED IN EA RLIER YEARS AND THERE WAS NO DISALLOWANCE IN ANY OF THE EARLIER YEARS U/S. 14A. HE ALSO REFERRED TO SCHEDULE-10 TO INFORM THAT ABOUT R S. 2.55 CRORES WAS INVESTED AS ON 31-03-2011 AND DURING THE YEAR, THE INVESTMENT HAS GONE UPTO RS. 3.22 CRORES, MOSTLY OUT OF ASSESSEES FUNDS. IT WAS FURTHER SUBMITTED THAT NONE OF THE BORROWED AMOUNTS WERE INVESTED SO AS TO INVOKE DISALLOWANCE UNDER RUL E 8D(2)(II). WITH REFERENCE TO DISALLOWANCE U/S. 8D(2)(III), HE SU BMITTED THAT NO INCOME WAS RECEIVED DURING THE YEAR WHICH WAS CLAIM ED AS EXEMPT, HENCE DISALLOWANCE IS NOT WARRANTED. I.T.A. NO. 1211/HYD/2016 DRS LABS (INDIA) PRIVATE LIMITED :- 3 - : 5. LD.DR HOWEVER, RELIED ON THE ORDERS OF THE CIT(A). 6. I HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES. THERE IS NO FINDING GIVEN BY THE AO OR CIT(A) THAT ANY OF THE BORROWED FUNDS HAVE BEEN DIVER TED FOR INVESTMENTS IN SHARES. EVENTHOUGH THE LD.CIT(A) DISCUSS ED THE PRINCIPLES OF LAW, HE DID NOT EXAMINE WHETHER ANY OF THE BORROWED FUNDS HAVE BEEN DIVERTED FOR INVESTMENT. UNLESS THE FUNDS WERE OUT OF THE BORROWED FUNDS, NO DISALLOWANCE IS WARRANT ED UNDER RULE 8D(2)(II) IT WAS THE CONTENTION THAT BORROWED FUNDS WERE UTILISED IN THE BUSINESS OF ASSESSEE. ASSESSEES CONTENTION THAT A O HAS NOT DISALLOWED ANY AMOUNT U/S. 36(1)(III) HAS A VALID PO INT. INVOKING RULE 8D(2) WILL ONLY COME WITH REFERENCE TO OTHER INT EREST WHICH WAS NOT DIRECTLY RELATED TO THE BUSINESS. SINCE THERE IS NO FINDING BY THE AO THAT THE INTEREST CLAIM IS NOT FOR THE PURPOSE O F BUSINESS, IN MY OPINION, INVOKING SECTION 14A AND DI SALLOWANCE ON ON A PROPORTIONATE BASIS IS NOT CORRECT. AS SEEN FROM THE RECORD ALSO, MOST OF THE FUNDS WERE BORROWED IN EARLIER YEAR S, SUBSTANTIAL AMOUNT WAS ALSO INVESTED IN EARLIER YEARS. THERE SE EMS TO BE NO DISALLOWANCE IN EARLIER YEARS U/S. 14A. IN VIEW OF THAT, THE DISALLOWANCE U/S. 8D(2)(II) CANNOT BE SUSTAINED. 7. COMING TO THE ISSUE OF DISALLOWANCE U/S. 8D(2)(I II) I.E., 0.5% ON THE AVERAGE INVESTMENTS, ASSESSEES CONTENTION WAS TH AT NO SUCH DISALLOWANCE WAS WARRANTED, AS NO INCOME WAS EA RNED DURING THE YEAR. HOWEVER, IT CANNOT BE STATED THAT ASSESSEE HAS NOT UTILISED ITS PERSONNEL AND EFFORTS TO MAKE INVESTMENTS IN THE SHARES. THERE WILL BE SOME EXPENDITURE INVOLVED, WH ICH CANNOT BE QUANTIFIED. THEREFORE, RULE 8D(2)(III) PROVIDES FOR ESTIMATION OF I.T.A. NO. 1211/HYD/2016 DRS LABS (INDIA) PRIVATE LIMITED :- 4 - : EXPENDITURE FOR 0.5% OF AVERAGE INVESTMENTS. THIS ISSU E WAS DISCUSSED ELABORATELY BY THE CO-ORDINATE BENCH IN THE CASE OF BELLWETHER MICROFINANCE FUND PVT. LTD., IN ITA NO. 17 43/HYD/2013 DT. 27-06-2014. THE RELEVANT PORTION OF THE SAID ORDER IS AS UNDER: 7. WE HAVE HEARD PARTIES AND PERUSED MATERIALS ON RECORD AS WELL AS THE ORDERS OF THE AUTHORITIES ON THIS ISSUE . SO FAR AS THE CONTENTION OF THE LEARNED AR THAT PROVISIONS OF SECTION 14A IS NOT ATTRACTED AND IT HAS NOT INCURRED ANY EXPENDITURE TOWARDS EARNING OF EXE MPT INCOME AND FURTHER CONTENTION THAT DIVIDEND INCOME CANNOT BE C ONSIDERED AS EXEMPT INCOME AS IT IS SUBJECTED TO DIVIDEND DISTRIBUTION TAX U/S 115J AND 115-O OF THE ACT, IN OUR VIEW, IT IS NOT ACCEPTABLE SIMP LY BECAUSE OF THE FACT THAT THE ASSESSEE ITSELF RECOGNIZING THE FACT THAT IT HA S INCURRED EXPENDITURE TOWARDS EARNING OF EXEMPT INCOME HAS DISALLOWED EXP ENDITURE TO THE TUNE OF RS. 35,65,860/- U/S 14A READ WITH RULE 8D(2) OF THE ACT. THEREFORE, ASSESSEES CHALLENGE WITH REGARD TO APPLICABILITY O F SECTION 14A READ WITH RULE 8D (2) CANNOT BE SUSTAINED. HOWEVER, SO FAR AS ASSESSEES CONTENTION WITH REGARD TO MODE OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2), IN OUR VIEW, REQUIRES CONSIDERATION. AS CAN BE SEEN, A T THE STAGE OF ASSESSMENT PROCEEDING ITSELF ASSESSEE HAS STATED TH AT DISALLOWANCE UNDER RULE 8D(2)(I) SHOULD BE ONLY IN RELATION TO T HE INVESTMENT, WHICH HAS YIELDED ANY EXEMPT INCOME IN THE RELEVANT FY. EXPEN DITURE CANNOT BE IN RELATION TO THE TOTAL INVESTMENT IRRESPECTIVE OF TH E FACT WHETHER ANY INCOME IS EARNED OR NOT DURING THE YEAR. BEFORE GOING INTO THE MERITS OF ASSESSEES CONTENTIONS, IT IS DEEMED NECESSARY TO LOOK INTO TH E PROVISIONS CONTAINED UNDER RULE 8D(2) WHICH IS RELEVANT FOR OUR PURPOSE. THE SAME IS EXTRACTED HEREUNDER FOR THE SAKE OF CONVENIENCE: 8D. (1) XXXXXXXXXXX (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY : (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FO RMULA, NAMELY : A X B/C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR ; I.T.A. NO. 1211/HYD/2016 DRS LABS (INDIA) PRIVATE LIMITED :- 5 - : B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHI CH DOES NOT OR SHALL NOT FORM PART OF THE TO TAL INCOME, AS APPEARING IN THE BALANCE SHEET OF TH E ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BAL ANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) XXXXXXXXXXXX 7.1 ON CAREFUL READING OF THE AFORESAID PROVISION, IT WOULD BE EVIDENT THAT IT IS IN THREE PARTS. THE FIRST PART C ONTAINED IN SUB-RULE D(2)(I), SPEAKS OF DISALLOWANCE OF THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . SECOND PART UNDER SUB-RULE 8D(2)((II) DEALS WITH DISALLOWANCE TO BE COMPUTED ON THE BASIS OF FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE THIRD PART AS PROVIDED UNDER SUB-RU LE 8D(2)(III) IS AN ARTIFICIAL FIGURE I.E. ONE-HALF PER CENT OF THE AVE RAGE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE T OTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON T HE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. AGGREGATE OF THESE T HREE COMPONENTS WOULD CONSTITUTE EXPENDITURE IN RELATION TO EXEMPT INCOME AND WOULD BE DISALLOWED U/S 14A OF THE ACT. THEREFORE, IF WE EX AMINE THE FACTS OF THE PRESENT CASE IN THE CONTEXT OF THE AFORESAID STATUT ORY PROVISION, IT IS QUITE CLEAR THAT AO WHILE WORKING OUT DISALLOWANCE UNDER RULE 8D(2)(I) HAS TAKEN THE TOTAL INVESTMENT IRRESPECTIVE OF THE FACT WHETHER THEY HAVE YIELDED INCOME OR NOT DURING THE ASSESSMENT YEAR UN DER CONSIDERATION. THE REASONING OF THE AO IN THIS REGARD IS ACTUAL EA RNING OR RECEIPT OF INCOME WILL NOT BE A CONDITION FOR DISALLOWANCE OF SUCH EXPENDITURE UNDER THE PROVISIONS OF SECTION 14A AS IT SPEAKS ABOUT EX PENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . HE WAS OF THE VIEW THAT EVEN IF NO INCOME WAS RECEIVED, EXPENDITURE IN CURRED CAN BE DISALLOWED U/S 14A. HOWEVER, RULE 8D(2)(I) SPEAKS O F EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOT AL INCOME. THE TERM TOTAL INCOME HAS NOT BEEN DEFINED EITHER U/S 14A OR UNDER RULE 8D. THEREFORE, ONE HAS TO LOOK TO THE DEFINITION OF TO TAL INCOME AS APPEARING IN SECTION 2(45) OF THE ACT, WHICH READS AS UNDER: 'TOTAL INCOME' MEANS THE TOTAL AMOUNT OF INCOME REF ERRED TO IN SECTION 5, COMPUTED IN THE MANNER LAID DOWN IN THIS ACT ; SECTION 5 OF THE ACT READS AS UNDER:- SCOPE OF TOTAL INCOME. I.T.A. NO. 1211/HYD/2016 DRS LABS (INDIA) PRIVATE LIMITED :- 6 - : 5. (1) SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOT AL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME F ROM WHATEVER SOURCE DERIVED WHICH (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR AR ISE TO HIM IN INDIA DURING SUCH YEAR ; OR (C) ACCRUES OR ARISES 57 TO HIM OUTSIDE INDIA DURING SUCH YEAR : PROVIDED THAT, IN THE CASE OF A PERSON NOT ORDINARILY RESIDE NT IN INDIA WITHIN THE MEANING OF SUB-SECTION (6)* OF SECTION 6, THE INCOM E WHICH ACCRUES OR ARISES TO HIM OUTSIDE INDIA SHALL NOT BE SO INCLUDED UNLESS I T IS DERIVED FROM A BUSINESS CONTROLLED IN OR A PROFESSION SET UP IN INDIA. (2) SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOTA L INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A NON-RESIDENT INCLUDES ALL INCOME FR OM WHATEVER SOURCE DERIVED WHICH (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN IND IA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR AR ISE TO HIM IN INDIA DURING SUCH YEAR. EXPLANATION 1. INCOME ACCRUING OR ARISING OUTSIDE INDIA SHALL NOT BE DEEMED TO BE RECEIVED 57 IN INDIA WITHIN THE MEANING OF THIS SECTION BY REA SON ONLY OF THE FACT THAT IT IS TAKEN INTO ACCOUNT IN A BALANCE SHE ET PREPARED IN INDIA. EXPLANATION 2. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT INCOME WHICH HAS BEEN INCLUDED IN THE TOTAL INCOME OF A PE RSON ON THE BASIS THAT IT HAS ACCRUED OR ARISEN OR IS DEEMED TO HAVE ACCRUED OR A RISEN TO HIM SHALL NOT AGAIN BE SO INCLUDED ON THE BASIS THAT IT IS RECEIVED OR DEE MED TO BE RECEIVED BY HIM IN INDIA. 7.2 AS CAN BE SEEN, DEFINITION OF TOTAL INCOME U/S 2(45) REFERS TO SECTION 5 WHICH ENVISAGES SCOPE OF TOTAL INCOME. ON A REA DING OF SECTION 5 OF THE IT ACT, IT WOULD BE EVIDENT THAT AS PER THIS SECTIO N TOTAL INCOME IS OF ANY PREVIOUS YEAR AND WHICH INCLUDES INCOME FROM WHATE VER SOURCE DERIVED WHICH IS RECEIVED OR DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON OR ACCRUES OR ARISES OR IS DE EMED TO ACCRUE OR ARISES I.T.A. NO. 1211/HYD/2016 DRS LABS (INDIA) PRIVATE LIMITED :- 7 - : TO HIM IN INDIA DURING SUCH YEAR OR ACCRUES OR ARIS E TO HIM OUTSIDE INDIA DURING SUCH YEAR. CONSIDERED IN AFORESAID CONTEXT, EXPRESSION TOTAL INCOME REFERRED TO IN RULE 8D(2)(I) CANNOT BE IN A BSTRACT. IT MUST RELATE TO A PREVIOUS YEAR INCOME OF WHICH IS SOUGHT TO BE ASSE SSED. THEREFORE, AS A NATURAL COROLLARY IT FOLLOWS THAT ONLY EXPENDITURE DIRECTLY RELATING TO INCOME WHICH IS EARNED EITHER ON RECEIPT BASIS OR ON ACCRU AL BASIS AND WHICH DOES NOT FORM PART OF TOTAL INCOME OF A PARTICULAR ASSES SMENT YEAR CAN BE DISALLOWED UNDER CLAUSE (I) OF RULE 8D(2). RULE 8D( 2)(I) DOES NOT REFER TO THE INVESTMENT MADE BY THE ASSESSEE. ON A CONJOINT READ ING OF CLAUSE (I) AND CLAUSE (III) OF RULE 8D(2), THE DIFFERENCE BETWEEN THEM IS CLEARLY DISCERNIBLE. WHILE CLAUSE (I) SPEAKS OF DISALLOWANCE OF EXPENDIT URE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, CL AUSE (III) PROVIDES FOR DISALLOWANCE OF EXPENDITURE OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON F IRST DAY AND LAST DAY OF THE PREVIOUS YEAR. THEREFORE, WHILE DISALLOWANCE OF EXPENDITURE UNDER CLAUSE (I) IS RELATED TO INCOME EARNED WHICH DOES N OT FORM PART OF TOTAL INCOME, CLAUSE (III) RELATES TO THE AVERAGE OF THE VALUE OF INVESTMENT APPEARING IN THE BALANCE SHEET. ON A PLAIN READING OF RULE 8D(2) AS A WHOLE THE LEGISLATIVE INTENT BECOMES CLEAR THAT TH E DISALLOWANCE OF EXPENDITURE CONTEMPLATED UNDER SUB-RULE(I) MUST REL ATE TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THA T YEAR. THEREFORE, INVESTMENT, WHICH HAS NOT RESULTED IN ANY INCOME CA NNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE UNDER RULE 8D(2)(I) . HOWEVER, WHILE COMPUTING DISALLOWANCE UNDER RULE 8D(2)(III), THE A VERAGE OF THE TOTAL INVESTMENT OF THE ASSESSEE AS APPEARING IN THE BALA NCE SHEET ON THE FIRST DAY AND LAST DAY OF THE YEAR IRRESPECTIVE OF THE FA CT WHETHER IT HAS YIELDED INCOME OR NOT CAN BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE. THE USE OF THE WORDS DOES NOT OR SHALL NOT IN RULE 8D(2)(III) CONNOTES THAT INCOME NOT ONLY DOES NOT FORM PART OF TOTAL INCOME DURING THE YEAR BUT IT ALSO SHALL NOT FORM PART OF TOTAL INCOME AT ANY TIME. HAD IT B EEN THE INTENTION OF THE RULE FRAMING AUTHORITIES TO DISALLOW UNDER RULE 8D( 2)(I) EXPENDITURE RELATING TO TOTAL VALUE OF INVESTMENT OR INCOME WHI CH IS NOT EARNED DURING THE RELEVANT PREVIOUS YEAR, THEN, THEY WOULD HAVE U SED THE EXPRESSION DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME AS APPEARING IN RULE 8D(2)(III) INSTEAD OF WORDS DOES NOT FORM PART OF TOTAL INCOME. THAT BEING THE CASE, AO CANNOT DISALLOW EXPENDITURE RELATING T O INVESTMENT WHICH HAS NOT YIELDED ANY EXEMPT INCOME DURING THE PREVIOUS Y EAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE. THEREFORE, WE DIRECT THE AO TO DISALLOW THE EXPENDITURE RELATING TO INVESTMENTS RESULTING I N INCOME EARNED/ACCRUED WHICH DOES NOT FORM PART OF TOTAL IN COME OF THE IMPUGNED ASSESSMENT YEAR. HOWEVER, SO FAR AS AOS COMPUTATIO N OF EXPENDITURE TO BE DISALLOWED UNDER RULE 8D(2)(III), THE SAME IN OU R VIEW, IS IN CONFORMITY WITH RULE 8D(2)(III), HENCE, DO NOT CALL FOR ANY IN TERFERENCE. I.T.A. NO. 1211/HYD/2016 DRS LABS (INDIA) PRIVATE LIMITED :- 8 - : 7.1. RESPECTFULLY FOLLOWING THE DISALLOWANCE UNDER R ULE 8D(2)(III) IS CONFIRMED. IN VIEW OF THAT, WHILE CONFIRMING THE D ISALLOWANCE U/S. 8D(2)(III) TO AN EXTENT OF RS. 1,44,445/-, THE D ISALLOWANCE MADE U/S. 8D(2) TO AN EXTENT OF RS. 6,67,992/- IS DE LETED. 8. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND MARCH, 2017 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 22 ND MARCH, 2017 TNMM COPY TO : 1. DRS LABS (INDIA) PRIVATE LIMITED, SECUNDERABAD. C/O. M. ANANDAM & CO., CHARTERED ACCOUNTANTS, 7A, SURYA TOWERS, S.D. ROAD, SECUNDERABAD. 2. THE INCOME TAX OFFICER, WARD-17(1), HYDERABAD. 3. COMMISSIONER OF INCOME TAX(APPEALS)-5, HYDERABAD . 4. THE PR. COMMISSIONER OF INCOME TAX-5, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.