Gemini Industries & Imaging Limited, CHENNAI V. DCIT, CHENNAI

ITA 1537/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9261 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 15-03-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 02-07-2015
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: ANIL NAIR
• Keywords: Earning of tax free income; Proportionate interest; Retrospective amendment; Capital expenditure
• Section: 143(3); 14A; 115JB

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 1537 /MDS/2015 / ASSESSMENT YEAR : 20 1 0 - 11 M/S. GEMINI INDUSTRIES & IMAGING LIMITED, NO. 28, NEW BANGARU COLONY, WEST K.K. NAGAR, CHENNAI 600 0 7 8 . [PAN: A AACG7890H ] VS. THE DEPUTY COMMISSIONER OF I NCOME TAX , MEDIA CIRCLE I , C HENNAI - 34 . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI ANIL NAIR , C.A. / RESPONDENT BY : SHRI A.V. SREEKANTH , J CIT / DATE OF HEARI NG : 1 5 . 0 3 .201 6 / DATE OF P RONOUNCEMENT : 27 . 0 5 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 14 , C HENNAI , DATED 3 1 . 03 .20 1 5 RELEVANT TO THE ASSESSMENT YEAR 20 10 - 1 1 . THE ASSESSEE HAS RAISED TWO EFFECTIVE GROUND S VIZ ., (I) CONFIRMATION OF ADDITIONS UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] AMOUNTING TO .1,20,35,988/ - AND (II) I.T.A. NO . 1537 /M/ 15 2 CONFIR MATION OF DISALLOWANCE UNDER SECTION 35D OF THE ACT AMOUNTING TO .1,58,64,973/ - . 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PRODUCTION AND EXPLOITATION OF FEATURE FILMS, ETC. AND FILED ITS RETURN OF INCOME FOR THE A SSESSMENT YEAR 2010 - 11 ON 22.09.2010 ADMITTING A TOTAL INCOME OF .1,04,56,731/ - UNDER NORMAL PROVISIONS AND .2,50,60,000/ - UNDER SECTION 115JB OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS D ULY SERVED UPON THE ASSESSEE ON 05.09.2011. THE ASSESSEE IN THE COMPUTATION HAS ALSO CLAIMED SET OFF OF BROUGHT FORWARDED LOSS OF ASSESSMENT YEAR 2008 - 09 AND HAD SHOWN ONLY NIL INCOME UNDER NORMAL PROVISIONS. AFTER HEARING THE AR OF THE ASSESSEE AND CONSID ERING THE DETAILS FILED BY THE ASSESSEE, THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT BY ASSESSING TOTAL INCOME OF THE ASSESSEE AT .4,15,65,050/ - AFTER MAKING VARIOUS DISALLOWANCES/ADDITIONS. 3. ON APPEAL, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND ALSO CONSIDERING THE FACTS OF THE CASE, THE LD. CIT(A) PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. 4. ON BEING AGGR IEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. WITH REGARD TO THE CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 35D OF I.T.A. NO . 1537 /M/ 15 3 THE ACT, THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED THAT FILM PRODUCTION, FILM PROCESSING ACTIVITIES IS AN INDUSTRI AL UNDERTAKING AND THEREFORE, THE EXPENDITURE INCURRED IN CONNECTION WITH THE ISSUE OF SHARES IS ELIGIBLE FOR DEDUCTION UNDER SECTION 35D OF THE ACT AS THE ASSESSEE IS AN INDUSTRIAL UNDERTAKING. 5. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE OR DER PASSED BY THE AUTHORITIES BELOW. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSEE HAS CLAIMED .1,58,64,973/ - A S DEDUCTION UNDER SECTION 35D OF THE ACT . AS THE SAID EXPENSES DO NOT APPEAR TO HAVE BEEN CLAIMED IN RELATION TO ANY PUBLIC ISSUE, ETC. THE ASSESSEE COMPANY WAS ASKED TO FURNISH THE DETAILS OF THE SAID EXPENSES. ACCORDINGLY, THE ASSESSEE HAS SUBMITTED UNDER AS UNDER: WITH THE ADVENT OF DIGITAL CINEMA AND WITH A VIEW T O EXTEND THE ACTIVITIES OF THE COMPANY, THE COMPANY TOOK STEPS FOR SUBSTANTIAL EXTENSION OF THE UNDERTAKING AND INCURRED EXPENSES ON PLACEMENT OF SHARES. THE PROJECT ALSO INCLUDED SETTING UP FACILITIES FOR DIGITAL CINEMA IN SOUTHERN STATES AND ALL OVER IND IA AND SETTING UP THEATRES AND CREATING INTANGIBLE CONTENT OF THE MOTION PICTURE INDUSTRY. THE TOTAL ESTIMATED PROJECT COST IN THE VARIOUS YEARS UNDER THE BROAD HEADS IS AS UNDER: I.T.A. NO . 1537 /M/ 15 4 ASSET DETAILS AMOUNT ( . IN CRORES) PLANT AND MACHINERY 30 BUILDINGS 200 LAND INCLUDING LEASEHOLD 120 OTHER FIXED ASSETS 5 TOTAL 355 THE ENTIRE EXPANSION IS YET TO BE COMPLETED AND THE THEATRES ARE EXPECTED TO COMMENCE OPERATIONS IN THE FINANCIAL YEAR ENDED 2014. TOTAL EXPENSES INCURRED UNDER THE VARIOUS BROAD HEADS FO R THE SAME INCLUDING ADVANCES PAID UPTO YEAR 31.03.2013 IS .341.92 CRORES. THE EXPENSES INCURRED TOWARDS THE ISSUE OF SHARES ARE AS BELOW: PARTY AMOUNT D.E. SHAW INDIA ADVISORY SERVICES PVT. LTD. 57,14,495 IL&FS FINANCIAL SERVICES LIMITED 45,00,000 PIONEER INVEST CORP LTD. 5,80,00,000 RANI LEASING LIMITED 61,60,368 ROC FOR INCREASING AUTHORISED CAPITAL 49,50,000 TOTAL 7,93,24,863 THE AR OF THE ASSESSEE COMPANY HAS FURTHER SUBMITTED THAT THIS IS THE THIRD YEAR OF THE CLAIM AND THEREFORE, HAS TO BE ALLOWED. 6.1 AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND IN VIEW OF THE PROVISIONS OF SECTION 35D OF THE ACT, THE ASSESSING OFFICER HAS OBSERVED THAT THE DEDUCTION IS ALLOWABLE IN CONNECTION WITH THE EXTENSION OF HIS INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW INDUSTRIAL UNIT; BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE EXTENSION OF THE INDUSTRIAL UNDERTAKING IS COMPLETED OR THE NEW UNIT COMMENCES PRODUCTION OR I.T.A. NO . 1537 /M/ 15 5 OPERATION. IN THE PRESENT CASE, THE ASSESSEE IS EXPANDING ITS EXISTING BUSINESS AND THEREFORE THE QUESTION OF ANY DE DUCTION UNDER SECTION 35D OF THE ACT WOULD ARISE ONLY IF THE SAID EXPANSION IS COMPLETED IN THE RELEVANT ASSESSMENT YEAR . THE FACT AS INFORMED BY THE ASSESSEE VIDE ITS LETTER DATED 26.03.2013 THAT THE EXPANSION IS YET TO BE COMPLETED AND THE THEATRES ARE E XPECTED TO COMMENCE OPERATIONS IN THE FINANCIAL YEAR ENDED 2014. FURTHER, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAS STATED TO HAVE GRANTED ADVANCES OF .341 CRORES AS ON 31.03.2013 I.E. SUBSEQUENT TO THE BALANCE SHEET DATE OF 31.03.2010 RELE VANT FOR THE ASSESSMENT YEAR 2010 - 11. THEREFORE, THE ASSESSING OFFICER HAS HELD THAT THE DEDUCTION UNDER SECTION 35D OF THE ACT IS NOT ALLOWABLE IN THIS YEAR IN WHICH AS PER ASSESSEE S OWN VERSION, THE EXPANSION IS NOT COMPLETED. 6.2 FURTHER, THE ASSESS EE HAS CLAIMED EXPENDITURE RELATING TO ISSUE OF PREFERENCE SHARES OF ABOUT .7.93 CRORES. THE ASSESSING OFFICER HAS OBSERVED THAT THE EXPENSES INCURRED BY THE ASSESSEE ARE NOT RELATED TO ANY PUBLIC ISSUE. IT IS FOR THE ISSUE OF PREFERENCE SHARES AND ANY EXPENSES THEREOF, IN THE FIRST PLACE WOULD NOT QUALIFY FOR DEDUCTION UNDER SE CTION 35D OF THE ACT. FURTHER THE ASSESSEE HAS NOT EXPLAINED THE NATURE AND SERVICE RENDERED BY THE PARTIES CONCERNED TO WHOM THE AMOUNTS WERE PAID AND WHAT SERVICES WERE RENDERED BY THEM. FURTHER, THE ASSESSEE HAS ALSO NOT INFORMED WHETHER ANY TDS HAD BEE N DEDUCTED THEREON. THOUGH THE I.T.A. NO . 1537 /M/ 15 6 EXPENSES WERE RELATED TO AN EARLIER YEAR, THE ASSESSEE CANNOT ABSOLVE ITSELF FROM FURNISHING THESE DETAILS AS THE DEDUCTION WAS CLAIMED BY THE ASSESSEE IN THIS YEAR ALSO. UNDER THE FACTS, THE ASSESSING OFFICER HAS HELD THAT ONLY EXPENDITURE IN THE NATURE AS SPECIFIED UNDER SECTION 35D(2()(C)(IV) OF THE ACT IS ALLOWABLE FOR DEDUCTION UNDER THAT SECTION AND THAT ONLY FOR ANY PUBLIC ISSUE. THEREFORE, THE CLAIM OF EXPENDITURE RELATING TO PREFERENCE SHARE ISSUE EXPENSES AND OTHER PAYMENTS NOT SPECIFIED UNDER SECTION 35D(2)(C)(IV) OF THE ACT ARE NOT ALLOWABLE DEDUCTION. 6.3 BEFORE THE ASSESSING OFFICER, THE ASSESSEE HAS SUBMITTED THAT THE EXTENSION IS FOR CREATING INTANGIBLE ASSETS OF THE MOTION PICTURE INDUSTRY. BUT, THE ESTIMATE D PROJECT IS GIVEN IN RESPECT OF PLANT & MACHINERY, BUILDING, ETC., WHICH ARE NOT RELATED TO THE INTANGIBLE ASSETS. THUS, THE INTENTION IS TO UTILIZE THE FUNDS FOR THE PURPOSE OF WORKING CAPITAL REQUIREMENTS AND GENERAL CORPORATE PURPOSES . THEREFORE, THE ASSESSING OFFICER HAS OBSERVED THAT THE WORKING CAPITAL REQUIREMENTS AND GENERAL CORPORATE EXPENSES ARE NOT INCLUDIBLE IN THE CALCULATION OF DEDUCTION UNDER SECTION 35D OF THE ACT AND ACCORDINGLY, HELD THAT THE ASSESSEE IS NOT ELIGIBLE TO CLAIM THE DEDUCT ION. 6.4 WITH REGARD TO THE COST OF PROJECT AND CAPITAL EMPLOYED IN THE BUSINESS, THE ASSESSING OFFICER HAS OBSERVED THAT THE AMOUNT OF EXPENDITURE IS ALLOWABLE ONLY IF IT IS FOR EXTENSION OF ANY UNDERTAKING. SINCE THE ASSESSEE HAS PROPOSED FOR SETTING U P OF THEATRES, ETC. WHICH WOULD NOT I.T.A. NO . 1537 /M/ 15 7 QUALIFY AS AN INDUSTRIAL UNDERTAKING. THEREFORE, THE ASSESSING OFFICER HAS HELD THAT THE AMOUNTS PAID BY THE ASSESSEE AS SHARE ISSUE EXPENSES ARE NOT ELIGIBLE FOR DEDUCTION AS PER THE PROVISIONS OF SUB - SECTION (3) SINCE THE FUNDS ARE NOT UTILIZED FOR EXTENSION OF ANY INDUSTRIAL UNDERTAKING. 6.5 THE ASSESSING OFFICER HAS FURTHER OBSERVED THAT THE ASSESSEE HAS ADMITTED THAT THE EXTENSION IS NOT FULLY COMPLETED IN THE RELEVANT ASSESSMENT YEAR, THE SUB - SECTION (1) WHICH CLE ARLY STIPULATES THE CONDITION THAT THE DEDUCTION WOULD BE ALLOWABLE IN THE RELEVANT ASSESSMENT YEAR ONLY IF THE EXTENSION OF THE UNIT IS COMPLETED. THEREFORE, THE ASSESSING OFFICER HAS HELD THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM ANY DEDUCTION UNDER SEC TION 35D OF THE ACT AND DISALLOWED .1,58,64,973/ - . 7. AFTER CONSIDERING THE WRITTEN SUBMISSIONS OF THE ASSESSEE AND BY FOLLOWING THE DECISION IN THE CASE OF NIRMA INDUSTRIES LTD. V. ACIT 95 ITD 199, WHEREIN IT WAS HELD THAT SETTING UP OF NEW INDUSTRIAL UNDERTAKING WAS TO BE AMORTIZED AND DEDUCTION UNDER SECTION 35D WOULD BE ALLOWED TO THE ASSESSEE IN THE YEAR IN WHICH THE INDUSTRIAL UNDERTAKING COMMENCED PRODUCTION OR OPERATION, IN OUR CONSIDERED OPINION, THE LD. CIT(A) HAS RIGHTLY HELD THAT SINCE THE E XPANSION WAS NOT COMPLETED DURING THE RELEVANT ACCOUNTING PERIOD, THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION UNDER SECTION 35D OF THE ACT. WITH REGARD TO EXPENSES INCURRED FOR ISSUANCE OF PREFERENCE SHARES OF ABOUT .7.93 CRORES, THE LD. CIT(A) HAS OBSERVED THAT THE I.T.A. NO . 1537 /M/ 15 8 ALLOWABILITY OF EXPENDITURE INCURRED IN CONNECTION WITH ISSUE OF PUBLIC SUBSCRIPTION OF SHARES IN THE COMPANY IS TO BE SEEN UNDER SECTION 35D(2)(C)(IV) OF THE ACT. THE SAID SUB - CLAUSE IS QUALIFIED WITH TH E WORDS BEING UNDERWRITING COMMISSION, BROKERAGE AND CHARGES FOR DRAFTING, TYPING, PRINTING AND ADVERTISEMENT OF THE PROSPECTUS . AS PER THE DETAILS SUBMITTED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER, THE EXPENSES INCURRED TOWARDS THE ISSUE OF SHARES, THE ASSESSEE COMPANY HAS NOT EXPLAINED THE NATURE AND SERVICES RENDERED BY THE ABOVE CONCERNS AS REPRODUCED HEREINABOVE. THE ASSESSEE HAS NOT SUBMITTED ANY FRESH DETAILS WITH REGARD TO THE EXPENSES INCURRED FOR THE PURPOSE OF ISSUING SHARES. THEREFORE, TH E FINDINGS OF THE LD. CIT(A) IS HEREBY CONFIRMED. WITH REGARD TO EXPANSION OF INDUSTRIAL UNDERTAKING, THE ASSESSEE HAS NOT ADDUCED ANY DETAILS EXCEPT SETTING UP OF THEATRES. THEREFORE, WE ARE UNABLE TO TAKE A DIFFERENT VIEW. 7.1 CONCLUSIVELY, IN VIEW OF T HE DECISION OF THE HON BLE MADRAS HIGH COURT IN THE CASE OF CIT V. ASHOK LEYLAND 349 ITR 663 [MAD], THE EXPENDITURE INCURRED IN CONNECTION WITH EXPANSION OF THE CAPITAL BASE OF THE COMPANY WOULD BE ALLOWABLE UNDER SECTION 35D OF THE ACT CANNOT BE APPLICABL E TO THE FACTS OF THE PRESENT CASE. IN THAT CASE, THE ASSESSEE HAS TANGIBLE MANUFACTURING UNIT AND ISSUANCE OF SHARES ARE DIRECTLY RELATABLE TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY. HOWEVER, IN THE PRESENT CASE, THE ASSESSEE IS STATED TO HAVE I NCURRED EXPENDITURE FOR CREATING INTANGIBLE I.T.A. NO . 1537 /M/ 15 9 CONTENT OF THE MOTION PICTURE INDUSTRY. MOREOVER, THE EXPANSION ACTIVITY HAS NOT BEEN COMPLETED IN THE ASSESSMENT YEAR UNDER CONSIDERATION AS ACCEPTED BY THE ASSESSEE AND THEREFORE, EITHER EXPANSION ACTIVITY HAS BEEN COMPLETED OR THE PRODUCTION ACTIVITY OF THE ASSESSEE HAS BEEN CARRIED OUT FOR WHICH THE ASSESSEE HAS CLAIMED AMORTIZATION OF EXPENSES UNDER SECTION 35D OF THE ACT, WHICH IN OUR OPINION IS NOT PERMISSIBLE. THE LD. CIT(A) HAS ELABORATELY DISCUSSED THE ISSUE WITH REGARD TO CLAIM OF DEDUCTION UNDER SECTION 35D OF THE ACT BY RELYING ON VARIOUS DECISIONS AND THE ASSESSEE COULD NOT COUNTER THE FINDINGS OF THE LD. CIT(A). THUS, WE CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND THE GROUND RAISED BY THE ASSESSEE IN ALL COUNTS IS DISMISSED. 8. THE NEXT GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 8.1 IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS OBSERVED THAT THE AS SESSEE HAS SHOWN INVESTMENTS OF .256,21,74,354/ - AS ON 31.03.2010. THE INVESTMENTS AS ON 31.03.2009 WAS .225,22,20,855/ - . THE INVESTMENTS AS APPEARING ON 31.03.2010 ARE IN SHARES INCLUDING AN OFFSHORE COMPANY FOR .10,21,20,000/ - AND IN PARTNERSHIP FIRMS TO THE EXTENT OF .246,00,54,35 4/ - . THE INCREASE IN THE CAPITAL OF FIRMS AND ALSO THE INVESTMENT IN SHARES DURING THE YEAR SHOW THAT THEY WERE MADE WITH THE ACTIVE INVOLVEMENT OF THE MANAGEMENT AND EXECUTIVES. FURTHER, THE ASSESSING OFFICER HAS OBSERVED I.T.A. NO . 1537 /M/ 15 10 THAT THE ASSESSEE HAS ALSO INCURR ED INTEREST EXPENDITURE AND FINANCIAL CHARGES OF .1,74,21,664/ - DURING THE YEAR. THE SHARE OF PROFITS FROM THE FIRMS ARE EXEMPT IN THE HANDS OF THE ASSESSEE COMPANY AND THE INVESTMENT IN SHARES ALSO WOULD GIVE THE ASSESSEE INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME. THE INTEREST EXPENDITURE, MAN AGEMENT COST, ETC. WOULD HAVE A PORTION ATTRIBUTABLE TO THE INVESTMENT, WHICH GIVE RAISE TO INCOME WHICH IS EXEMPT. HOWEVER, THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE UNDER SECTION 14A OF THE ACT RELATING TO ANY EXPENDITURE INCURRED FOR INCREASING/SUSTAIN ING THE INVESTMENT WHICH HAD OR WOULD RESULT IN AN INCOME BY WAY OF DIVIDEND, PROFIT FROM FIRM, ETC. WHICH WOULD NOT BE FORMING PART OF THE TOTAL INCOME OF THE ASSESSEE. FURTHER, THE ASSESSEE INCURS ROUTINE EXPENDITURE TO MAINTAIN ITS ESTABLISHMENT AND TOW ARDS ADMINISTRATION, A PORTION OF WHICH CAN BE ATTRIBUTABLE TO THE ACTIVITY OF EARNING DIVIDEND. THEREFORE, A PORTION OF THE EXPENDITURE OF THE ASSESSEE COULD BE ATTRIBUTABLE TOWARDS THE DIVIDEND EARNED BY THE ASSESSEE WHICH I CLAIMED AS EXEMPT UNDER SECTI ON 10 OF THE ACT. EVEN THOUGH THE ACCOUNTS OF THE ASSESSEE SHOW THAT A PORTION OF ESTABLISHMENT EXPENSES AS REFERRED TO ABOVE, IS ATTRIBUTABLE TO THE EARNING OF THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSESSEE HAS NOT DISALLOWED ANY AMOUNT OF SUCH EXPENDITURE ON ITS OWN AND FAILED TO SATISFACTORILY PROVE ITS CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THEREFORE, THE ASSESSING OFFICER HAS OPINED THAT THE PROVISIONS OF SUB - I.T.A. NO . 1537 /M/ 15 11 S ECTION (2) OF SECTION 14A OF THE ACT ARE DIRECTLY ATTRACTED IN THIS CASE AND MOREOVER, THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE ON ITS OWN, IT IS MANDATORY TO APPLY THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE INVESTMENTS AND THE COMPONENT OF MANAG ERIAL REMUNERATION AND OTHER STAFF EXPENSES ARE INTERLINKED AND DIFFICULT TO ALLOCATE INDIVIDUALLY. THEREFORE, THE ASSESSING OFFICER, BY TAKING INTO CONSIDERATION THE COMPOSITE NATURE OF ACCOUNTS OF THE ASSESSEE, APPLIED THE MECHANISM GIVEN IN RULE 8D FOR WORKING OUT THE DISALLOWANCE. 8.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AR OF THE ASSESSEE HAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE INTEREST PAID BY THE ASSESSEE IS RELATING TO THE LOANS TAKEN FOR HIS BUSINESS AND IS NOT RELATED TO THE ABOVE INVESTMENTS AND ALL THE INVESTMENTS MADE WERE OUT OF SURPLUS FUNDS AND THEREFORE, DISALLOWANCE UNDER SECTION 14A OF THE ACT IS NOT AT ALL WARRANTED. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS OFFERED INTEREST RECEIVED FROM THE PARTNERSHIP FIRMS AND THERE IS NO NET EFFECT A INTEREST EARNED IS MORE THAN INTEREST PAID. THEREFORE, THE AR OF THE ASSESSEE STRONGLY CONTENDED BEFORE THE ASSESSING OFFICER THAT THE PROVISIONS OF SECTION 14A OF THE ACT HAVE NO APPLICATION FOR MAKING ANY DISALLOWANCE. HOWEVE R, THE ASSESSING OFFICER HAS NOT ACCEPTED THE SUBMISSIONS OF THE ASSESSEE AND SINCE A PART OF THE ESTABLISHMENT AND ADMINISTRATION EXPENSES ARE ATTRIBUTABLE TO THE INVESTMENTS FROM WHICH DIVIDEND IS EARNED BY THE I.T.A. NO . 1537 /M/ 15 12 ASSESSEE, THE ASSESSING OFFICER HAS COMPUTE D THE DISALLOWANCE OF .1,20,35,988/ - UNDER SECTION 14A R.W. RULE 8D. 8.3 ON APPEAL, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AS WELL AS BY CONSIDERING VARIOUS DECISIONS, THE LD. CIT(A) CONFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER. 8.4 AGGRIEVED, THE ASSESSE E IS IN APPEAL BEFORE THE TRIBUNAL AND THE LD. COUNSEL FOR THE ASSESSEE HAS REITERATED THE SUBMISSIONS AS MADE BEFORE THE AUTHORITIES BELOW. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 8.5 WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND BY APPLYING THE PROVISIONS OF RULE 8D, COMPUTED THE DISALLOWANCE SINCE THE ASSESSEE HAS NOT DIS CLOSED ANY EXPENDITURE INCURRED FOR EARNING OF EXEMPT INCOME, WHERE THE ESTABLISHMENT AND ADMINISTRATION EXPENSES ARE ATTRIBUTED TO THE INVESTMENTS MADE BY THE ASSESSEE. WHILE CONSIDERING THE FACTS OF THE CASE AND BY FOLLOWING VARIOUS DECISIONS, THE LD. CI T(A) HAS OBSERVED AND HELD AS UNDER: 8.4 THE DECISION: SECTION 14A WAS INSERTED BY THE FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 1 - 4 - 1962 AND THE LEGISLATIVE INTENT WAS GIVEN IN EXPLANATORY MEMORANDUM ISSUED WITH THE FINANCE BILL, 2001. IT EXPLAIN S THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. THERE WAS ANOTHER AMENDMENT BY THE FINANCE I.T.A. NO . 1537 /M/ 15 13 ACT, 2006 TO SECTION 14A WHICH ENLARGED THE SCOPE OF APPLICABILITY OF SECTION 14A WHICH SAYS THE ASSE SSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. BUT WITH EFFECT FROM AY 2008 - 09 THE RULES FOR DETERMINATION OF DISALLOWANCE WERE PRESCRIBED VIDE RULE 8D. 8.4.2 THE MANDATE OF THE PROVISIONS OF SECTION 14A IS TO CURB THE PRACTICE TO CLAIM DEDUCTION OF THE EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME TO AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT M AKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. ON THE PRINCIPLES OF EQUITY, WHEN AN ITEM OF INCOME IS EXEMPTED FROM INCOME - TAX, THE EXPENDITURE INCURRED TO EARN THAT INCOME IS TO BE DEDUCTED THEREOF. THUS, UNDER THE BASIC PRINCI PLE OF TAXATION, ONLY THE NET INCOME IS OUTSIDE THE PURVIEW OF TAXATION. OBJECTIVE BEHIND INSERTION OF SECTION 14A WAS EXPLAINED BY THE SUPREME COURT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. [2010] 326 ITR 1, THAT THE INSERTION OF SE CTION 14A WITH RETROSPECTIVE EFFECT REFLECTS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT A GAINST THE TAXABLE INCOME. [2011, 247 CTR 162 (DELHI) MAXOPP INVESTMENT LTD. PARA 16] INVESTMENT IN SHARES: DIVIDEND INCOME EARNED BY THE ASSESSEE FROM SHARES AND UNITS OF MUTUAL FUNDS DID NOT FORM PART OF THE TOTAL INCOME IN VIEW OF THE PROVISIONS OF S. 10(33) AND HENCE, THE EXPENDITURE WHICH WAS INCURRED IN RELATION TO EARNING OF THAT INCOME HAS TO BE DISALLOWED. [GODREJ & BOYCE MFG. CO. LTD. VS. CIT & ANR. (2010) 328 ITR 81(BOM) FOLLOWED] 8.4.3 OVERHEADS: THE KOLKATA BENCH OF THE INCOME - TAX APPELLAT E TRIBUNAL IN DY. C IT V. S.G. INVESTMENTS & INDUSTRIES LTD. [2004] 89 ITD 44 HELD THAT THE EXPRESSION 'EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME', ACCORDING TO THE BENCH, SHOULD BE GIVEN A WIDER MEANING AND IT CANNOT BE CONSTRUED IN A NARROW OR RESTRICTED MANNER. AS PER THE BENCH IF SUCH A WIDER MEANING IS GIVEN, THE SAID EXPRESSION WOULD ENCOMPASS NOT ONLY THE DIRECT OR PROXIMATE I.T.A. NO . 1537 /M/ 15 14 EXPENDITURE INCURRED FOR THE PURPOSE OF MAKING OR EARNING EXEMPT INCOME, BUT IT WOULD ALSO INCLUDE ALL OTHER EXPENSES ATTRIBUTABLE OR IN RELATION TO EXEMPT INCOME. IN OTHER WORDS, IT WOULD SIGNIFY OR IMPLY BOTH DIRECT AND INDIRECT RELATIONSHIP BETWEEN EXPENDITURE AND EXEMPT INCOME. 8.4.4 ACTUAL EARNING OF EXEMPTED I NCOME IS IMMATERIAL: WHETHER ACTUAL EARNING OF INCOME IS NOT SINE QUA NON FOR DECIDING DEDUCTION OF EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR PURPOSE OF EARNING SUCH INCOME - HELD AS YES. WHETHER, THEREFORE, WHERE INVESTMENT HAD BEEN MADE IN SHARES, WHICH DID NOT YIELD ANY DIVIDEND IN YEAR UNDER CONSIDERATION, EXPENDITURE INCURRED FOR EARNING INCOME WAS DEDUCTIBLE NOTWITHSTANDING FACT THAT NO SUCH INCOME HAD BEEN EARNED - HELD, YES. IN THE CASE TECHNOPAK ADVISORS (P.) LTD [2012] 50 SOT 31 ( DELHI) IT IS HELD: 'SECTION 14A(1) SPEAKS ABOUT DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE FIRST ARGUMENT OF THE LEARNED COUNSEL IS THAT ONLY THOSE INVESTMENTS CAN BE TAKEN INTO ACCOUNT FO R THE PURPOSE OF RULE 8D FROM WHICH INCOME HAS BEEN EARNED. NO SPECIFIC ARGUMENT HAS BEEN ADVANCED IN THIS BEHALF. WE FIND THAT SEC. 57(III) DEALS WITH ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING THE INCOME. IN A NUMBER OF CASES DECIDED UNDER THIS PROVISION, IT HAS BEEN HELD THAT ACTUAL EARNING OF THE INCOME IS NOT SINE QUA NON FOR DECIDING THE DEDUCTION OF EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR E XCLUSIVELY FOR THE PURPOSE OF EARNING THE INCOME. THUS, WHERE INVESTMENT HAS BEEN MADE IN SHARES, WHICH DID NOT YIELD ANY DIVIDEND IN THE YEAR UNDER CONSIDERATION, THE EXPENDITURE INCURRED FOR EARNING THE INCOME IS DEDUCTIBLE NOTWITHSTANDING THE FACT THAT NO SUCH INCOME HAS BEEN EARNED. WE ARE OF THE VIEW THAT RATIO OF THESE CASES WILL APPLY MUTATIS MUTANDIS UNDER SEC. 14A OF THE ACT ALSO WHILE ASCERTAINING THE EXPENDITURE INCURRED FOR EARNING TAX - FREE INCOME FROM INVESTMENT'. [PARA 3]. 8.4.5 FURTHER, IN T HE CASE MAXOPP INVESTMENT LTD. [2011] 247 CTR 162 (DELHI) IT IS HELD: IN VIEW OF FOREGOING DISCUSSION, EXPENDITURE (INCLUDING INTEREST PAID ON (FUNDS BORROWED) IN RESPECT OF INVESTMENT IN SHARES OF OPERATING COMPANIES FOR ACQUIRING AND RETAINING A CONTR OLLING INTEREST THEREIN IS HIT BY SECTION 14A INASMUCH AS THE DIVIDEND I.T.A. NO . 1537 /M/ 15 15 RECEIVED ON SUCH SHARES DOES NOT FORM PART OF THE TOTAL INCOME.' (PARA 44] 'THE EXPRESSION 'IN RELATION TO' APPEARING IN SECTION 14A CANNOT BE ASCRIBED A NARROW OR CONSTRICTED MEANING . THE EXPRESSION 'IN RELATION TO' DOES NOT HAVE ANY EMBEDDED OBJECT. IT SIMPLY MEANS 'IN CONNECTION WITH' OR 'PERTAINING TO'. IF THE EXPENDITURE IN QUESTION HAS A RELATION OR CONNECTION WITH OR PERTAINS TO EXEMPT INCOME, IT CANNOT BE ALLOWED AS A DEDUCTION EVEN IF IT OTHERWISE QUALIFIES UNDER THE OTHER PROVISIONS OF THE SAID ACT. IN WALFORT SHARE AND STOCK BROKERS (P.) LTD. (SUPRA), THE SUPREME COURT MADE IT VERY CLEAR THAT THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONL Y WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE HEADS OF INCOME AND IS CHARGEABLE TO TAX. THE SUPREME COURT FURTHER CLARIFIED THAT IF AN INCOME LIKE DIVIDEND INCOME IS NOT PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION RELATED TO SUCH INC OME, THOUGH OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59, CANNOT BE ALLOWED AGAINST OTHER INCOME WHICH IS INCLUDABLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX.' [PARA 25]. 8.4.6 IN RELAXO FOOTWEARS LTD. V. ADDL. CIT (2012) 50 SOT 102 (D ELHI), IT IS HELD THAT SECTION 14A CAN BE INVOKED EVEN IN THE ABSENCE OF EXEMPT INCOME. IT IS HELD: 'THE FIRST QUESTION IS - WHETHER IN ABSENCE OF INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, THE PROVISION CONTAINED IN SECTION 14A CAN BE INVOKED. NO NE OF THE PARTIES HAS CITED ANY CASE BEFORE US. THEREFORE, THE ISSUE IS TO BE DECIDED ON THE BASIS OF STATUTORY LANGUAGE AND GENERAL PRINCIPLES OF INTERPRETATION OF LAW. SUB - SECTION (1) OF SECTION 14A CONTAINS A PROVISION TO THE EFFECT THAT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER CHAPTER IV, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THE FACTUAL POSITION IN THIS CASE IS THAT N O SUCH INCOME IS STATEDLY EARNED IN THIS YEAR ALTHOUGH INTEREST ON NSCS HAS ACCRUED AS PER THE TERMS AND CONDITIONS. OTHER INVESTMENTS MAY NOT HAVE YIELDED INCOME IN THIS YEAR BUT ARE CAPABLE OF YIELDING' THE INCOME. THE QUESTION IS WHETHER THE WORD 'INCOM E' SHOULD BE INTERPRETED NARROWLY OR WIDELY? THE NARROW INTERPRETATION WOULD BE THAT ONLY WHEN SUCH INCOME IS ACTUALLY EARNED, THE EXPENDITURE CAN BE DISALLOWED. THE WIDER MEANING WOULD BE THAT EVEN IF NO INCOME IS EARNED IN A PARTICULAR YEAR BUT THE INVES TMENTS ARE CAPABLE OF EARNING THE INCOME, THE EXPENDITURE RELATABLE TO HOLDING OF THE INVESTMENTS BECOMES I.T.A. NO . 1537 /M/ 15 16 DISALLOWABLE. IN THIS CONNECTION, WE MAY EXAMINE A REVERSE PROVISION CONTAINED IN SECTION 57{III), WHICH ALLOWS THE DEDUCTION OF ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME FROM INCOME CHARGEABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. THERE ARE A NUMBER OF DECISIONS WHICH HOLD THAT THE EARNING OF THE INCOME IN A PARTICULAR YEAR IS NOT SINE QUA NON OF ALLOWING EXPENDITURE. THUS, THE INCOME MAY BE NIL, YET THE EXPENDITURE INCURRED IN PURSUIT OF EARNING SUCH INCOME IS DEDUCTIBLE. WE ARE OF THE VIEW THAT SIMILAR PROPOSITION WILL APPLY W HILE INTERPRETING THE AFORESAID PROVISION CONTAINED IN SECTION 14A(1). THEREFORE, WE ARE NOT IN AGREEMENT WITH THE LD. COUNSEL IN RESPECT OF FIRST LINE OF ARGUMENT.' 8.4.7 FURTHER, THE SPECIAL BENCH IN CHEMINVEST LTD. V. INCOME - TAX OFFICER [2009] 121 ITD 318 (DELHI)(SB) HELD: 'THE CONTROVERSY RAISED IN THE INSTANT CASE WAS THAT THE ASSESSEE HAD NOT EARNED OR RECEIVED ANY DIVIDEND IN THE YEAR UNDER CONSIDERATION AND, THEREFORE, NO DISALLOWANCE COULD BE MADE BY INVOKING THE PROVISIONS OF SECTION 14A. THER E WAS NO FORCE IN THE SAID CONTENTION OF THE ASSESSEE. WHEN THE EXPENDITURE OF INTEREST IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOWANCE, IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARNED BY THE ASSESSEE OR NOT. SECTION 14A DOES NOT ENVISAGE ANY SUCH EXCEPTION. THIS IS SO EVEN IF THE INTEREST PAID ON BORROWINGS FOR THE PURCHASE OF SHARES IS ALLOWABLE UNDER SECTION 57 AS AN EXPENDITURE INCURRED FOR EARNING OR MAKING INCOME OR UNDER SECTION 36(1 )(III) AS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. WHEN PRIOR TO INTRODUCTION OF SECTION 14A, AN EXPENDITURE BOTH UNDER SECTIONS 36 AND 57 WAS ALLOWABLE TO AN ASSESSEE WITHOUT SUCH REQUIREMENT OF EARNING OR RECEIPT OF INC OME, NO SUCH CONDITION COULD BE IMPORTED WHEN IT CAME TO DISALLOWANCE OF THE SAME EXPENDITURE UNDER SECTION 14A. NOW SINCE DIVIDEND WAS EXEMPT, AS A CONSEQUENCE THEREOF EXPENDITURE HAD TO BE DISALLOWED.' [PARA 22] 8.4.8 STATUTORY PRESUMPTION SUBSTITUTES THE REQUIREMENT OF FACTUAL EVIDENCE: I N THE CASE OF M/S. LAKSHMI RING TRAVELLERS, ITA NO.2083(MDS)/2011 ASSESSMENT YEAR: 2008 - 09. THE ITAT HELD: I.T.A. NO . 1537 /M/ 15 17 'WE CONSIDERED THE ARGUMENTS OF BOTH THE SIDES IN DETAIL. SEC.14A(L) DECL ARES THE LAW THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT SHALL NOT BE ALLOWED AS A DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. SEC. 14A(2) PROVIDES FOR DE TERMINING THE QUANTUM OF SUCH EXPENDITURE WHICH SHALL NOT BE ALLOWED AS A DEDUCTION. THAT IS THE MACHINERY PROVISION AS FAR AS SEC.14A IS CONCERNED. IN THAT PROVISION, IT HAS BEEN PROVIDED THAT IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE COMPUTATIONS MADE BY AN ASSESSEE, HE SHALL COMPUTE THE QUANTUM IN ACCORDANCE WITH THE METHOD THAT MAY BE PRESCRIBED. FOR THIS MATTER, RULE 8D HAS ALREADY BEEN PRESCRIBED. SUB - SEC.(3} FURTHER PROVIDES THAT EVEN IN A CASE WHERE AN ASSESSEE CLAIMS THA T NO EXPENDITURE WAS INCURRED, THE ASSESSING AUTHORITY HAS TO PRESUME THE INCURRING OF SUCH EXPENDITURE AS PROVIDED UNDER SUB - SEC.(2) READ WITH RULE PRESCRIBED. THEREFORE, IT BECOMES CLEAR THAT EVEN IN A CASE WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE W AS SO INCURRED, THE STATUTE HAS PROVIDED FOR A PRESUMPTIVE EXPENDITURE WHICH HAS TO BE DISALLOWED BY FORCE OF THE STATUTE. IN A DISTANT MANNER, LITERALLY SPEAKING, IT MAY EVEN BE CONSIDERED FOR THE PURPOSE OF CONVENIENCE AS A DEEMING PROVISION. WHEN SUCH D EEMING PROVISION IS MADE ON THE BASIS OF STATUTORY PRESUMPTION, THE REQUIREMENT OF FACTUAL EVIDENCE IS REPLACED BY STATUTORY PRESUMPTION AND THE ASSESSING OFFICER HAS TO FOLLOW THE CONSEQUENCES STATED IN THE STATUTE. IT MEANS THAT EVEN IN A CASE WHERE NO E XPENDITURE IS STATED TO HAVE BEEN INCURRED, THE ASSESSING AUTHORITY HAS TO APPLY RULE 8D. AS THE STATUTORY PRESUMPTION SUBSTITUTES THE REQUIREMENT OF FACTUAL EVIDENCE, THE QUESTION OF ENQUIRY DOES NOT ARISE.' 8.4.9 CONSIDERING THE FACTS OF THE CASE, VARI OUS JUDICIAL PRONOUNCEMENTS AND THE REASONING GIVEN BY THE ASSESSING OFFICER, I HOLD THAT THE DISALLOWANCE U/S 14A MADE BY THE AO IS JUSTIFIED AS IT IS STRICTLY ACCORDING TO RULE 8D. SINCE THE SOURCE OF GENERATING INCOME IS ALREADY CREATED BY VARIOUS INVES TMENTS INCLUDING INVESTMENTS IN SISTER CONCERNS IT REQUIRED TO BE DEVELOPED AND NURTURED. THUS THE ADMINISTRATIVE EXPENSES INCURRED FOR THIS HAS TO BE DISALLOWED AS PER THE COMPUTATION PRESCRIBED IN RULE 8D(III). SIMILARLY THE PROPORTIONATE INTEREST, EXPEN SES IS DISALLOWED UNDER RULE 8D(II) IS CONFIRMED. HENCE GROUND NO. 9 TO 25 SET OUT IN THE GROUNDS OF APPEAL ARE DISMISSED. I.T.A. NO . 1537 /M/ 15 18 8.6 THE OBJECT BEHIND INSERTION OF SECTION 14A OF THE ACT WAS EXPLAINED BY THE SUPREME COURT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. [2010] 326 ITR 1, THAT THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT REFLECTS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME. FURTHER, IN VIEW OF THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. CIT & ANR. (2010) 328 ITR 81, THE EXEMPT INCOME EARNED BY THE ASSESSEE FROM SHARES AND UNITS OF MUTUAL FUNDS DID NOT FORM PART OF THE TOTAL INCOME IN VIEW OF THE PROVISIONS OF SECTION 10(33) OF THE ACT AND HENCE, THE EXPENDITURE WHICH WAS INCURRED IN RELATION TO EARNING OF THAT INCOME HAS TO BE DISALLOW ED. BY RELYING ON THE GROUNDS OF APPEAL, THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED THAT THE FORMULA UNDER RULE 8D HAS BEEN APPLIED WITHOUT ESTABLISHING ANY NEXUS BETWEEN EXEMPT INCOME AND EXPENDITURE INCURRED THEREON FOR EARNING SUCH EXEMPT I NCOME. WE ARE OF THE OPINION THAT THE INVESTMENTS WOULD DEFINITELY INVOLVE CERTAIN ADMINISTRATIVE AND ESTABLISHMENT COST SINCE THE DECISION TO MAKE INVESTMENTS, TRACK INVESTMENTS, SALE OF SUCH INVESTMENTS AND FOLLOW - UP OF THE RECEIPT OF INCOME, SALE PROCEE DS ETC HAVE TO BE UNDERTAKEN WHICH ENTAILS DEFINITE COSTS. IT IS FOR THIS PURPOSES THAT RULE 8D(2)(III) PROVIDES THAT ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENTS WILL BE DEEMED TO BE EXPENDITURE I.T.A. NO . 1537 /M/ 15 19 INCURRED FOR THE SAME. WHEN THE ACT HAS SPECIFIE D A DEFINITE FORMULA FOR WORKING OUT THE EXPENDITURE TO BE DISALLOWED, THE DEPARTMENT IS NOT REQUIRED TO ESTABLISH THE NEXUS BETWEEN THE EXEMPT INCOME AND EXPENDITURE INCURRED THEREON FOR EARNING SUCH EXEMPT INCOME. IN VIEW OF THE LAW LAID DOWN BY THE STAT UTE, SINCE THE ASSESSEE HAS NOT EXCLUDED ANY EXPENDITURE RELATABLE TO EARNING EXEMPT INCOME, THE ASSESSING OFFICER HAS DISALLOWED % OF AVERAGE VALUE OF THE INVESTMENTS AS PER RULE 8D(2)(III) AS EXPENDITURE INCURRED FOR EARNING OF EXEMPT INCOME AND THE LD . CIT(A) HAS RIGHTLY CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THUS, THE GROUND RAISED BY THE ASSESSEE IS LIABLE TO BE DISMISSED AND ACCORDINGLY DIS MISSED. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNC ED ON THE 27 TH MAY , 201 6 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 27. 0 5 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.