Sri KSSV Finvest Private Limited, Hyderabad, Hyderabad V. ITO, Ward-3(3), Hyderabad, Hyderabad

ITA 1591/HYD/2016

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6799 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 10-07-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 25-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V APARNA
• Assessee Lawyers: V RAGHAVENDRA RAO
• Keywords: Capital asset; Earning of tax free income; Rule 8D
• Section: 142(1); 14A; 115JB; 147; 11

Judgement Text

IN T HE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B , HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1591 /HYD/201 6 ASSESSMENT YEAR: 20 1 2 - 13 SRI KSSV FINVEST PVT. LTD., HYDERABAD. PAN A AACK9655Q VS. INCOME - TAX OFFICER, WARD 3 ( 3 ) , HYDERABAD. ( APPELLANT ) (RESPONDENT) ASSESSEE BY : SHRI V. RAGHAVENDRA RAO REVENUE BY : S MT. V. APARNA DATE OF HEARING : 1 0 / 0 7 /201 9 DATE OF PRONOUNCEMENT : 24 / 0 7 / 201 9 O R D E R PER S . RIFAUR RAHMAN , A .M. : T H IS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF CIT(A) 3 , DATED 30 / 08 /201 6 , HYDERABAD FOR AY 20 1 2 - 13 . 2. BRIEF FACTS OF THE CASE ARE, THE ASSESSEE E - FILED ITS RETURN OF INCOME FOR THE AY 2012 - 13 ON 29/09/2012 ADMITTING INCOME AT RS. 20,89,520/ - . SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY UNDER CASS BY ISSUE OF NOTICE U/S 143(2) OF THE INCOME - TAX ACT, 1961 ( IN SHORT THE ACT). SUBSEQUENTLY, NOTICE U/S 142(1) WAS ISSUED CA LLING FOR VARIOUS DETAILS. IN COMPLIANCE TO THE SAID NOTICES, THE AR OF THE ASSESSEE APPEARED AND FURNISHED THE DETAILS CALLED FOR. 2.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ASKED THE A.R OF THE ASSESSEE TO SHOW - CAUSE AS TO WHY THE PROVI SIONS OF SECTION 14A READ WITH RULE 8D (2) SHOULD NOT BE INVOKED SINCE THE ASSESSEE COMPANY EARNED DIVIDEND INCOME AND INCOME FROM UNITS OF 2 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. MUTUAL FUNDS AGGREGATING TO RS.21,63,996/ - WHICH IS EXEMPT AS PER THE PROVISIONS OF SECTION 10 OF THE I.T. ACT, 1961. THE AR OF THE ASSESSEE FILED WRITTEN SUBMISSIONS DURING THE COURSE OF HEARING CONDUCTED ON 12.01.2015, THE RELEVANT PORTION OF WHICH READS AS FOLLOWS: 'IT IS SUBMITTED THAT THERE IS NO DISALLOWABLE EXPENDITURE ULS 14A OF THE IT ACT SINCE THE INVESTMENT I N SHARES AND MUTUAL FUNDS WAS NOT MADE OUT OF BORROWED FUNDS AND NO DIRECT EXPENDITURE CAN BE ATTRIBUTABLE TO EARNING OF DIVIDEND (EXEMPT) INCOME. IT IS FURTHER SUBMITTED THAT THERE IS NO INTEREST PAYMENT MADE ON ACCOUNT OF BORROWED FUNDS. THEREFORE DISALL OWANCE OF EXPENDITURE IS NOT WARRANTED ULS 14A R.W.R. 8D.' 2.2 THE AO REJECTED THE ABOVE SUBMISSIONS OF THE ASSESSEE FOR THE REASON THAT ON VERIFICATION OF FINANCIAL STATEMENTS FOR THE PREVIOUS YEAR RELEVANT TO A.Y 2012 - 2013, THE OTHER EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT (SCHEDULE 16 TO PROFIT AND LOSS ACCOUNT) ARE FOUND TO HAVE NEXUS AND PROXIMATE CONNECTION WITH EARNING OF DIVIDEND INCOME AND OTHER EXEMPT INCOME SINCE S UBSTANTIAL FUNDS WERE INVESTED IN VARIOUS COMPANIES TOWARDS SHARE CAPITAL AND IN UNITS OF MUTUAL FUNDS. THE AVERAGE VALUE OF INVESTMENTS WORKED OUT TO RS.12,96,15,109/ - . 2.3 IN VIEW OF THE ABOVE OBSERVATIONS AS WELL AS REFERRING TO THE PROVISIONS OF SEC TION 14A AND RELYING ON THE DECISION OF KERALA HIGH COURT IN THE CASE OF CIT VS. STATE BANK OF TRAVANCORE, 203 TAXMANN 639 AND IN THE CASE OF BELLWETHER MICROFINANCE FUND IN ITA NO. 1743/HYD/2013, DATED 22/06/14, COMPUTED THE DISALLOWANCE U/S 14A RWR 8D AT AN AMOUNT OF RS. 6,48,076/ - , WHICH IS 0.5% OF RS. 12,96,15,109/ - . 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). 3 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. 4. BEFORE THE CIT(A), THE ASSESSEE FILED WRITTEN SUBMISSIONS, IN WHICH, IT WAS STATED THAT THE AO DID NOT RECORD HIS S ATISFACTION WITH REFERENCE TO ACCOUNTS AND CORRECTNESS OF CLAIM OF EXPENSES, THEREFORE NO DISALLOWANCE U/S 14A CAN BE MADE. EVEN IF ANY DISALLOWANCE IS TO BE MADE, THE SAME SHOULD BE RESTRICTED TO 5% OF THE EXPENSES. IT WAS SUBMITTED THAT THE DECISION IN T HE CASE OF BELLWETHER MICROFINANCE FUND (SUPRA) DOES NOT APPLY TO ASSESSEES CASE AS THE ISSUE OF SATISFACTION U/S 14A WAS NOT THE SUBJECT MATTER OF THAT APPEAL. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CIT(A) , CONFIRMED THE DISALLOWANCE MADE BY THE AO BY, INTER - ALIA, OBSERVING AS UNDER: THEREFORE THE COMBINED READING OF BALANCE SHEET AND P&L ACCOUNT CLEARLY REVEAL THAT MAJORITY OF THE INVESTMENT WAS MADE IN SHARES AND MUTUAL FUNDS ( TO THE TUNE OF RS.12 CRORES ) AND CERTAIN LOANS AND ADVANCES WERE ALSO GIVEN (TO THE TUNE OF RS. 5.7 CRORES ). THE MAIN ACTIVITY OF THE APPELLANT IS INVESTMENT IN SHARES AND MUTUAL FUNDS ON WHICH EXPENSES TO THE TUNE OF RS. 67,42,089/ - WERE INCURRED. THEREFORE I DO NOT SEE ANY MERIT IN APPELLANT'S CONTENTION THAT ASSESSING OFFICER DID NOT RECORD HIS SATISFACTION , ON THE CONTRARY ASSESSING OFFICER SPECIFICALLY MENTIONED THAT SUBSTANTIAL FUNDS WERE INVESTED IN MUTUAL FUNDS AND THE EXPENSES CLAIMED HAS PROXIMATE NEXUS WITH EARNING OF DIVIDEND. THOUGH SUBSTANTIAL AMOUNTS WERE INCURRED TO EARN SUCH DIVIDEND INCOME, TH E ASSESSING OFFICER WAS REASONABLE ENOUGH TO DISALLOW ONLY AN AMOUNT OF RS. 6,48,076/ - UNDER THIRD LIM B OF RULE 8 D . THEREFORE DISALLOWANCE MADE BY ASSESSING OFFICER IS CONFIRMED. IT IS ALSO PERTINENT TO MENTION THAT THE HON'BLE ITAT, HYDERABAD IN ITS ORD ER IN CASE OF M/S SPANDANA SPHOORTHY FINANCIAL LTD IN ITA NO.1653/HYD/2012 DATED 10.10.2014 HELD THAT THE THIRD LIM B OF RULE 8 D IS APPLICABLE EVEN IF NO EXPENSES WERE INCURRED. 6. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US RAI SING THE FOLLOWING GROUNDS OF APPEAL: 1. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 3, HYDERABAD [CIT(A)] HAS ERRED ON FACTS AND IN LAW, IN DISMISSING THE APPEAL OF THE ASSESSEE. 2. LEARNED CIT(A) HAS ERRED IN OBSERVING THAT THE ASSESSING OFFICER (A. O .) WAS REASONABLE ENOUGH TO DISALLOW AN AMOUNT OF 4 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. RS.6,48,076/ - OUT OF EXPENSES OF RS. 33, 31,803/ - (44,31,803 - 11,00,000), WHEREAS HE MECHANICALLY APPLIED RULE 8D(2)(III) RWS 14A OF THE I. T. ACT WITHOUT REACHING SATISFACTION. 3. LEARNED CIT(A) HAS ALSO ERRED IN HOLDING THAT SUBST ANTIAL FUNDS WERE INVESTED AND EXPENSES CLAIMED HAS PROXIMATE NEXUS WITH EARNING OF DIVIDEND INCOME. THIS IS AGAINST THE FACTS OF THE CASE BECAUSE NO EXPENDITURE WAS INCURRED TO RECEIVE OR EARN DIVIDEND INCOME, ALL THE FUNDS INVESTED BEING OWN FUNDS. DIVI DENDS GET D IRECTLY CREDITED IN THE BANK A/C OF THE ASSESSEE AND NO EXPENDITURE IS INCURRED FOR THE PURPOSE . 4. LEARNED CIT(A) HAS ERRED IN COMING TO THE CONCLUSION THAT OBSERVATION OF THE A. O . THAT SUBSTANTIAL FUNDS WERE INVESTED AND EXPENSES CLAIMED HA S PROXIMATE NEXUS WITH EARNING OF DIVIDEND INDICATES SATISFACTION ON THE PART OF THE A. O , UNDER SEC. 14A OF THE I. T. ACT LW.S RULE 8D WHEREAS A. O. HAS NOT INDICATED ONLY SUCH SATISFACTION. 5. ASSUMING THAT THE OBSERVATIONS OF THE A. O . AMOUNT TO HIS SATIS FACTION U/S 14A R.W. S RULE 8D, LEARNED CIT (A) HAS ERRED IN HOLDING THAT SUBSTANTIAL INVESTMENTS OF OWN FUNDS HAS ANY NEXUS WITH ANY OF THE ITEMS OF EXPENSES CLAIMED. THE TWO ARE TOTALLY UNCONNECTED. 6. FOR THESE AND ANY OTHER GROUNDS THAT MAY BE RAISED AT/BEFORE THE TIME OF HEARING, IT IS PRAYED THAT THE DISALLOWANCE MADE BY THE A. O , AND UPHELD BY THE LEARNED CIT(A) BE KINDLY DELETED. 6.1 THE ASSESSEE HAS ALSO RAISED THE FOLLOWING ADDITIONAL GROUNDS BEFORE US, RELYING ON THE JUDGMENT OF THE HONBLE SU PREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. VS. CIT, 229 ITR 382: WITHOUT PREJUDICE TO THE GROUNDS OF APPEAL ORIGINALLY RAISED 1. COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(III) AT RS. 6,48,076/ - IS NOT LEGALLY CORRECT BECAUSE THE VALUE OF INVESTMENTS IN SHARES FROM WHICH EXEMPT INCOME DOES NOT FORM PART OF THE TOTAL INCOME HAS ALSO BEEN INCLUDED IN THE COMPUTATION. 2. AO IS NOT LEGALLY CORRECT IN ADDING ANY DISALLOWANCE U/S 14A FOR COMPUTING BOOK PROFITS U/ S.115JB. 7. AS THE SAID ADDITIONAL GROUNDS ARE LEGAL GROUNDS, WHEREIN, THE FACTS ARE ON RECORD AND FACTS DO NOT REQUIRE FRESH INVESTIGATION, 5 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO., LIMITED VS. CIT 229 ITR 383 (SC), WE ADMIT THE SAID ADDITIONAL GROUNDS OF ASSESSEE. 8. BEFORE US, THE LD. AR OF THE ASSESSEE ADVANCED HIS ARGUMENTS ONLY ON ADDITIONAL GROUNDS. HE RELIED ON THE FOLLOWING CASES: 1. ACB INDIA LTD. VS. ACIT, [2015] 374 ITR 108 (DEL.) 2. YASHODA HEALTH CARE SERV ICES P. LTD. VS. DCIT, [2017] 54 ITR (TRIB) 26 (ITAT, HYD) 3. EICHER MOTORS LTD. VS. CIT, [2017] 86 TAXMANN.COM 49 (DEL.) 4. M/S SKANDA AEROSPACE PVT. LTD. VS. ITO, ITA NO. 661/HYD/2017, ORDER DATED 30/08/2017. 9. THE LD. DR BESIDES RELYING ON THE ORDERS OF REVENUE AUTHORITIES, RELIED ON THE FOLLOWING CASE LAW: 1. PR. CIT VS. M/S RELIANCE CAPITAL ASSET MANAGEMENT LTD., ITA NO. 487 OF 2015 (BOMBAY HC), JUDGEMENT DATED 19/09/2017. 2. KALPATARU CONSTRUCTION OVERSEAS (P) LTD. V S. DCIT, [2006] 100 TTJ 451 (MUM.) 3. BELWETHER MICROFINANCE FUND (P.) LTD. VS. ITO, [2014] 47 TAXMANN.COM 260 (HYD. TRIB.) 4. SPANDANA SPHOORTY LTD. VS. ADDL. CIT, ITA NO. 1653/HYD/12, ORDER DATED 10/10/2014 5. GOETZE INDIA LTD., [2014] 361 ITR 505 (DELHI ) 10. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. ASSESSEE HAS PRESSED ONLY ADDITIONAL GROUNDS OF APPEAL AND ACCORDINGLY, WE PROCEED TO ADJUDICATE ONLY ADDITIONAL GROUNDS AND THE OTHER GROUNDS OF APPEAL OF THE ASSESSEE ARE DISMISS ED AS NOT PRESSED. IN ADDITIONAL GROUNDS OF APPEAL, ASSESSEE HAS RAISED TWO GROUNDS. FIRST BEING, AO HAS APPLIED RULE 8D(III) AND ADOPTED TOTAL INVESTMENT INSTEAD OF INVESTMENTS WHICH HAS EARNED DIVIDEND INCOME. THE COORDINATE BENCH HAS CONSIDERED SIMILAR ISSUE IN THE CASE OF M/S SKANDA AEROSPACE PVT. LTD. (SUPRA) AND I N THE CASE OF TRANSPORT CORPORATION OF INDIA LTD. IN ITA NO. 117/HYD/2016 VIDE ORDER DATED 21 ST SEPTEMBER, 2016 THE COORDINATE BENCH OF THIS TRIBUNAL HAS HELD AS UNDER: 11.1 WHILE CAREFULLY READING THE RULE 8D(2)(II), THE FORMULA GIVEN ARE: 6 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. 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: B = THE AVERAGE OF 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 THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; IN PARTICULAR, THE NOTES FOR B CLEARLY STATES THAT THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. IT IS CLEAR THAT WE HAVE TO INCLUDE THOSE INVESTMENTS WHICH HAS GENERATED INCOME AND EXCLUDE THOSE INVESTMENTS, WHICH HAVE NOT GENERATED INCOME. IN THE PRESENT CASE, AO HAD TAKEN THE TOTAL IN VESTMENT INSTEAD OF THOSE INVESTMENTS, WHICH HAVE GENERATED INCOME. ACCORDINGLY, WE DIRECT THE AO TO CALCULATE THE DISALLOWANCE OF INTEREST AS BELOW ( AS PER RULE 8D): INTEREST X INVESTMENT( WHICH GENERATED INCOME) AVERAGE TOTAL ASSETS THE MAIN REASON IS THAT AS PER SECTION 14A, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH IS EXEMPT FROM TAX. THE RELEVANCE IS THE EXPENDITURE IN RELATION TO INCOME. THE QUANTIFICATION HAS TO BE U NDERTAKEN IN RELATION TO THE EXEMPT INCOME. THE INVESTMENT WHICH HAS NOT GENERATED EXEMPT INCOME SHOULD BE EXCLUDED FROM THE CALCULATION OF RATIO TO DETERMINE THE DISALLOWANCE. 11.2 SIMILARLY, FOR THE ADMINISTRATIVE EXPENSES, 0.5% OF AVERAGE INVESTMENTS FROM WHICH THE EXEMPT INCOME IS RECEIVED SHOULD BE CONSIDERED INSTEAD OF AVERAGE OF THE TOTAL INVESTMENTS. 11.3 CONSIDERING THE ABOVE DISCUSSION, WE DIRECT THE AO TO RECALCULATE THE DISALLOWANCE AS PER RULE 8D AS PER THE ABOVE GUIDANCE. ACCORDINGLY, GRO UND RAISED BY ASSESSEE IS ALLOWED. AS THE ISSUE UNDER CONSIDERATION IS MATERIALLY IDENTICAL TO THAT OF THE SAID CASE, FOLLOWING THE CONCLUSIONS DRAWN THEREIN WE DIRECT THE AO TO RECALCULATE THE DISALLOWANCE AS PER RULE 8D AS PER THE GUIDELINES GIVEN AS ABOVE IN THE CASE OF TRANSPORT CORPORATION OF INDIA AND CALCULATE THE DISALLOWANCE OF EXPENDITURE UNDER RULE 7 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. 8D(2)(III) TAKING THE AVERAGE INVESTMENT FROM WHICH THE EXEMPT INCOME IS RECEIVED. FOLLOWING THE ABOVE DECISION, WE DIRECT THE AO TO CALCULATE TH E DISALLOWANCE UNDER RULE 8D(2)(III) IN LINE WITH THE ABOVE DECISION AND IT IS IN LINE WITH THE DECISION OF SPECIAL BENCH DECISION OF ITAT, DELHI BENCH IN THE CASE OF ACIT VS. VIREET INVESTMENT P. LTD., IN ITA NO. 502/DEL/2012 AND C.O. NO. 68/DEL/2014 . ACC ORDINGLY, 1 ST ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 10.1 WITH REGARD TO 2 ND ADDITIONAL GROUND REGARDING DISALLOWANCE U/S 14A FOR COMPUTING BOOK PROFITS U/S 115JB , AO HAS MADE ADDITION IN CALCULATING BOOK PROFIT U/S 115JB OF THE ACT. WE FIND THAT ON SIMILAR GROUND, THE ITAT, AHMEDABAD BENCH IN THE CASE OF M/S TORRENT PVT. LTD. IN ITA NOS. 737 & 167 1/AHD/2012, VIDE ORDER DATED 13/04/2018 HAS HELD AS UNDER: AFTER THE CAREFUL ANALYSIS OF THE ISSUE INVOLVED, WE ARE OF THE OPINION THAT THE BOOK PROFIT HAS TO BE COMPUTED AS PER THE AUDITED BOOKS OF ACCOUNTS MAINTAINED BY THE APPELLANT AND THE AUDITED RE SULTS WHICH HAVE BEEN APPROVED IN THE A.G.M. BY THE SHAREHOLDERS. ONLY THOSE ADJUSTMENTS CAN BE MADE TO THE APPROVED BOOK PROFIT WHICH ARE SPECIFICALLY MENTIONED IN THE INCOME TAX ACT . ANY NOTIONAL ADJUSTMENT IN THE BOOK PROFIT IS NOT PERMISSIBLE. THE FACTS OF THE CASE ARE ALSO IDENTICAL TO THE JUDGMENT OF ITAT, AHMEDABAD IN THE CASE OF GUJARAT STATE ENERGY GENERATION LTD.(SUPRA) AND THEREFORE RESPECTFULLY FOLLOWING THE JUDGMENT OF ITAT, AHMEDABAD, THE DISALLOWANCE MADE BY THE A. O. AS PER CLAUSE F TO THE EXPLANATION OF SECTION 115J B IS DIRECTED TO BE DELETED. THE GROUND OF APPEAL IS ALLOWED.' 10.2 HONBLE MUMBAI ITAT BENCHES IN THE CASE OF DCIT VS. VIRAJ PROFILES LIMITED ITA NO. 4439/MUM/2013 ASSESSMENT YEAR 2008 - 09 VIDE ORDER DATED 21.10.2015 , HAS HELD AS UNDER: WE HAVE OBSERVED THAT SECTION 115JB OF THE ACT STARTS WITH NON - OBSTANTE CLAUSE 'NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION IN THIS ACT...' MEANING THEREBY THAT THE SECTION 115JBSHALL BE APPLICABLE NOTWITHSTANDING ANYTHING CONTAINED IN ANY OT HER PROVISION OF THE ACT AND SHALL HAVE OVER - RIDING EFFECT UPON OTHER PROVISIONS OF THE ACT. THE SECTION 115JB STIPULATES 8 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. PAYMENT OF MINIMUM ALTERNATE TAX BASED UPON THE BOOK PROFIT COMPUTED AS PER PROVISIONS OF SECTION 115JB(2) OF THE ACT. BOOK PROFIT SHA LL BE COMPUTED AS PER SECTION 115JB(2) OF THE ACT WHICH STIPULATE THAT BOOK PROFIT MEANS NET PROFIT AS SHOWN IN PROFIT AND LOSS ACCOUNT PREPARED FOR FINANCIAL YEAR IN ACCORDANCE WITH PART II AND III OF SCHEDULE VI TO THE COMPANIES ACT,1956 , ALSO COMPLYING WITH OTHER CONDITIONS AS STIPULATED IN SECTION 115JB(2) OF THE ACT . SUCH BOOK PROFIT HAS TO BE INCREASED BY ITEM NOS. (A) TO (K) OF THE SAID EXPLANATION 1 TO SECTION 115JB OF THE ACT IF THEY ARE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND FROM SUCH PROFIT ITEM NOS. (I) TO (VIII) OF THE EXPLANATION ARE TO BE REDUCED. THE FIGURE ARRIVED AT AFTER THE ABOVE EXERCISE IS THE BOOK PROFIT OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEARS. THE EXPLANATION 1 CLAUSE (F) TO SECTION 115JB(2) OF THE ACT STIPULATE THAT AMO UNT OF EXPENDITURE RELATABLE TO ANY EXEMPT INCOME, OTHER THAN SECTION 10(38) OF THE ACT, IS LIABLE TO BE ADDED BACK TO NET PROFIT SHOWN IN PROFIT AND LOSS ACCOUNT IF THE AMOUNT REFERRED TO THEREIN IS DEBITED TO PROFIT AND LOSS ACCOUNT. NOW, WE REFER TO SEC TION 14A OF THE ACT WHICH READS AS UNDER: 'EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AS SESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.] THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN AC CORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED90, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB - SECTION (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL I NCOME UNDER THIS ACT PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001.]' 9 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. PERUSAL OF SECTION 14A OF THE ACT PROVIDES THAT IT MANDATES DISALLOWANCE OF EXPENDITURE 'IN RELATION' TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT WHILE CLAUSE (F) IN EXPLANATION1 TO SECTION 115JB (2) OF THE ACT MANDATES DISALLOWANCE OF EXPENDITURE 'RELATABLE' TO THE INCOME TO WHICH SECTION 10 (OTHER THAN SECTION 10(38) OF THE ACT) OR SECTION 11 OR SECTION 12OF THE ACT APPLIES . THE CLOSE PERUSAL OF THE BOTH THE ABOVE PROVISIONS REVEALS THAT MORE OR LESS SIMILAR LANGUAGE IS USED IN BOTH THE AFORE - STATED PROVISIONS. THE DIVIDEND INCOME IS DECLARED ON THE SHARE INVESTMENT WHICH IS EXEMPT U/S 10(33) OF THE ACT (NOT SECTION 10(38) OF THE ACT) . WE ALSO NOTE THAT THE CLAUSE (F) TO EXPLANATION 1 TO SECTION 115JB(2) OF THE ACT REQUIRES EXPENDITURE RELATABLE TO THE EXEMPT INCOME TO BE DISALLOWED PROVIDED THE SAME IS DEBITED TO PROFIT AND LOSS ACCOUNT WHILE SECTION14A(2) OF THE A CT MANDATES THAT IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , THEN DISALLOWANCE SHALL BE COMPUT ED IN ACCORDANCE WITH THE PRESCRIBED METHOD. RULE 8D OF INCOME TAX RULES, 1962 PRESCRIBES THE METHOD FOR COMPUTING DISALLOWANCE OF EXPENDITURE IN RELATION TO EARNING OF EXEMPT INCOME . THE SAID RULE 8D OF INCOME TAX ACT,1961 IS A MACHINERY PROVISION TO COM PUTE DISALLOWANCE OF EXPENDITURE U/S 14 A OF THE ACT IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND IS HELD TO BE APPLICABLE W.E.F. ASSESSMENT YEAR 2008 - 09 AS HELD BY HON'BLE BOMBAY HIGH COURT IN GODREJ AND BOYCE MANUFACTURING L IMITED(SUPRA) DECISION . THE IMPUGNED ASSESSMENT YEAR UNDER APPEAL IN PRESENT CASE IS ALSO ASSESSMENT YEAR 2008 - 09 AND HENCE SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES,1962 IS APPLICABLE. IT IS AXIOMATIC TO ASSUME THAT THE AMOUNT COMPUTED UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962 SHALL HAVE NO REFERENCE TO THE AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT AND THERE CANNOT BE ANY DISALLOWANCE U/S 14A OF THE ACT UNLESS THE EXPENDITURE IS DEBITED TO PROFIT AND L OSS ACCOUNT AND HENCE DISALLOWANCE U/S 14A IS ALWAYS A PART OF EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT. IN THE INSTANT CASE UNDER APPEAL, THE AO HAS DISALLOWED THE EXPENDITURE OF RS. 73,07,018 COMPUTED U/S 14A OF THE ACT READ WITH RULE 8D OF INC OME TAX RULES , 1962 FOR COMPUTING NORMAL TAXABLE INCOME WHICH IS UPHELD BY THE CIT(A) IN THE FIRST APPEAL AND THE SAME AMOUNT OF EXPENDITURE OF RS. 73,07,018/ - IS ADDED TO COMPUTE BOOK PROFIT U/S 115JB OF THE ACT WHICH IS COMPUTED U/S 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES,1962. RESPECTFULLY FOLLOWING THE PROPOSITION LAID DOWN BY THE HONBLE TRIBUNAL WE DIRECT THE AO TO MAKE THE ADDITION OF THE AMOUNT OF DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF 10 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. INCOME TAX RULES 1962 TO THE TOTAL INCOME OF THE ASSESSEE UNDER THE NORMAL PROVISIONS AND UNDER THE PROVISIONS OF THE MAT AS SPECIFIED UNDER SECTION 115JB OF THE ACT. HENCE THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. IN THE GIVEN CASE, AO DISALLOWED U/S 14A APPLYING R ULE 8D(2)(III), WHICH IS BASED ON PRESUMPTION THAT ASSESSEE MUST HAVE UTILIZED THE RESOURCES FOR EARNING THE EXEMPT INCOME. THEREFORE, THERE IS NO DIRECT IMPACT ON THE P&L A/C MAINTAINED BY THE ASSESSEE. HENCE, AO CANNOT MAKE ADDITION WHILE DETERMINING BOO K PROFIT. ACCORDINGLY, R ESPECTFULLY FOLLOWING THE ABOVE SAID DECISION S , WE DIRECT THE AO TO DELETE THE DISALLOWANCE MADE U/S 14A FOR COMPUTING BOOK PROFIT U/S 115 JB. ACCORDINGLY, 2 ND GROUND OF ADDITIONAL GROUND IS ALLOWED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 24 TH JULY , 201 9 . SD/ - SD/ - ( P. MADHAVI DEVI ) (S . RIFAUR RAHMAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 24 TH JULY , 201 9 KV C OPY TO: - 1) SHRI KSSV FINVEST PVT. LTD., 3 RD FLOOR, MOHANS PLAZA, PLOT NO. 733, ROAD NO. 36, JUBILEE HILLS, HYDERABAD 500 03 3 2) ITO, WARD 3 ( 3 ) , SIGNATURE TOWERS, KONDAPUR, OPP. BOTANICAL GARDENS, HYDERABAD 3) CIT(A) 3, HYDERABAD. 4) PR. CIT - 3 , HYD. 5 ) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABAD. 6 ) GUARD FILE 11 ITA NO. 1591 /HYD/1 6 SRI KSSV FINVEST PVT. LTD., HYD. S.NO DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER