Spandana Sphoorty Financial Ltd, Hyderabad V. Addl, CIT, Range-3, Hyderabad

ITA 1653/HYD/2012

• Counselvise Citation: 165322514 RSA 2012
• Duration Of Justice: 1 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 05-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1653/HYD/2012 ASSESSMENT YEAR : 2009-10 SPANDANA SPHOORTY FINANCIAL LTD., HYDERABAD PAN AAICS6213N ADDL. COMMISSIONER OF INCOME-TAX, RANGE 3, HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI G.V.N. HARI REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 23-09-2014 DATE OF PRONOUNCEMENT 10-10-2014 O R D E R PER SAKTIJIT DEY, J.M.: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 31/08/2012 OF THE CIT(A)-IV, HYDERABAD PERTAINING T O THE AY 2009- 10. 2. THE DISPUTE IN THE PRESENT APPEAL IS CONFINED TO ADDITION OF AN AMOUNT OF RS. 14,23,29,696 U/S 14A READ WITH RUL E 8D OF THE IT RULES. 3. BRIEFLY THE FACTS ARE, ASSESSEE IS A COMPANY ENG AGED IN THE BUSINESS OF MICRO FINANCE. FOR THE AY UNDER CONSIDE RATION, IT FILED ITS RETURN OF INCOME ON 30/09/2009 DECLARING TOTAL INCOME OF RS. 153,31,02,225. DURING THE ASSESSMENT PROCEEDING, AO WHILE 2 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. EXAMINING THE FINAL ACCOUNTS OF THE ASSESSEE NOTICE D THAT THE ASSESSEE HAS EARNED EXEMPT INCOME TOWARDS DIVIDEND EARNED ON INVESTMENTS MADE IN MUTUAL FUNDS. ON FURTHER VERIFI CATION, HE FOUND THAT WHILE INVESTMENTS MADE IN MUTUAL FUNDS AS ON 3 1/03/08 WAS AT RS. 1,42,45,685, THE SAME HAS INCREASED TO 295,05, 66,475 AS ON 31/03/09. AO BEING OF THE VIEW THAT AS PER THE PROV ISIONS OF SECTION 14A READ WITH RULE 8D, EXPENDITURE IN RELATION TO I NCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE DISALL OWED, ISSUED A SHOW CAUSE NOTICE TO ASSESSEE PROPOSING TO COMPUTE DISALLOWANCE AS PER SECTION 14A READ WITH RULE 8D OF THE ACT. IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED BY THE AO, ASSESSEE SUBMIT TED ITS REPLY STATING THEREIN THAT THE INVESTMENTS IN MUTUAL FUND S WERE MADE OUT OF INTERNAL ACCRUALS COMPRISED OF SHARE CAPITAL, RE SERVES AND SURPLUS ETC. AND NO BORROWED FUND WAS UTILIZED FOR MAKING THE INVESTMENT. HENCE, AS NO EXPENDITURE WAS INCURRED B Y ASSESSEE TOWARDS EARNING EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE. ASSESSEE FURNISHING THE DETAILS OF LOANS TAKEN FROM THE BANKS WITH LOAN DISBURSED MONTH-WISE, STATED THAT EXCEPT MARCH 09 CLOSING BALANCE OF LOAN TAKEN IS MORE THAN THE CLOSING BALA NCE OF LOANS DISBURSED, WHICH PROVES THE FACT THAT THERE WAS NO SURPLUS BORROWED FUND AVAILABLE WITH ASSESSEE TO BE INVESTE D IN MUTUAL FUNDS. IT WAS FURTHER STATED THAT ONLY IN THE MONTH OF MARCH09, THE INVESTMENTS IN MUTUAL FUNDS ARE HIGHER BECAUSE BANK S DISBURSED THE MAXIMUM AMOUNTS IN THIS MONTH TO ACHIEVE THEIR PRIORITY SECTOR LENDING TARGETS. AS THE ENTIRE BORROWED FUND COULD NOT BE DISBURSED IMMEDIATELY TO BORROWERS, THE SURPLUS AVAILABLE FRO M BORROWED FUNDS WAS TEMPORARILY INVESTED IN MUTUAL FUNDS. IT WAS, THUS, SUBMITTED BY ASSESSEE AS THERE IS NO NEXUS BETWEEN BORROWED FUNDS AND THE INVESTMENTS MADE IN MUTUAL FUNDS, NO PRESUMPTIVE DISALLOWANCE CAN BE MADE U/S 14A OF THE ACT. AO AFT ER CONSIDERING THE SUBMISSIONS OF ASSESSEE WAS, HOWEVER, NOT CONVI NCED WITH THE 3 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. SAME. AO RELYING UPON THE DECISION OF THE HONBLE B OMBAY HIGH COURT IN CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD., 234 CTR 1 HELD THAT IF THERE IS EXEMPT INCOME EARNED BY ASSESSEE, THEN, THE PROVISIONS OF SECTION 14A WOULD COME INTO PLAY AND RELATABLE EXPENDITURE FOR EARNING THE EXEMPT INCOME HAS TO BE DISALLOWED IN TERMS WITH RULE 8D(2). ACCORDINGLY, A O PROCEEDED TO COMPUTE THE DISALLOWANCE UNDER RULE 8D(2) BY DISALL OWING AN AMOUNT OF RS. 13,49,17,666 TOWARDS INTEREST EXPENDI TURE AS PER RULE 8D(2)(II) AND ADMINISTRATIVE EXPENDITURE OF RS . 74,12,030 ON THE AVERAGE VALUE OF INVESTMENT AS PER RULE 8D(2)(I II). THUS, THE TOTAL DISALLOWANCE MADE BY THE AO WAS TO THE TUNE O F RS. 14,23,29,696, WHICH WAS ADDED TO THE INCOME OF ASSE SSEE FOR THE IMPUGNED ASSESSMENT YEAR. BEING AGGRIEVED OF THE AD DITION MADE, ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). LE ARNED CIT(A) ALSO SUSTAINED THE DISALLOWANCE BY HOLDING AS UNDER : 6. I HAVE GONE THROUGH THE FACTS OF THE CASE AND TH E SUBMISSIONS OF THE APPELLANT. THE APPELLANT HAS NOT DISPUTED THAT IT HAD MADE INVESTMENTS IN THE MONTH OF MARCH, 2009 OUT OF THE LOANS DISBURSED TO IT BY ITS BANKERS. EVEN I F SUCH FUNDS HAD TO BE INVESTED AS THOSE WERE LYING IDLE FOR WAN T OF IMMEDIATE DISBURSAL, AND EVEN OF THE PURPOSE OF SUC H INVESTMENT WAS TO MINIMIZE THE INTEREST BURDEN, IT CANNOT BE DENIED THAT SUCH INVESTMENT RESULTED IN EARNING OF INCOME/DIVIDEND WHICH WAS NOT TO FORM PART OF THE T OTAL INCOME. THEREFORE, THE VERY FACT OF SUCH INVESTMENT INDEED ATTRACTED THE PROVISIONS OF SECTION 14A OF THE ACT. 6.1 ONCE THE PROVISIONS OF SECTION 14A WERE ATTRACT ED, THE DISALLOWANCE OF RELATABLE EXPENDITURE WAS INDEED WA RRANTED. SINCE THE EXPENDITURE INCURRED EXCLUSIVELY FOR SUCH INVESTMENT COULD NOT BE MADE OUT SEPARATELY, AND TH E ASSESSMENT YEAR INVOLVED WAS THE AY 2009-10, IN TH E LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN CA SE THE OF GODREJ AND BOYCE CO. LTD. (SUPRA), RULE 8D WAS INDE ED TO BE APPLIED. IT IS CLEAR THAT THE SAID RULE IS TO BE AP PLIED UNDER THE PROVISIONS OF THE ACT UNDER SUCH CIRCUMSTANCES AND THE AO DOES NOT HAVE ANY DISCRETION TO WORK OUT THE DISALL OWANCE BY TAKING THE AVERAGE RATE OF INTEREST AND ACTUAL NUMB ER OF DAYS FOR WHICH FUNDS ARE INVESTED IN MUTUAL FUNDS. FURTH ER, EVEN IF 4 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. THE DISALLOWANCE WORKED OUT ON THIS BASIS WAS HIGHE R THAN THE EXEMPT INCOME ITSELF, THE AO WAS INDEED REQUIRE D TO MAKE DISALLOWANCE OF THE AMOUNT WORKED OUT AS PER R ULE 8D ITSELF, AS HE DOES NOT HAVE THE DISCRETION TO RESTR ICT THE DISALLOWANCE TO THE EXTENT OF EXEMPT INCOME ITSELF. LIKEWISE, THERE IS NO MERIT IN THE CONTENTION THAT NO PRUDENT BUSINESSMAN WILL BORROW AT HIGH COST AND INVEST AT LOWER RETURNS, AS THE ONLY FACT THAT LEADS TO THE APPLICA TION OF SEC. 14A R.W. RULE 8D IS THAT AN EXPENDITURE HAS BEEN IN CURRED IN RELATION TO THE EARNING OF THE EXEMPT INCOME. UNDER THE CIRCUMSTANCES, FINDING NO INFIRMITY IN THE ACTION O F THE AO, THE DISALLOWANCE OF RS. 14,23,29,696/- IS UPHELD AND TH E GROUNDS RAISED IN THIS APPEAL ARE DECIDED AGAINST THE APPEL LANT. 4. REITERATING THE SUBMISSIONS MADE BEFORE THE REVE NUE AUTHORITIES, LEARNED AR CONTENDED THAT EXCEPT THE M ONTH OF MARCH09, THE FUND AVAILABLE WITH THE ASSESSEE FROM INTERNAL ACCRUALS WAS MORE THAN THE INVESTMENTS MADE. IN THI S CONTEXT, HE REFERRED TO MONTH-WISE BREAKUP OF INVESTMENT AS AT PAGE 34 OF THE ASSESSEES PAPER BOOK. IT WAS SUBMITTED THAT ONLY I N THE MONTH OF MARCH AS THE DISBURSEMENT OF LOAN BY THE BANKS WAS MORE THAN THE DISBURSEMENTS MADE BY ASSESSEE TO BORROWERS, TH ERE WAS SURPLUS FUND AVAILABLE FROM THE BORROWALS MADE BY A SSESSEE FROM THE BANK, WHICH WAS TEMPORARILY INVESTED IN MUTUAL FUNDS. HOWEVER, THE SITUATION AGAIN CHANGED FROM THE NEXT MONTH AS THE LOAN AMOUNT WAS DISBURSED TO THE BORROWERS. IT WAS SUBMITTED THAT THE LOAN SANCTIONED BY BANKS WERE FOR SPECIFIC PURP OSE AND ASSESSEE CANNOT UTILIZE FOR ANY OTHER PURPOSE. IT W AS SUBMITTED THAT ASSESSEE HAS TO SUBMIT UTILIZATION CERTIFICATE TO THE BANK SHOWING UTILIZATION OF THE FUND FOR THE PURPOSE FOR WHICH IT WAS DISBURSED. LEARNED AR DRAWING OUR ATTENTION TO THE BALANCE SHEET OF THE COMPANY SUBMITTED THAT ASSESSEES OWN FUNDS FROM RESERVES AND SURPLUS AS WELL AS CURRENT LIABILITIES ARE MORE THAN THE INVESTMENTS MADE IN THE MUTUAL FUNDS. THEREFORE, WH EN SURPLUS FUND IS AVAILABLE WITH ASSESSEE TO MAKE INVESTMENTS IN THE MUTUAL FUNDS, NO DISALLOWANCE CAN BE MADE U/S 14 A BY PRES UMING THAT 5 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. BORROWED FUNDS WERE UTILIZED IN MAKING INVESTMENTS IN MUTUAL FUNDS. IN SUPPORT OF SUCH CONTENTION, LEANED AR REL IED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN CASE OF CI T VS. HDFC BANK LTD., IN ITA NO. 330 OF 2012 DATED 23/07/14 AN D THE DECISION OF ITAT , DELHI BENCH IN CASE OF ACIT VS. MOHAN EXP ORTS PVT. LTD., 82 DTR 110. REFERRING TO THE P&L A/C, LEARNED AR SU BMITTED THAT ASSESSEE HAS MORE INTEREST INCOME THAN INTEREST EXP ENDITURE, THEREFORE, THERE IS A NET SURPLUS OF INTEREST INCOM E. IT WAS, THEREFORE, SUBMITTED THAT WHEN ASSESSEE IS HAVING N ET POSITIVE INCOME FROM INTEREST, THEN, NO DISALLOWANCE OF INTE REST EXPENDITURE CAN BE MADE U/S 14A READ WITH RULE 8D. IN THIS CONT EXT, LEARNED AR RELIED UPON A DECISION OF ITAT, AHMEDABAD BENCH IN CASE OF ITO VS. KARNAVATHI PETROCHEM PVT. LTD., IN ITA NO. 2228 /AHM./12, DATED 05/07/2013. LEARNED AR SUBMITTED, AS WOULD B E EVIDENT FROM THE FACTS ON RECORD, EXCEPT FOR THE MONTH OF M ARCH, LOAN BORROWED BY ASSESSEE IS LESS THAN THE AMOUNT DISBUR SED TO BORROWERS. ONLY IN THE MONTH OF MARCH, DUE TO DISBU RSEMENT OF LOAN BY BANKS TO ACHIEVE THEIR TARGET, THERE WAS SURPLUS FUND AVAILABLE WITH THE ASSESSEE FROM THE BORROWED FUND, WHICH COU LD NOT BE IMMEDIATELY DISBURSED AND HAD TO BE INVESTED KEEPIN G IN VIEW THE BUSINESS PRUDENCE, ACCORDINGLY, ASSESSEE INVESTED I N MUTUAL FUNDS. HOWEVER, SUCH TEMPORARY PARKING OF FUNDS CAN NOT NOT BE TAKEN INTO ACCOUNT FOR MAKING DISALLOWANCE U/S 14A. IN THIS CONTEXT, LEARNED AR RELIED UPON A DECISION OF ITAT, MUMBAI B ENCH IN CASE OF KUNAL CORPORATION VS. ACIT, 28 ITR (TRIB.) 27. LEARNED AR FINALLY SUBMITTED THAT DURING THE YEAR ASSESSEE HAS EARNED EXEMPT INCOME OF RS. 90 LAKHS WHEREAS DISALLOWANCE MADE U /S 14A IS TO THE TUNE OF RS. 13,49,17,666, WHICH CANNOT BE THE INTENTION OF THE LEGISLATURE. AR SUBMITTED THAT ONLY BECAUSE THE PR OVISIONS OF SECTION 14A PROVIDES FOR DISALLOWANCE OF EXPENDITUR E ON EXEMPT INCOME, IT CANNOT BE APPLIED IN AN ARBITRARY MANNER . IF AT ALL, 6 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. DISALLOWANCE IS TO BE MADE U/S 14A READ WITH RULE 8 D, THEN, IT HAS TO BE IN PROPORTION TO THE EXEMPT INCOME EARNED BY ASSESSEE. IN THIS CONTEXT, LEARNED AR RELIED UPON A DECISION OF THE ITAT, D BENCH IN CASE OF SAHARA INDIA FINANCIAL CORPORATION LTD., VS. DCIT, 105 DTR 19. 5. THE LEARNED DR, ON THE OTHER HAND SUBMITTED THAT ASSESSEE ITSELF BEFORE AO AS WELL AS BEFORE CIT(A) ACCEPTED THE FACT THAT BORROWED FUNDS HAVE BEEN UTILIZED FOR INVESTMENTS I N MUTUAL FUNDS. THAT BEING THE CASE, PROVISIONS OF SECTION 14A IS C LEARLY ATTRACTED. IT WAS SUBMITTED THAT ONCE SECTION 14A IS ATTRACTED , THEN, DISALLOWANCE HAS TO BE COMPUTED IN TERMS WITH RULE 8D. LEARNED DR SUBMITTED THAT WHEN THERE IS NO DISPUTE TO THE F ACT THAT ASSESSEE EARNED EXEMPT INCOME ON ACCOUNT OF DIVIDEN DS FROM MUTUAL FUNDS AND SUCH INVESTMENTS WERE BY UTILIZING INTEREST BEARING FUNDS, THEN, ASSESSEE CANNOT HAVE ANY GRIEV ANCE IF DISALLOWANCE IS MADE UNDER RULE 8D. LEARNED DR SUBM ITTED THAT INFORMATION SUBMITTED BY ASSESSEE ITSELF REVEALS TH AT BORROWED FUNDS HAVE BEEN UTILIZED IN INVESTMENTS IN MUTUAL F UNDS, THEREFORE, DISALLOWANCE MADE IS JUSTIFIED. SO FAR AS DISALLOWA NCE OF 0.5% TOWARDS ADMINISTRATIVE EXPENSES ON THE AVERAGE VALU E OF INVESTMENT, LEARNED DR SUBMITTED THAT WHETHER OR NO T ASSESSEE HAS INCURRED ANY DIRECT EXPENDITURE, BUT, ONCE ASSE SSEE HAS MADE INVESTMENTS IN MUTUAL FUNDS OR SHARES, INVESTMENTS FROM WHICH WILL NOT FORM PART OF TOTAL INCOME, THEN, DISALLOWANCE H AS TO BE MADE AS PER SECTION 14A RULE 8D(2)(III) OF THE ACT. THUS, IT WAS SUBMITTED THAT DISALLOWANCE HAVING BEEN MADE IN TERMS WITH MA NDATORY STATUTORY PROVISION, CIT(A)S ORDER HAS TO BE SUSTA INED. 6. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S, PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON 7 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. RECORD. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECISIONS RELIED UPON BY THE PARTIES BEFORE US. THE UNDISPUTE D FACTS ARE, ASSESSEE DURING THE YEAR HAS EARNED EXEMPT INCOME F ROM DIVIDEND ON MUTUAL FUNDS AMOUNTING TO RS. 90,34,811. IT IS ALSO NOT DISPUTED THAT INVESTMENTS IN MUTUAL FUNDS AT THE BE GINNING OF THE YEAR IS AT RS. 1,42,46,585 AND AT THE END OF THE YE AR THE SAME WAS AT RS. 2,950,566,474. THERE IS NO DOUBT THAT THERE IS SUBSTANTIAL INCREASE IN THE INVESTMENTS MADE IN THE MUTUAL FUND S DURING THE YEAR. HOWEVER, ON PERUSAL OF THE MONTH-WISE INVESTM ENTS AND AVAILABILITY OF FUNDS, DETAILS OF WHICH ARE PLACED AT PAGE 34 OF THE ASSESSEES PAPER BOOK, IT IS TO BE NOTED THAT ASSES SEE IS HAVING RESERVES AND SURPLUS MORE THAN THE INVESTMENTS MADE IN MUTUAL FUNDS IN ALL THE MONTHS EXCEPT MARCH09 WHEREIN RES ERVES AND SURPLUS ALONG WITH SHARE CAPITAL IS RS. 205,86,24,5 54 AS AGAINST MUTUAL FUND INVESTMENTS OF RS. 295,05,66,475, THERE BY RESULTING IN EXCESS OF INVESTMENT OVER THE SURPLUS FUNDS AVAILAB LE WITH ASSESSEE TO THE EXTENT OF RS. 89,19,41,920. WHEN TH IS FIGURE IS JUXTAPOSED TO THE MONTH-WISE BORROWALS MADE BY ASSE SSEE FROM BANKS, IT IS TO BE NOTED THAT ONLY IN THE MONTH OF MARCH09, BORROWALS MADE BY ASSESSEE FROM BANKS IS MORE THAN THE LOAN DISBURSED TO THE BORROWERS. THEREFORE, IF AT ALL TH ERE IS ANY INVESTMENT MADE BY ASSESSEE OUT OF BORROWED FUNDS I N THE MUTUAL FUNDS, THEN, THE SAME CAN POSSIBLY BE IN THE MONTH OF MARCH09 ONLY. FURTHER, ON A PERUSAL OF THE BALANCE SHEET, I T APPEARS THAT OWN FUNDS AVAILABLE WITH ASSESSEE FROM RESERVES AND SURPLUS AND CURRENT LIABILITIES IS TO THE TUNE OF RS. 314,82,01 ,550=00 WHEREAS THE TOTAL INVESTMENTS AS ON 31/03/2009 IS RS. 295,0 5,66,474. FROM THIS, IT IS CLEAR THAT THE INVESTMENTS MADE IN MUTU AL FUNDS COULD HAVE BEEN MADE OUT OF THE OWN FUNDS AVAILABLE WITH ASSESSEE WITHOUT UTILIZING THE BORROWED FUNDS. IN THESE CIRC UMSTANCES, WHEN ASSESSEE WAS HAVING SUFFICIENT SURPLUS FUNDS TO MA KE INVESTMENT 8 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. IN MUTUAL FUNDS NO DISALLOWANCE CAN BE MADE TOWARDS INTEREST EXPENDITURE UNLESS NEXUS IS ESTABLISHED BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS MADE. IN THIS CONTEXT, WE RELY UPON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN CASE O F CIT VS. HDFC BANK AND THE DECISION OF ITAT, DELHI BENCH IN CASE OF ACIT VS. MOHAN EXPORT P. LTD. (SUPRA). FURTHER ON A PERU SAL OF P&L ACCOUNT OF ASSESSEE FOR THE IMPUGNED AY ALONG WITH ITS SHOULDERS CLEARLY SHOWS A NET POSITIVE INTEREST INCOME. WHEN THERE IS A POSITIVE INTEREST INCOME, NO DISALLOWANCE CAN BE MA DE U/S 14A READ WITH RULE 8D. IN THIS CONTEXT, WE RELY ON THE DECISION OF THE COORDINATE BENCH IN CASE OF ITO VS. KARNAVATI PETRO CHEM (P) LTD. (SUPRA). EVEN, ASSUMING THAT THERE IS INVESTMENT MA DE BY ASSESSEE IN THE MUTUAL FUNDS OUT OF BORROWED FUNDS, BUT, AS CAN BE SEEN FROM THE FACTS ON RECORD, SUCH POSSIBILITY ARI SES ONLY IN RESPECT OF INVESTMENT IN MARCH09. HOWEVER, FOR MA KING ANY DISALLOWANCE, IT HAS TO BE ESTABLISHED ON RECORD HO W MUCH BORROWED FUND HAS BEEN INVESTED IN THE MUTUAL FUNDS AND FOR WHAT PERIOD. AO CERTAINLY CANNOT CHARGE INTEREST FOR THE ENTIRE YEAR WHEN THE INVESTMENT IS MADE BY ASSESSEE FOR A MONTH OR F EW DAYS. FURTHER, A LINK IS REQUIRED TO BE ESTABLISHED BETWE EN THE ACTUAL AMOUNT OF INVESTMENT MADE OUT OF BORROWED FUNDS. W HEN AO HAS NOT UNDERTAKEN ANY SUCH EXERCISE, PRESUMPTIVE DISAL LOWANCE ON ACCOUNT OF INTEREST EXPENDITURE CANNOT BE SUSTAINED . THOUGH WE RESPECTFULLY AGREE WITH THE RATIO LAID DOWN BY HON BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA), IT NEEDS TO BE STATED THAT THE SAID DECISION CANNOT BE CONSIDERED TO BE LAYING DOWN A PROPOSITION THAT DISALLOWANCE OF I NTEREST EXPENDITURE HAS TO BE MADE IRRESPECTIVE OF THE FACT WHETHER THERE IS NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTM ENT MADE BY ASSESSEE WHICH RESULTED IN EARNING OF EXEMPT INCOME AND FURTHER WHETHER ASSESSEE HAS ACTUALLY INCURRED ANY INTEREST EXPENDITURE 9 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. TOWARDS EARNING OF EXEMPT INCOME. THAT BEING THE CA SE, WE DO NOT FIND ANY REASON TO SUSTAIN THE ADDITION OF RS. 13,4 9,17,666, TOWARDS INTEREST EXPENDITURE UNDER RULE 8D(2)(III). HOWEVER, SO FAR AS DISALLOWANCE OF RS. 74,12,030 @ 0.5% ON THE AVERAGE VALUE OF INVESTMENT UNDER RULE 8D(2)(III) IS CONCERNED, WE A RE OF THE VIEW THAT THE SAME IS IN ORDER. READING OF THE PROVISION CONTAINED U/S 14A AND MORE SPECIFICALLY SUB-SECTION(3) OF SECTION 14A READ WITH RULE 8D(2)(III) MAKES IT CLEAR, EVEN WHERE THE ASSE SSEE CLAIMS THAT HE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING EXE MPT INCOME, DISALLOWANCE OF EXPENDITURE DEEMED TO HAVE BEEN INC URRED HAS TO BE WORKED OUT @ 0.5% ON THE AVERAGE VALUE OF INVEST MENTS. AS THE AO HAS CORRECTLY COMPUTED DISALLOWANCE IN TERMS WIT H RULE 8D(2)(III), THE SAME DESERVES TO BE UPHELD. ACCORDI NGLY, WE SUSTAIN THE ADDITION OF RS. 74,12,030 OUT OF THE TOTAL ADDI TION OF RS. 14,23,29,696 MADE U/S 14A BY THE AO. 7. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED. PRONOUNCED IN THE OPEN COURT ON 10/10/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 10 TH OCTOBER, 2014 KV 10 ITA NO.1653/HYD/2012 SPANDANA SPHOORTY FINANCIAL LTD. COPY TO:- 1) SPANDANA SPHOORTY FINANCIAL LTD., PLOT NO. 79, CARE CRYSTAL, VINAYAK NAGAR, GACHIBOWLI, HYDERABAD 500 0 01 2) ADD. CIT, RANGE 3, HYDERABAD 3) CIT(A)-IV, HYDERABAD. 4) CITIII, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.