Bellwether Microfinance Fund Private Limited, Hyderabad V. ITO,Ward 1(1), Hyderabad

ITA 1743/HYD/2013

• Counselvise Citation: 174322514 RSA 2013
• Duration Of Justice: 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 17-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SOLGY JOSET T KOTTARAM
• Keywords: Earning of tax free income
• Section: 234B; 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. 1743/HYD/2013 ASSESSMENT YEAR : 2009-10 BELLWETHER MICROFINANCE FUND PVT. LTD., HYDERABAD. PAN AADCS4132K INCOME-TAX OFFICER, WARD 1 (1),HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI DEEPAK CHOPRA REVENUE BY SHRI SOLGY JOSET T. KOTTARAM DATE OF HEARING 28-04-2014 DATE OF PRONOUNCEMENT 27-06-2014 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 01/10/2013 PASSED BY CIT(A)-II, HYDERABAD RELATING TO THE AY 2009- 10. 2. THE ASSESSEE HAS RAISED 7 GROUNDS. AT THE OUTSET , LEARNED AR SUBMITTED THAT HE DOES NOT WANT TO PRESS GROUND NO. 1, HENCE, THIS GROUND IS DISMISSED AS NOT PRESSED. GROUND NOS. 2 & 7 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. GROUND NOS. 3 TO 5 RELATE TO ONLY ONE ISSUE OF DISALLOWANCE OF EXPENDITURE OF RS. 1,97,36,624/- U/S 14A READ WITH RULE 8D OF THE ACT. IN GROUND NO. 6, ASSESSEE HAS CHALLENGED LEVY OF INTEREST U/S 234B AND 234D OF TH E ACT. 3, BRIEFLY, THE FACTS RELATING TO THE ISSUE IN DISP UTE ARE, THE ASSESSEE IS A NON-BANKING FINANCING COMPANY ENGAGED IN THE 2 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. BUSINESS OF INVESTING IN MICROFINANCE COMPANIES IN INDIA. THE ASSESSEE WAS EARLIER KNOWN AS SUFALA FINANCE LTD., WHICH WAS INCORPORATED ON 25/11/1991 AS A PRIVATE LIMITED COM PANY ENGAGED IN THE BUSINESS OF PROVIDING FINANCIAL SERVICES AS HIR E PURCHASE AND LEASING OF INCOMES. AFTER CHANGE OF MANAGEMENT, IT ALSO CHANGED ITS BUSINESS MODEL BY MAKING INVESTMENTS IN EQUITY, MUT UAL FUND AND ALSO ADVANCED LOANS TO MICRO FINANCE INSTITUTIONS. ASSESSEE ENTERED INTO A FUND MANAGEMENT AGREEMENT WITH CASPIAN ADVIS ORS PVT. LTD. (IN SHORT CAPL) ON 27/05/2005 A PER WHICH THE SAID COMPANY WOULD RENDER CONSULTATION SERVICES TO THE ASSESSEE IN THE MATTER OF INVESTMENT ETC. AS FUND MANAGER. FOR THE ASSESSMENT YEAR UNDER DISPUTE ASSESSEE FILED ITS RETURN OF INCOME ON 15/0 9/2009 DECLARING NIL INCOME. INITIALLY THE RETURN WAS PROCESSED U/ S 143(1) AND REFUND ON ACCOUNT OF TDS AMOUNTING TO RS. 62,21,130/- WAS ALSO ISSUED TO THE ASSESSEE. SUBSEQUENTLY, ASSESSEES CASE WAS SEL ECTED FOR SCRUTINY. DURING THE SCRUTINY ASSESSMENT PROCEEDING , AFTER EXAMINING THE BOOKS OF ACCOUNT AND OTHER DETAILS SUBMITTED BY THE ASSESSEE, IT WAS NOTED BY THE AO THAT THE FUND MANAGER I.E. CAPL WAS HOLDING 18.7% SHAREHOLDING IN THE ASSESSEE COMPANY. ONE OF THE DIRECTOR IN THE ASSESSEE COMPANY SHRI S. VISWANATH PRASAD WAS A LSO A DIRECTOR IN CAPL WITH 99% SHAREHOLDING. HE FURTHER NOTICED THAT IN LIEU OF THE SERVICES RENDERED, THE FUND MANAGER WAS TO BE PAID REMUNERATION TO THE FUND BASED SERVICES, WHICH WAS AGREED UPON AS U NDER: A) 3.50% PER ANNUM ON OUTSTANDING EQUITY OR EQUITY LINKED INVESTMENTS ON COST BASIS. B) 2.25% PER ANNUM ON OUTSTANDING DEBT INVESTMENTS ONLY ON PRINCIPAL. C) 1.00% PER ANNUM ON ALL OTHER ASSETS 3.1 THE AO FURTHER NOTICED THAT WHILE COMPUTING ITS INCOME, ASSESSEE HAS DISALLOWED EXPENDITURE OF RS. 35,65,86 0/- U/S 14A READ WITH RULE 8D, OUT OF THE FUND MANAGEMENT FEES CLAIM ED, WHICH WORKED OUT AS UNDER: 3 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. RULE DETAILS OF WORKING AMOUNT DISALLOWED RULE 8D(2)(I) AVERAGE VALUE OF MUTUAL FUNDS 14,33,99,099 ADD: AVERAGE VALUE OF INVESTMENTS INCOME FROM WHICH IS EXEMPT 6,50,00,000 AVERAGE VALUE OF INVESTMENTS 20,832,99,099 1% ON RS.20,83,99,099 2083999 ADD: PERFORMANCE PAY 164421 ADD: SERVICE TAX 271667 25,20,080 RULE 8D(2)(II) TOTAL INTEREST EXPENDITURE 14,394 PROPORTIONATE EXPENDITURE 3,785 RULE 8D(2)(III) 0.5% OF AVERAGE VALUE OF INVESTMENTS (TOTAL ASSETS ADJUSTED BY ADDING CURRENT LIABILITIES) 10,41,995 TOTAL 35,65,860 3.2 AFTER EXAMINING THE DETAILS, AO WAS OF THE VIEW THAT THE DISALLOWANCE OF FUND MANAGEMENT FEES WORKED OUT BY THE ASSESSEE IS NOT CORRECT. ON THE BASIS OF THE AGREEMENT WITH FUN D MANAGER, AO WORKED OUT THE FEES PAID TO THE FUND MANAGER AS UND ER: SL.NO. CATEGORY TOTAL INVESTMENTS FUND MANAGEMENT FEE INVESTMENT %AGE AMOUNT 1A EQUITY THROUGH BELLWETHER TRUST 24,19,66,037 1B DIRECT INVESTMENT (EQUITY) 24,34,5,747 TOTAL OF 1A & 1B 48,54,20,784 3.50 1,69,89,727 2 DEBT (LOANS) 13,41,25,699 2.25 30,17,828 3 TREASURY I) INVESTMENT (PREF. SHARES) II) CASH & BANK BALANCES 11,00,00,000 3,23,55,852 1.00 1.0 1,00,000 3,23,559 FUND MANAGEMENT FEE PERFORMANCE DAY 16,41,067 TOTAL FUND 4 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. MANAGEMENT FEE 2,20,82,181 ADD: SERVICE TAX TOTAL 26,66,863 2,47,49,044 3.3 AO ALSO QUANTIFIED THE EXPENDITURE PERTAINING T O EXEMPT/TAXABLE INCOME FOR THE PURPOSE OF DISALLOWANCE U/S 14A AND CALLED FOR AN EXPLANATION FROM ASSESSEE FOR PROPOSED DISALLOWANCE . ASSESSEE OBJECTING TO THE DISALLOWANCE PROPOSED BY THE AO U/ S 14A OF THE ACT, SUBMITTED THAT DIVIDEND INCOME AND INCOME FROM MUTU AL FUND CANNOT BE REGARDED AS EXEMPT INCOME SINCE TAX HAS BEEN IMP OSED AND PAID BY THE PAYER U/S 115-O AND 115J. IT WAS SUBMITTED THAT TAX ON DIVIDEND DISTRIBUTED CANNOT BE ANY THING OTHER THAN TAX ON DIVIDEND INCOME OF THE RECIPIENT/SHAREHOLDER, WHICH FOR THE SAKE OF ADMINISTRATIVE CONVENIENCE AND COST EFFECTIVENESS I S COLLECTED FROM THE PAYING COMPANY. IT WAS FURTHER SUBMITTED THAT T HE SITUATION IS ANALOGOUS TO FBT PAID ON ESOP ISSUED TO NON-RESIDEN T. VIDE CBDT CIRCULAR NO. 9 OF 2007 THE NON RESIDENT EMPLOYEE IS ALLOWED TO TAKE CREDIT, IN A FOREIGN COUNTRY, FOR THE FBT PAID BY T HE EMPLOYER ON ESOPS. IT WAS SUBMITTED THAT IN TERMS WITH RULED 8D ASSESSEE HAS COMPUTED DISALLOWANCE U/S 14A BY ARRIVING AT THE DI RECT EXPENDITURE BY CONSIDERING FEES ATTRIBUTABLE TO THOSE INVESTMEN TS WHICH HAVE YIELDED INCOME. AO REJECTING EACH OF THE ARGUMENTS OF THE ASSESSEE HELD THAT THE ASSESSEE HAVING NOT CORRECTLY COMPUTE D DISALLOWANCE U/S 14A, WORKED OUT THE DISALLOWANCE IN THE FOLLOWI NG MANNER AND ACCORDINGLY ADDED RS. 1,97,36,624/- TO THE INCOME O F THE IMPUGNED ASSESSMENT YEAR. UNDER RULE 8D(2)(I): AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME 2 ,04,06,834 UNDER RULE 8D(2)(II) : NI L UNDER RULE 8D(2)(III): 0.5% OF AVERAGE VALUE OF OPENING AND CLOSING VALUES OF TOTAL INVESTMENTS OPENING BAL. OF INVESTMENTS 56,28,38,038/- CLOSING BAL. OF INVESTMENTS 59,54,22,178/- AVERAGE OF THE ABOVE 57,91,30,108/- DISALLOWANCE @ 0.5% OF AVERAGE 28,95,650/- 5 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. TOTAL DISALLOWANCE U/S 14A 2,33,02,484 LESS: ADMITTED BY ASSESSEE HIMSELF 35,65,860 1,97,36,624 ========= 3.4 BEING AGGRIEVED OF THE ASSESSMENT ORDER, SO PA SSED, ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 4. BEFORE THE CIT(A), ASSESSEE RELYING UPON VARIOUS JUDICIAL PRECEDENTS CONTENDED THAT THE DISALLOWANCE MADE BY THE AO IS NOT IN ACCORDANCE WITH THE STATUTORY MANDATE. IT WAS SUBMI TTED THAT AS THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE TO EARN E XEMPT INCOME DISALLOWANCE U/S 14A IS NOT WARRANTED. IT WAS FURTH ER SUBMITTED THAT FUND MANAGEMENT FEES WAS NOT ENTIRELY TOWARDS EXEMP T INCOME. ASSESSEE ALSO EARNED LONG TERM CAPITAL GAIN WHICH W AS TAXABLE. IT WAS FURTHER SUBMITTED THAT ASSESSEE HAS MADE INVEST MENT IN EQUITY WHICH HAS NOT EARNED ANY EXEMPT INCOME. THEREFORE, THE AO SHOULD HAVE DETERMINED FUND MANAGEMENT FEES RELATING TO EQ UITY INVESTMENTS, WHICH ACTUALLY GAVE RISE TO EXEMPT INC OME. IT WAS FURTHER SUBMITTED THAT DIVIDEND INCOME RECEIVED BY THE ASSE SSEE CANNOT BE CONSIDERED TO BE EXEMPT FROM TAX AS THE COMPANIES H AVE PAID DIVIDEND DISTRIBUTION TAX U/S 115-O. THE CIT(A) AFT ER EXAMINING THE CONTENTIONS OF THE ASSESSEE IN THE CONTEXT OF PROVI SIONS CONTAINED U/S 14A READ WITH RULE 8D UPHELD THE ADDITION MADE BY T HE AO ON THE FOLLOWING FINDINGS: 7 FROM THE PERUSAL OF THE ASSESSMENT ORDER IT IS EV IDENT THAT THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE COMPUTED BY THE ASSESSEE. BASED ON THE ASSESSEES AGREEMENT WITH CAPL THE AO CORRECTLY COM PUTED THE DISALLOWANCE UNDER RULE 8D(2)(I). THE AO CAN AP PLY THE PROVISIONS OF RULE 14A EVEN IF NO EXPENDITURE IS IN CURRED TO EARN EXEMPT INCOME. THE AO WAS FAIR ENOUGH IN COMPUTING THE DISALLOWANCE U/S 14A SEPARATELY FOR EXEMPT INCOME A ND FOR TAXABLE INCOME. HE DISALLOWED ONLY THAT PART OF EXP ENDITURE WHICH PERTAINS TO EXEMPT INCOME. IT IS ALSO PERTINE NT TO MENTION THAT THE RULE 8D(2)(III) APPLIES EVEN IN CASES WHER E THERE IS NO EXEMPT INCOME AS THE FORMULA RELATES TO INVESTMENT AND NOT TO INCOME EARNED. MEANING THEREBY CERTAIN DISALLOWANCE HAS TO BE 6 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. MADE EVEN IN CASES WHERE THERE IS NO INCOME AT ALL AND ALSO IN CASES WHERE NO EXPENDITURE WAS ACTUALLY INCURRED. 7.1 IT IS ALSO PERTINENT TO MENTION HERE THAT THE H ONBLE MUMBAI HIGH COURT IN THE CASE OF GODREJ & BOYCE CO. LTD., VS. DCIT 328 ITR 81 HELD THAT THE PROVISIONS OF RULE 8D ARE PROSPECTIVE AND ARE APPLICABLE WITH EFFECT FROM AY 2008-09. IT IS ALSO PERTINENT TO MENTION THAT THE CIT(A)-V, HYD ERABAD FOR THE AY 2007-08 HAD DISMISSED THE APPEAL ON THE SAME ISSUE VIDE ORDER IN ITA NO. 175/DCIT-1(3)/CIT(A)-V/2012-1 3 DATED 14/02/2013. 7.2 IN VIEW OF THE ABOVE DISCUSSION THE DISALLOWANC E MADE BY THE AO OF RS. 1,97,36,624/- IS SUSTAINED, THEREFORE , THE GROUNDS OF THE APPEAL OF THE ASSESSEE ON THIS ISSUE ARE DIS MISSED. 5. THE LEARNED AR REITERATING THE CONTENTIONS RAISE D BEFORE THE REVENUE AUTHORITIES SUBMITTED THAT DISALLOWANCE MAD E BY THE AO BEING NOT IN ACCORDANCE WITH THE MECHANISM LAID DOW N IN RULE 8D(2) OF THE IT RULES, IT CANNOT BE SUSTAINED. IT WAS SUB MITTED BY THE LD. AR THAT THERE BEING NO EXPENDITURE INCURRED BY THE ASS ESSEE TOWARDS EARNING OF EXEMPT INCOME, PROVISIONS OF SECTION 14A ARE NOT ATTRACTED. IT WAS SUBMITTED THAT SINCE DIVIDEND INC OME EARNED BY THE ASSESSEE WAS SUBJECT TO DIVIDEND DISTRIBUTION ACT U /S 115-O OF THE ACT, IT CANNOT BE CONSIDERED AS EXEMPT INCOME SO AS TO BRING IT WITHIN THE AMBIT OF SECTION 14A OF THE ACT. CHALLENGING TH E COMPUTATION MADE BY THE AO, IT WAS SUBMITTED THAT AO HAS COMMIT TED FUNDAMENTAL ERROR BY DISALLOWING EXPENDITURE RELATING TO INVEST MENTS WHICH HAVE NOT YIELDED ANY INCOME DURING THE YEAR. IN THIS CON TEXT, LEARNED AR REFERRING TO RULE 8D(2)(I) OF THE RULES SUBMITTED T HAT DISALLOWANCE UNDER THE AFORESAID SUB-RULE MUST RELATE TO THE INC OME ACTUALLY EARNED WHICH IS EXEMPT. IT HAS NO RELATION TO THE I NVESTMENTS MADE BY ASSESSEE AS A WHOLE WHEREAS RULE 8D(2)(III) APPLIES TO THE WHOLE OF THE INVESTMENTS IRRESPECTIVE OF THE FACT WHETHER IN COME HAS BEEN EARNED OR NOT. IT WAS, THEREFORE, CONTENDED THAT WH ILE THE AO MAY BE CORRECT IN COMPUTING DISALLOWANCE UNDER RULE 8D(2)( III) BY CONSIDERING TOTAL INVESTMENTS MADE BY ASSESSEE IRRESPECTIVE OF THE FACT WHETHER THEY HAVE YIELDED INCOME OR NOT, BUT, WHILE COMPUTI NG DISALLOWANCE 7 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. UNDER RULE 8D(2)(I), AO SHOULD NOT HAVE CONSIDERED THE INVESTMENTS WHICH HAVE NOT YIELDED ANY INCOME. IT WAS, THUS, CO NTENDED BY LEARNED AR THAT COMPUTATION MADE BY AO BEING ERRONE OUS AND NOT IN ACCORDANCE WITH STATUTORY PROVISIONS, THE ADDITION MADE MAY BE DELETED AND THE DISALLOWANCE MADE BY THE ASSESSEE I TSELF BE ACCEPTED. 6. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THA T AO IS EMPOWERED TO DISALLOW EXPENDITURE RELATING TO EXEMP T INCOME U/S 14A OF THE ACT. RULE 8D ONLY PROVIDES THE MODE OF COMPU TATION OF DISALLOWANCE. THEREFORE, ASSESSEE CANNOT CLAIM THAT THERE SHOULD NOT BE ANY DISALLOWANCE OF EXPENDITURE U/S 14A READ WIT H RULE 8D. IT WAS SUBMITTED THAT THE BALANCE SHEET OF THE ASSESSEE SI NCE DID NOT PROVIDE CORRECT PICTURE, AO HAS UNDERTAKEN THE EXER CISE HIMSELF FOR QUANTIFYING DISALLOWANCE TO BE MADE U/S 14A READ WI TH RULE 8D(2)(I). IT WAS SUBMITTED BY THE LEARNED DR THAT NEITHER DUR ING THE ASSESSMENT PROCEEDING NOR BEFORE THE CIT(A), ASSESS EE HAS SUBSTANTIATED BY FURNISHING DETAILS WHAT AMOUNT REL ATES TO EARNING OF EXEMPT INCOME AND WHAT AMOUNT WAS TOWARDS EARNING O F TAXABLE INCOME. THEREFORE, IN ABSENCE OF ANY DETAILS BY THE ASSESSEE, IT CANNOT BE SAID THAT THE COMPUTATION MADE BY THE AO IS INCORRECT. 7. WE HAVE HEARD PARTIES AND PERUSED MATERIALS ON R ECORD 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 EXEMPT INCOME AND FURTHER CONTENTION THAT DIVIDEND INCOME CANNOT BE CONSIDERED AS EXEMPT INCOME AS IT IS SUBJECTED TO DIVIDEND DISTRI BUTION TAX U/S 115J AND 115-O OF THE ACT, IN OUR VIEW, IT IS NOT ACCEP TABLE SIMPLY BECAUSE OF THE FACT THAT THE ASSESSEE ITSELF RECOGNIZING TH E FACT THAT IT HAS INCURRED EXPENDITURE TOWARDS EARNING OF EXEMPT INCO ME HAS DISALLOWED EXPENDITURE TO THE TUNE OF RS. 35,65,860 /- U/S 14A READ WITH RULE 8D(2) OF THE ACT. THEREFORE, ASSESSEES C HALLENGE WITH 8 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. REGARD TO APPLICABILITY OF SECTION 14A READ WITH RU LE 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, AT THE STAG E OF ASSESSMENT PROCEEDING ITSELF ASSESSEE HAS STATED THAT DISALLOW ANCE UNDER RULE 8D(2)(I) SHOULD BE ONLY IN RELATION TO THE INVESTME NT, WHICH HAS YIELDED ANY EXEMPT INCOME IN THE RELEVANT FY. EXPEN DITURE CANNOT BE IN RELATION TO THE TOTAL INVESTMENT IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARNED OR NOT DURING THE YEAR. BEFORE GOI NG INTO THE MERITS OF ASSESSEES CONTENTIONS, IT IS DEEMED NECESSARY T O LOOK INTO THE PROVISIONS CONTAINED UNDER RULE 8D(2) WHICH IS RELE VANT FOR OUR PURPOSE. THE SAME IS EXTRACTED HEREUNDER FOR THE SA KE 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 I NCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; ( II ) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPEND ITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTR IBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, 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 ; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHI CH 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 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 AVERA GE 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. 9 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. (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 EX PENDITURE 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 WHIC H IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. T HE THIRD PART AS PROVIDED UNDER SUB-RULE 8D(2)(III) IS AN ARTIFICIAL FIGURE I.E. ONE-HALF PER CENT OF THE AVERAGE INVESTMENT, INCOME FROM WHI CH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. AGGREGATE OF THESE THREE COMPONENTS WOULD CON STITUTE EXPENDITURE IN RELATION TO EXEMPT INCOME AND WOULD BE DISALLOWED U/S 14A OF THE ACT. THEREFORE, IF WE EXAMINE THE FACTS OF THE PRESENT CASE IN THE CONTEXT OF THE AFORESAID STATUTORY PROV ISION, 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 REGA RD IS ACTUAL EARNING OR RECEIPT OF INCOME WILL NOT BE A CONDITIO N FOR DISALLOWANCE OF SUCH EXPENDITURE UNDER THE PROVISIONS OF SECTION 14 A AS IT SPEAKS ABOUT EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HE WAS OF THE VIEW THAT EVEN IF N O INCOME WAS RECEIVED, EXPENDITURE INCURRED CAN BE DISALLOWED U/ S 14A. HOWEVER, RULE 8D(2)(I) SPEAKS OF EXPENDITURE DIRECTLY RELATI NG TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. THE TERM TOT AL INCOME HAS NOT BEEN DEFINED EITHER U/S 14A OR UNDER RULE 8D. THERE FORE, ONE HAS TO LOOK TO THE DEFINITION OF TOTAL INCOME AS APPEARI NG IN SECTION 2(45) OF THE ACT, WHICH READS AS UNDER: 10 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. '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. 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 ARIS E 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 INCOME 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 FROM 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 ARIS E 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 DEEMED 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 READING OF SECTION 5 OF THE IT ACT, IT WOULD BE EVIDENT THAT A S PER THIS SECTION TOTAL INCOME IS OF ANY PREVIOUS YEAR AND WHICH IN CLUDES INCOME FROM 11 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. WHATEVER SOURCE DERIVED WHICH IS RECEIVED OR DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSO N OR ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISES TO HIM IN I NDIA DURING SUCH YEAR OR ACCRUES OR ARISE TO HIM OUTSIDE INDIA DURIN G SUCH YEAR. CONSIDERED IN AFORESAID CONTEXT, EXPRESSION TOTAL INCOME REFERRED TO IN RULE 8D(2)(I) CANNOT BE IN ABSTRACT. IT MUST REL ATE TO A PREVIOUS YEAR INCOME OF WHICH IS SOUGHT TO BE ASSESSED. THE REFORE, AS A NATURAL COROLLARY IT FOLLOWS THAT ONLY EXPENDITURE DIRECTLY RELATING TO INCOME WHICH IS EARNED EITHER ON RECEIPT BASIS OR O N ACCRUAL BASIS AND WHICH DOES NOT FORM PART OF TOTAL INCOME OF A P ARTICULAR ASSESSMENT 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 READING OF CLAUSE (I) AND CLAUSE (III ) OF RULE 8D(2), THE DIFFERENCE BETWEEN THEM IS CLEARLY DISCERNIBLE. WH ILE CLAUSE (I) SPEAKS OF DISALLOWANCE OF EXPENDITURE DIRECTLY RELA TING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, CLAUSE (I II) 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 AS SESSEE ON FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR. THEREFORE, W HILE DISALLOWANCE OF EXPENDITURE UNDER CLAUSE (I) IS RELATED TO INCOM E EARNED WHICH DOES NOT FORM PART OF TOTAL INCOME, CLAUSE (III) R ELATES 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 I NTENT BECOMES CLEAR THAT THE DISALLOWANCE OF EXPENDITURE CONTEMPL ATED UNDER SUB- RULE(I) MUST RELATE TO THE INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME OF THAT YEAR. THEREFORE, INVESTMENT, WHICH HAS NOT RESULTED IN ANY INCOME CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE UNDER RULE 8D(2)(I). HOWEVER, WHILE COMPUTING DISA LLOWANCE UNDER RULE 8D(2)(III), THE AVERAGE OF THE TOTAL INVESTMEN T OF THE ASSESSEE AS APPEARING IN THE BALANCE SHEET ON THE FIRST DAY AND LAST DAY OF THE YEAR IRRESPECTIVE OF THE FACT WHETHER IT HAS YIELDE D INCOME OR NOT CAN BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE. THE USE OF THE WORDS 12 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. 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 BEEN 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 USED 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 DISAL LOW EXPENDITURE RELATING TO INVESTMENT WHICH HAS NOT YIELDED ANY EX EMPT INCOME DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE. THEREFORE, WE DIRECT THE AO TO DISALLOW TH E EXPENDITURE RELATING TO INVESTMENTS RESULTING IN INCOME EARNED/ ACCRUED WHICH DOES NOT FORM PART OF TOTAL INCOME OF THE IMPUGNED ASSESSMENT YEAR. HOWEVER, SO FAR AS AOS COMPUTATION OF EXPENDITURE TO BE DISALLOWED UNDER RULE 8D(2)(III), THE SAME IN OUR VIEW, IS IN CONFORMITY WITH RULE 8D(2)(III), HENCE, DO NOT CALL FOR ANY INTERFERENCE . 8. IN GROUND NO. 6 ASSESSEE HAS CHALLENGED LEVY OF INTEREST U/S 234B AND 234D OF THE ACT. AT THE TIME OF HEARING LD . AR HAS NOT ARGUED THIS GROUND. EVEN OTHERWISE ALSO, LEVY OF IN TEREST U/S 234B AND 234D IS CONSEQUENTIAL TO INCOME FINALLY TO BE D ETERMINED BY AO. HENCE, THERE IS NO NECESSITY TO ADJUDICATE THIS GRO UND AT PRESENT. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 27/06/2014 SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 27 TH JUNE, 2014 KV 13 ITA NO. 1743/H/13 BELLWETHER MICROFINANCE FUND PVT. LTD. COPY TO:- 1) BELLWETHER MICROFINANCE FUND PVT. LTD., 8-2-596/ 5/B/1/D, ROAD NO. 10, BANJARA HILLS, HYDERABAD 500 034 2) ITO, WARD 1(1), HYDERABAD. 3) CIT(A)-II, HYDERABAD 4) CIT-I, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.