M/s Srinivasa Cystine Private Limited, Hyderabad V. ITO, Ward-3(1), Hyderabad, Hyderabad

ITA 1846/HYD/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6251 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 20-12-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 04-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Assessee Lawyers: C.V. NARASIMHAM
• Keywords: Business expenditure; Earning of tax free income; Rule 8D
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 14A; 115JB; 80IA; 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1846/HYD/2014 ASSESSMENT YEAR: 2010-11 SRINIVASA CYSTINE PVT. LTD., HYDERABAD. PAN AADCS 4063R VS. INCOME TAX OFFICER, WARD 3(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.V. NARASIMHAM REVENUE BY : SMT. SUMAN MALIK DATE OF HEARING : 03-01-2017 DATE OF PRONOUNCEMENT : 18-01-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)- IV, HYDERABAD, DATED 15/09/2014 FOR AY 2 010-11. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY FILED ITS RETURN OF INCOME ON 29/09/2010 ADMITTING A TOTAL INCOME OF RS. NIL AFTER CLAIMING A DEDUCTION OF RS. 41,12,784 /- U/S 80IA AND BOOK PROFIT U/S 115JB AT RS. 5,38,964/-. AO DISALLO WED THE DEDUCTION U/S 80IA OF RS. 41,12,784/- AND RS. 21,97,594/- U/S 14A AND COMPUTED THE TOTAL INCOME AT RS. 63,10,378/-. 3. AS REGARDS THE CLAIM OF DEDUCTION U/S 80IA(5) OF THE ACT, THE ASSESSEE HAD STARTED OPERATION OF WINDMILLS, PROFIT S FROM WHICH WERE ELIGIBLE FOR DEDUCTION U/S 80IA FROM AY 2006-07. HO WEVER, DEDUCTION U/S 80IA WAS CLAIMED FOR THE FIRST TIME IN AY UNDER CONSIDERATION. THE ASSESSEE FURNISHED THE FOLLOWING DETAILS OF CARRIE D FORWARD LOSS: 2 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. AY LOSS B/F PROFIT/LOSS OF YEAR LOSS C/F 2006-07 (5,41,25,245) (5,41,25,245) 2007-08 (5,41,25,245) (50,92,470) (5,92,17,715) 2008-09 (5,92,17,715) 30,04,809 (5,62,12,906) 2009-10 (5,62,12,906) 64,42,419 (4,97,70,487) 2010-11 (4,97,70,487) 73,68,143 (4,24,02,344) THE AR OF THE ASSESSEE RELIED ON THE DECISION IN TH E CASE OF VELAYUDHASWAMY SPINNING MILLS VS. ACIT, 38 DTR 57 ( MAD.) 3.1 THE AO HELD THAT IF THE BUSINESS OF OPERATION O F WINDMILLS WAS TO BE CONSIDERED AS THE ONLY SOURCE OF INCOME OF TH E ASSESSEE, THE RESULT WOULD BE AS ABOVE AND THE ASSESSEE WOULD NOT HAVE ANY PROFIT FROM THE WINDMILL BUSINESS TO ENABLE IT TO CLAIM DE DUCTION U/S 80IA. THE AO RELYING ON THE DECISION OF THE COORDINATE BE NCH OF HYDERABAD IN THE CASE OF HYDERABAD CHEMICALS SUPPLIES LTD. VS . ACIT, ITA NO. 352/HYD/2005, HELD THAT THE ASSESSEE DID NOT HAVE A NY PROFITS DURING THE YEAR FOR DEDUCTION U/S 80IA AND DISALLOWED THE CLAIM OF THE ASSESSEE. 4. ON AN APPEAL BEFORE THE CIT(A), THE AR SUBMITTED THAT THE CLAIM OF THE ASSESSEE WAS SUPPORTED BY THE DECISION S IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS PVT. LTD. AS WELL AS CIT VS. ANIL H LAD, TS-140-HC-KAR[2014]. THE AR ALSO SUBMITTED THA T THESE DECISIONS HAD BEEN RENDERED AFTER CONSIDERING THE R ELEVANT STATUTORY PROVISIONS AND THAT THE DECISION OF THE HIGH COURT SHOULD PREVAIL OVER THE DECISION OF THE JURISDICTIONAL TRIBUNAL. 5. THE CIT(A) REJECTED THE SUBMISSIONS OF THE ASSES SEE AND CONFIRMED THE DISALLOWANCE MADE BY THE AO U/S 80IA OF THE ACT. 6. LD. AR SUBMITTED THAT THE ISSUE IN DISPUTE IS SQ UARELY COVERED BY THE DECISION OF THE COORDINATE BENCH OF ITAT HYD ERABAD IN THE CASE OF M/S HYDERABAD CHEMICAL PRODUCTS PVT. LTD., VS. ACIT IN ITA NO. 1033/HYD/2015, DATED 10/06/2016 FOR AY 2008-09, A COPY OF WHICH HAS BEEN FILED ON RECORD. 3 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. 7. LD. DR NEITHER CONTROVERTED THE SUBMISSION OF TH E AR OF THE ASSESSEE NOR BROUGHT ANY CONTRARY DECISION ON THIS ISSUE. 8. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. AS SUBMITTED BY THE LD. AR OF THE ASSESS EE, THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF THE COORDINATE BENCH OF HYDERABAD IN THE CASE OF M/S HYDERABAD CHEMICAL PRO DUCTS PVT. LTD. (SUPRA), WHEREIN THE COORDINATE BENCH HAS HELD AS U NDER: HAVING REGARD TO THE RIVAL SUBMISSIONS AND THE MAT ERIAL ON RECORD, WE FIND IT NECESSARY TO REPRODUCE THE RELEVANT PROVISION OF THE ACT FOR PRO PER APPRECIATION AND UNDERSTANDING OF THE PROVISION OF LAW. 'DEDUCTIONS IN RESPECT OF PROFITS AND GAINS FROM IN DUSTRIAL UNDERTAKINGS OR ENTERPRISES ENGAGED IN INFRASTRUCTURE DEVELOPMENT, ETC. 80-IA.( 1) TO (4) ....... (5) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT, THE PROFITS AND GAINS OF AN ELIGIBLE BUSINESS TO WHICH THE PROVISIO NS OF SUB-SECTION (1) APPLY SHALL, FOR THE PURPOSES OF DETERMINING THE QUANTUM OF DEDUCTION UN DER THAT SUB-SECTION FOR THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR OR ANY SUBSEQUENT ASSESSMENT YEAR, BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS WERE THE O NLY SOURCE OF INCOME OF THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO THE INITIAL ASSESSMEN T YEAR AND TO EVERY SUBSEQUENT ASSESSMENT YEAR UP TO AND INCLUDING THE ASSESSMENT YEAR FOR WH ICH THE DETERMINATION IS TO BE MADE. (6) ......' FROM A LITERAL READING OF THE ABOVE PROVISION, IT I S SEEN THAT THE PROFITS AND GAINS FROM THE BUSINESS OF THE ASSESSEE SHALL BE COMPUTED ON A STA ND ALONE BASIS FROM THE INITIAL ASSESSMENT YEAR OR ANY SUBSEQUENT ASSESSMENT YEAR. THE INITIAL ASSESSMENT YEAR HAS BEEN UNDERSTOOD BY THE ASSESSING OFFICER TO BE THE YEAR OF COMMENCEMEN T OF OPERATION OF THE UNIT BY THE ASSESSEE, WHEREAS THE CBDT VIDE CIRCULAR DATED 15.2 .2016 HAS CLARIFIED THE MATTER AS UNDER- 'SUBJECT: CLARIFICATION OF THE TERM 'INITIAL ASSESS MENT YEAR IN SECTION, 80IA (5) OF THE INCOME- TAX ACT , 1961 SECTION 801A OF THE INCOME-TAX ACT, I961 ('ACT'}, AS SUBSTITUTED BY THE FINANCE ACT , 1999 WITH EFFECT FROM 01.04.2000, PROVIDES FOR DE DUCTION OF AN AMOUNT EQUAL TO 100 % OF THE PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR ENTERPRISE FROM AN ELIGIBLE BUSINESS (AS REFERRED TO IN SUB-SECTION (4) OF THAT SECTION) IN ACCORDANCE WITH THE PRESCRIBED PROVISIONS. SUB-SECTION (2) OF SECTION 801A FURTHER PROVIDES THAT THE AFORESAID DEDUCTION CAN BE CLAIMED BY THE ASSESSEE, AT HIS OPTION, FOR ANY TEN CONSECU TIVE ASSESSMENT YEARS OUT OF FIFTEEN YEARS (TWENTY YEARS IN CERTAIN CASES) BEGINNING FROM THE YEAR IN WHICH THE UNDERTAKING COMMENCES OPERATION, BEGINS DEVELOPMENT OR STARTS P ROVIDING SERVICES ETC. AS STIPULATED THEREIN. SUB-SECTION (5) OF SECTION 801A FURTHER PROVIDES AS UNDER 'NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS A CT, THE PROFITS AND GAINS OF AN ELIGIBLE BUSINESS TO WHICH THE PROVISIONS OF SUB-SECTION (1) APPLY SHALL, FOR THE PURPOSES OF DETERMINING THE QUANTUM OF DEDUCTION UNDER THAT SUB -SECTION FOR THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR OR ANY SUBSEQUENT ASSESSMENT YEAR, BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS WERE THE ONLY SOURCE OF INCOME OF THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO THE INITIAL ASSESSMEN T YEAR AND TO EVERY SUBSEQUENT ASSESSMENT YEAR UP TO AND INCLUDING THE ASSESSMENT YEAR FOR WH ICH THE DETERMINATION IS TO BE MADE'. IN THE ABOVE SUB-SECTION, WHICH PRESCRIBES THE MANN ER OF DETERMINING THE QUANTUM OF DEDUCTION, A REFERENCE HAS BEEN MADE TO THE TERM 'I NITIAL ASSESSMENT YEAR'. IT HAS BEEN REPRESENTED THAT SOME ASSESSING OFFICERS ARE INTERP RETING THE TERM 'INITIAL ASSESSMENT YEAR' AS THE YEAR IN WHICH THE ELIGIBLE BUSINESS/ MANUFAC TURING ACTIVITY HAD COMMENCED AND ARE CONSIDERING SUCH FIRST YEAR OF COMMENCEMENT/OPERATI ON ETC. ITSELF AS THE FIRST YEAR FOR GRANTING DEDUCTION, IGNORING THE CLEAR MANDATE PROV IDED UNDER SUB-SECTION (2) WHICH ALLOWS 4 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. A CHOICE TO THE ASSESSEE FOR DECIDING THE YEAR FROM WHICH IT DESIRES TO CLAIM DEDUCTION OUT OF THE APPLICABLE SLAB OF FIFTEEN (OR TWENTY) YEARS. THE MATTER HAS BEEN EXAMINED BY THE BOARD. IT IS AB UNDANTLY CLEAR FROM SUB-SECTION (2) THAT AN ASSESSEE WHO IS ELIGIBLE TO CLAIM DEDUCTION U/S MA HAS THE OPTION TO CHOOSE THE INITIAL/ FIRST YEAR FROM WHICH IT MAY DESIRE THE CLAIM OF DE DUCTION FOR TEN CONSECUTIVE YEARS, OUT OF A SLAB OF FIFTEEN ( OR TWENTY) YEARS, AS PRESCRIBED U NDER THAT SUB-SECTION. IT IS HEREBY CLARIFIED THAT ONCE SUCH INITIAL ASSESSMENT YEAR HAS BEEN OPT ED FOR BY THE ASSESSEE, HE SHALL BE ENTITLED TO CLAIM DEDUCTION U/S 801A FOR TEN CONSECUTIVE YEA RS BEGINNING FROM THE YEAR IN RESPECT OF WHICH HE HAS EXERCISED SUCH OPTION SUBJECT TO THE F ULFILLMENT OF CONDITIONS PRESCRIBED IN THE SECTION. HENCE, THE TERM 'INITIAL ASSESSMENT YEAR' WO ULD MEAN THE FIRST YEAR OPTED FOR BY THE ASSESSEE FOR CLAIMING DEDUCTION U/S 801A. HOWEVER, THE TOTAL NUMBER OF YEARS FOR CLAIMING DEDUCTION SHOULD NOT TRANSGRESS THE PRESCRIBED SLAB OF FIFTEEN OR TWENTY YEARS, AS THE CASE MAY BE AND THE PERIOD OF CLAIM SHOULD BE AVAILED IN CONTINUITY. THE ASSESSING OFFICERS ARE, THEREFORE, DIRECTED TO ALLOW DEDUCTION U/S 801A IN ACCORDANCE WITH THIS CLARIFICATION AND AFTER BEING SATISFIED T HAT ALL THE PRESCRIBED CONDITIONS APPLICABLE IN A PARTICULAR CASE ARE DULY SATISFIED. PENDING LI TIGATION ON ALLOWABILITY OF DEDUCTION U/S 80 IA SHALL ALSO NOT BE PURSUED TO THE EXTENT IT RELAT ES TO INTERPRETING 'INITIAL ASSESSMENT YEAR' AS MENTIONED IN SUB-SECTION (5) OF THAT SECTION FOR WH ICH THE STANDING COUNSELS/DRS BE SUITABLY INSTRUCTED.' FROM A READING OF THE ABOVE CIRCULAR, IT IS CLEAR T HAT THE ASSESSEE WHO IS ELIGIBLE TO CLAIM DEDUCTION UNDER S.80IA HAS BEEN GIVEN AN OPTION TO CHOOSE INITIAL/FIRST YEAR FROM WHICH IT MAY DESIRE TO CLAIM THE DEDUCTION FOR TEN CONSECUTI VE YEARS OUT OF THE SLAB OF 15 OR 20 YEARS AS PRESCRIBED UNDER THE ABOVE SUB-SECTION. THE TERM 'INITIAL ASSESSMENT YEAR' HAS BEEN HELD TO MEAN THE FIRST YEAR OPTED TO BY THE ASSESSEE FOR CLAIMING DEDUCTION UNDER S.80IA OF THE ACT. THUS, IT IS CLEAR THAT THE INITIAL ASSESSMENT YEAR IS NOT THE YEAR OF OPERATION OR COMMENCEMENT OF BUSINESS, AS INTERPRETED BY THE ASS ESSING OFFICER, BUT IT IS THE FIRST YEAR IN WHICH THE ASSESSEE HAS OPTED TO CLAIM THE DEDUCTION UNDER S.80IA. IN VIEW OF THIS CLARIFICATION OF THE BOARD, WHICH CLINCHES THE ISSU E IN FAVOUR OF THE ASSESSEE, AND IS BINDING ON THE REVENUE AUTHORITIES, WE ACCEPT THE CONTENTIO NS OF THE ASSESSEE IN THIS BEHALF, AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE, AFTER VERIFYING THE RECORDS AS TO THE INITIAL ASSESSMENT YEAR IN WHICH THE ASSESSE E FOR THE FIRST TIME HAS CLAIMED THE DEDUCTION UNDER S.80IA AND CONSIDER THE INCOME OF THE ASSESSEE FROM THE ELIGIBLE UNIT FROM THAT YEAR ALONE ON A STAND ALONE BASIS. ASSESSEE'S G ROUNDS ON THIS ISSUE ARE ACCORDINGLY ALLOWED. AS THE ISSUE UNDER CONSIDERATION IS MATERIALLY IDEN TICAL TO THAT OF THE SAID CASE, WE DIRECT THE AO TO ADJUDICATE THE ISSUE FOLLOWING THE DIRECTIONS GIVEN BY THE COORDINATE BENCH IN THE SAI D CASE. 9. AS REGARDS THE ISSUE RELATES TO DISALLOWANCE OF RS. 21,97,594/- U/S 14A, THE AO COMPUTED THE SAME AS UNDER: A. INTEREST EXPENDITURE (EXCLUDING THE INTEREST ON TERM LOAN RELATABLE TO SETTING UP OF W INDMILLS) RS. 24,04,535 B. AVERAGE OF VALUE OF INVESTMENTS RS.1 8,98,72,832 C. AVERAGE OF TOTAL ASSETS RS.36,57,62, 756 (I) AXB/C RS. 23,48,230 (II) % OF B RS. 9,49,364 TOTAL DISALLOWANCE U/S 14A RS. 21,97,594 ======== 5 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. 10. BEFORE THE CIT(A), THE AR OF THE ASSESSEE SUBM ITTED THAT THERE WAS NO NEXUS BETWEEN THE BORROWED FUNDS AND THE INV ESTMENTS MADE AND THAT ALL THE INVESTMENTS HAD BEEN MADE IN THE P RECEDING YEARS OUT OF THE OWN AND SURPLUS FUNDS OF THE ASSESSEE. T HE AR RELIED ON THE FOLLOWING DECISIONS: 1. CIT VS. HERO CYCLES [2011] 323 ITR 518 (P&H) 2. CIT VS. RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM.) 3. CIT VS. LUBI SUBMERSIBLES LTD. ACAJ VOL. 35 PART 5 AUG 2011, P.319 4. CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD. [2010] 326 ITR 1(SC). 10. THE AR ALSO SUBMITTED THAT SOME OF THE INVESTME NTS WERE IN COMPANIES ENGAGED IN THE BUSINESS OF HYDEL AND GAS BASED POWER GENERATION IN WHICH THE ASSESSEE HAD INVESTED FOR T HE PURPOSE OF ADVANCEMENT OF ITS BUSINESS OUT OF COMMERCIAL EXPED IENCY AND THAT FOLLOWING THE DECISION IN THE CASE OF SA BUILDERS V S. CIT [20070 288 ITR 1 (SC), THE EXPENDITURE ON THE INVESTMENT, IF A NY, COULD NOT BE DISALLOWED. 11. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) OBSERVED THAT THE ISSUE IN THE PRESENT CASE IS NOT WHETHER THE INVESTMENTS WERE FOR THE PURPOSE OF BUSINESS AND, T HEREFORE, WHETHER THE EXPENSES INCURRED ON THE INVESTMENT ALLOWABLE A S A BUSINESS EXPENDITURE BUT WHETHER ANY EXPENSES WERE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME EARNED BY IT. THE FACT S AND THE RATIO OF THE DECISION IN THE CASE OF SA BUILDERS, BEING ENTI RELY DIFFERENT FROM THE FACTS IN THE PRESENT APPEAL, THIS DECISION DOES NOT COME TO THE RESCUE OF THE ASSESSEE. CONSEQUENTLY, THE DISTINCTI ON SOUGHT TO BE DRAWN BY THE ASSESSEE BETWEEN INVESTMENTS MADE AS I NVESTMENTS PER SE AND INVESTMENTS MADE OUT OF COMMERCIAL EXPED IENCY IS OF NO AVAIL FOR THE PURPOSE OF SECTION 14A. THE CIT(A) F URTHER OBSERVED THAT THE ASSESSEE HAS ALSO CLAIMED TO HAVE MADE THE INVESTMENTS OUT OF ITS OWN AND SURPLUS FUNDS. THE AR HAS SUBMITTED THAT WHILE THE 6 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. INVESTMENTS HAD INCREASED FROM RS. 18.81 CRORES AS ON 31/03/2009 TO RS. 19.16 CRORES AS ON 31/03/2010, THE SHARE CAPITA L AS ON 01/04/2009 WAS RS. 29.12. CRORES. 11.1 THE CIT(A) HELD THAT IT IS CLEAR FROM THE FACT S AS NARRATED ABOVE THAT THE ASSESSEE HAD SUFFICIENT FUNDS OF ITS OWN T O ENABLE TO MAKE THE INVESTMENTS WITHOUT RECOURSE TO THE BORROWED FU NDS. THERE IS ALSO NO SPECIFIC EVIDENCE ON RECORD THAT THE ASSESSEE HA D UTILIZED THE BORROWED FUNDS TO MAKE THE INVESTMENT IN SHARES. AS A RESULT, NO NEXUS HAS BEEN ESTABLISHED BETWEEN THE INTEREST BEA RING LOANS AND THESE INVESTMENTS TO ENABLE A CONCLUSION THAT INTER EST EXPENDITURE HAS BEEN INCURRED FOR THESE INVESTMENTS. HE, THEREF ORE, DIRECTED THE AO TO DELETE THE INTEREST EXPENSES OF RS. 12,48,230 /-. 11.2 THE CIT(A) OBSERVED THAT THE DISALLOWANCE U/S 14A IN THE ASSESSEES CASE HAS TWO COMPONENTS: RS. 12,48,230/- U/S 8D(2)(II) AND RS. 9,49,364/- U/R 8D(2)(III). THE TWO COMPONEN TS STAND ON DIFFERENT FOOTINGS AND NEED TO BE CONSIDERED SEPARA TELY. A DISALLOWANCE U/R 8D(2)(II) REQUIRES THAT A NEXUS BE ESTABLISHED BETWEEN THE INTEREST EXPENDITURE AND THE INVESTMENT S LEADING TO EXEMPT INCOMES. THE DISALLOWANCE U/R 8D(2)(III) DOE S NOT, HOWEVER, REQUIRE THE ESTABLISHMENT OF ANY SUCH NEXUS. THE DI SALLOWANCE U/R8D(2)(III) IS DEFINED IN TERMS OF PROPORTION OF THE INVESTMENT AND NOT WITH REFERENCE TO THE QUANTUM OR NATURE OF EXPE NSES INCURRED BY AN ASSESSEE. HE, THEREFORE, CONFIRMED THE DISALLOWA NCE OF RS. 9,49,364/- U/R 8D(2)(III) ON THE GROUND THAT THE SU BMISSIONS OF THE AR AND THE DECISIONS RELIED UPON BY HIM ARE OF NO RELE VANCE. 12. AGGRIEVED WITH THE CIT(A)S ORDER THE ASSESSEE IS IN APPEAL BEFORE US. 13. LD. AR SUBMITTED THAT THE ASSESSEE HAS NOT INCU RRED ANY EXPENDITURE IN EARNING THE EXEMPT INCOME. IN SUPPOR T OF THIS 7 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. PROPOSITION, HE BROUGHT TO OUR KNOWLEDGE THE PERSO NNEL EXPENSES OF THE ASSESSEE IN THAT YEAR WAS RS. 6,21,876/- (REFER PAGE 10 OF PAPER BOOK) FOR THE TOTAL BUSINESS. THE ASSESSEE HAS AN O PERATING INCOME OF RS. 121,61,332/- DURING THAT PERIOD AND THE EXEM PT INCOME IS ONLY RS. 9,05,399/-. HE FURTHER SUBMITTED THAT AS PER SE CTION 14A, AO SHOULD FIRST DETERMINE THE RELEVANT EXPENDITURE IN RELATION TO THE EXEMPT INCOME. THE RULE 8D CANNOT BE APPLIED WITHO UT CONSIDERING THE RELEVANT EXPENDITURE RELATING TO THE EXEMPT IN COME. FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF THE HONB LE DELHI HIGH COURT IN THE CASE MAXOPP INVESTMENTS LTD., VS. CIT, [2012 ] 347 ITR 272 (DELHI), WHEREIN THE HONBLE COURT HAS OBSERVED AS UNDER: 28. IT WAS CONTENDED THAT UNLESS AND UNTIL THERE WAS AC TUAL EXPENDITURE FOR EARNING THE EXEMPTED INCOME, THERE COULD NOT BE ANY DISALLOWANCE UNDER S. 14A. WHILE WE AGREE THAT THE EXPRESSION 'EXPENDITUR E INCURRED' REFERS TO ACTUAL EXPENDITURE AND NOT TO SOME IMAGINED EXPENDI TURE WE WOULD LIKE TO MAKE IT CLEAR THAT THE ACTUAL EXPENDITURE THAT IS IN CONTEMPLATION UNDER S. 14A(1) OF THE SAID ACT IS THE ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTION WITH OR PERTAINING TO EXEMPT INCOME. THE COROLLARY TO THIS IS THAT IF NO EXPENDITURE IS INCURRED IN RELATION TO THE EXEMP T INCOME, NO DISALLOWANCE CAN BE MADE UNDER S. 14A OF THE SAID ACT. SCOPE OF SUB-SS. (2) AND (3) OF S. 14A 29. SUB-S. (2) OF S. 14A OF THE SAID ACT PROVIDES THE M ANNER IN WHICH THE AO IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEV ER, IF WE EXAMINE THE PROVISION CAREFULLY, WE WOULD FIND THAT THE AO IS R EQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE AO, HAVING R EGARD 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 INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WO RDS, THE REQUIREMENT OF THE AO EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY I F THE AO RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THEREFORE, THE CONDITI ON PRECEDENT FOR THE AO ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS THAT THE AO MUST RECOR D THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. SUB-S. (3) IS NOTHING BUT AN OFFSHOOT OF SUB-S. (2) OF S. 14A. SUB-S. (3) APPLIES TO CASES WHERE THE ASSESSEE CLAI MS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-S. ( 2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDI TURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-S. (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THA T NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASE S, THE AO, IF SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RES PECT OF SUCH EXPENDITURE OR 8 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK U PON A DETERMINATION OF THE AMOUNT OF EXPENDITURE IN ACCORDANCE WITH ANY PR ESCRIBED METHOD, AS MENTIONED IN SUB-S. (2) OF S. 14A OF THE SAID ACT. IT IS ONLY IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE AO GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCORDANCE WITH THE PRESCRIBED METH OD. THE PRESCRIBED METHOD BEING THE METHOD STIPULATED IN R. 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPEND ITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, T HE AO WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. 13.1 HE FURTHER SUBMITTED THAT RULE 8D(2)(III) HAS TO BE APPLIED TO THE INVESTMENT WHICH HAD GENERATED INCOME AND NOT ON TH E WHOLE INVESTMENT. HE RELIED ON THE DECISION OF ITAT, KOLK OTTA BENCH IN THE CASE OF RANIGANJ CO-OPERATIVE BANK LTD., VS. DCIT, [2016] 73 TAXMANN.COM 90 (KOL.) WHEREIN THE BENCH HAS OBSERVE D AS UNDER: 18. IN THE PRESENT CASE, THE ASSESSEE HAS TAKEN A STAND THAT NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME AND THEREFORE NO EXP ENDITURE CAN BE DISALLOWED AS EXPENDITURE INCURRED IN EARNING EXEMPT DIVIDEND INC OME. AS PER THE PROVISIONS OF SEC.14A(3) OF THE ACT, EVEN IN SUCH A SITUATION, TH E AO HAS TO FOLLOW THE MANDATE LAID DOWN IN SEC.14A(2) OF THE ACT, I.E., HE HAS TO EXAM INE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE BOOKS OF ACCOUNTS OF THE ASSESSEE. IF THE AO DOES NOT AGREE WITH THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE, THEN IS IT MANDATORY FOR HIM TO RESORT TO RULE 8D OF THE INCOM E TAX RULES, 1962 TO QUANTIFY THE DISALLOWANCE U/S. 14A OF THE ACT? A PLAIN READING O F SEC. 14A(2) OF THE ACT SHOWS THAT THE LEGISLATURE HAS USED THE WORDS 'THE ASSESSING O FFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D AS MAY BE PRESCRIBED' AND THEREFORE THE AO HAS TO RESORT TO THE PROVISIONS OF RULE 8D OF THE RULES, IF THE CLAIM OF THE ASSESSEE REGARDING EXPENDITURE INCURRED IN EARN ING EXEMPT INCOME IS NOT ACCEPTED BY THE AO. IF SUCH AN INTERPRETATION IS ADOPTED THA N THAT WOULD RESULT ABSURD RESULTS, AS IN THE PRESENT CASE, THE EXEMPT INCOME IS A SUM OF RS. 5,60,301/- AND THE DISALLOWANCE U/S. 14A OF THE ACT IS A SUM OF RS. 6,48,411/-. WE ARE OF THE VIEW THAT EVEN IN A CASE WHERE THE AO REJECTS THE CLAIM OF THE ASSESSEE THAT NO EXPENSES WERE INCURRED TO EARN THE EXEMPT INCOME, IT IS NOT MANDATORY FOR HIM TO I NVOKE THE METHOD OF CALCULATION PRESCRIBED BY RULE 8D(2) OF THE RULES AND IS FREE T O MAKE THE DISALLOWANCE ON ANY REASONABLE BASIS. IF RULE 8D OF THE RULES IS BLINDL Y BY THE AO SOMETIMES IT WILL LEAD TO ABSURD RESULTS. THE AO EXAMINING THE CLAIM OF THE A SSESSEE REGARDING EXPENDITURE INCURRED IN EARNING THE EXEMPT INCOME, IS BOUND TO TAKE NOTE OFSUCH ABSURDITIES AND REFRAIN FROM INVOKING THE METHOD OF DISALLOWANCE OF EXPENSES AS PRESCRIBED BY RULE 8D(2) OF THE RULES. IT IS FOR THIS REASON THAT THE SECOND PART OF SEC. 14A(2) OF THE ACT PROVIDES AS FOLLOWS, 'IF THE ASSESSING OFFICER, HAV ING 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 N OT FORM PART OF THE TOTAL INCOME UNDER THIS ACT'. IN OTHER WORDS, IT IS ONLY WHEN NO REASONABLE AND PROPER PARAMETERS FOR MAKING DISALLOWANCE CAN BE ARRIVED AT, THAT RESORT TO RULE 8D(2) CAN BE HAD BY THE AO. RULE 8D(2) WILL THUS BE A LAST RESORT WHEN IT BECOM ES IMPOSSIBLE TO ARRIVE AT A JUST 9 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. CONCLUSION ON THE AMOUNT OF EXPENSES THAT HAS TO BE DISALLOWED AS ATTRIBUTABLE OR INCURRED IN EARNING EXEMPT INCOME. THEREFORE THE EX PRESSION 'SHALL' OCCURRING IN SEC.14A(2) OF THE ACT, VIZ., 'THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D AS MAY BE PRESCRIBED', SHOULD BE READ AS MAY. THE AO, U/S 14A OF THE ACT HAS THE DIS CRETION TO SUBSTITUTE THE COMPUTATION OF DISALLOWANCE U/S 14A AS MADE BY THE ASSESSEE IS UNDER ESTIMATION. THE SATISFACTION CONTEMPLATED U/.S 14A (2) OF THE ACT IS NOT MERELY RESTRICTED TO REJECTING THE CLAIM MADE BY THE ASSESSEE AND THE DISALLOWANCE TO BE MADE U/S 14A OF THE ACT BUT ALSO INCLUDES SUBSTITUTING THE CLAIM MADE BY THE ASSESSEE ON ANY OTHER REASONABLE BASIS AS THE AO DEEMS IT FIT. IN SUCH CIRCUMSTANCES THE CORRECTNESS OF THE AO'S JUDGMENT CAN BE REVIEWED BUT IT CANNOT BE SAID THAT THE AO HAD NO JURISDICTI ON TO DO SO AND AO OUGHT TO RESORT ONLY TO THE PROVISION OF RULE 8D OF THE RULES. IN OTHER WORDS RULE 8D IS NOT AUTOMATIC AND CAN BE RESORTED TO BY THE AO ONLY AS A MEASURE OF LAST RESORT. 19.. 20. AS FAR AS DISALLOWANCE OF OTHER EXPENSES U/R 8D (2)(III) OF THE RULES IS CONCERNED, SHOWS EXPENDITURE ON ACCOUNT OF STAFF AN D OFFICE EXPENSES OF RS.14,97,132 AND RS.28,22,543.16 PS. RESPECTIVELY. A LOOK AT SCHEDULE-14 AND 15 OF SCHEDULES TO PROFIT AND LOSS ACCOUNT (A C OPY OF WHICH IS GIVEN AS AN ANNEXURE TO THIS ORDER), ........SHOWS THAT EXCE PT SALARY OF RS.11,72,889, NO OTHER EXPENDITURE CAN BE SAID TO BE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. IN APPLYING THE FORMULA PRESCRIBED U/R 8D(2 )(III) OF THE RULES, THE AO HAS INCLUDED ALL INVESTMENTS, WHETHER IT YIELDING T AX FREE INCOME OR NOT. IT IS NOT IN DISPUTE BEFORE US THAT IT IS ONLY THE INVEST MENTS WHICH YIELD TAX FREE INCOME THAT HAS TO BE CONSIDERED FOR APPLYING THE F ORMULA PRESCRIBED IN RULE 8D(2)(II) & (III) OF THE RULES AS HAS BEEN VIEW HEL D BY THIS TRIBUNAL IN SEVERAL CASES. IF THE FORMULA PRESCRIBED BY RULE 8D(2)(III) OF THE RULES IS APPLIED BY CONSIDERING THE AVERAGE VALUE OF INVESTMENTS OF ONL Y UTI MUTUAL FUND WHICH YIELDED TAX FREE INCOME THEN THE CALCULATION OF DIS ALLOWANCE U/R.8D(2)(III) OF THE RULES WOULD BE AS FOLLOWS: 'AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOE S NOT FORM PART OF TOTAL INCOME FIRST DAY OF THE PREVIOUS YEAR 5,633,712.00(SCHEDULE-7(3)OF AUDITED BALANCE SHEET) LAST DAY PREVIOUS YEAR 10,599,750.00(SCHEDULE-7(3)OF AUDITED BALANCE SHEET) AVERAGE OF THE SAME (B) 8,116,731.00 8D(2)(I II) ONE HALF PERCENT OF THE AVERAGE OF THE VALUE OF INVESTMENT % OF RS.8116731/- 40,583.66' 13.2 HE FURTHER BROUGHT TO OUR NOTICE THE LATEST NO TIFICATION OF CBDT DATED 02/06/2016, WHEREIN IT HAS BEEN MENTIONED AS UNDER : S.O. 1949(E)- IN EXERCISE OF THE POWERS CONFERRED B Y SECTION 295 READ WITH SUBSECTION (2) OF SECTION 14A OF THE INCOME-TAX ACT, 1961 (43 OF 1 961), THE CENTRAL GOVERNMENT HEREBY MAKES THE FOLLOWING RULES FURTHER TO AMEND THE INCO ME-TAX RULES, 1962, NAMELY:- 1. (1) THESE RULES MAY BE CALLED THE INCOME-TAX (14 TH AMENDMENT) RULES, 2016. (2) THEY SHALL COME INTO FORCE ON THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. 2. IN THE INCOME-TAX RULES 1962, IN RULE 8D,- (1) FOR SUB-RULE (2), THE FOLLOWING SUB-RULE SHALL BE SUBSTITUTED, NAMELY:- (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 : - 10 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; AND (II) AN AMOUNT EQUAL TO ONE PER CENT OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGES OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF IN VESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME: PROVIDED THAT THE AMOUNT REFERRED TO IN CLAUSE (I) AND CLAUSE (II) SHALL NOT EXCEED THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE.'; (II) SUB-RULE (3) SHALL BE OMITTED. 14. LD. DR RELIED ON THE ORDER OF CIT(A). 15. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. THE ASSESSEE IS AGGRIEVED BECAUSE CIT(A) HAS SUSTAINED THE DISALLOWANCE U/R 8D(2)(III). THE MUTE QUESTION BEFORE US IS WHETHER THE INVESTMENT WHICH HAS NOT GENERATED INCO ME SHOULD ALSO BE CONSIDERED TO CALCULATE THE QUANTUM OF DISALLOWA NCE OR THE WHOLE INVESTMENT AS PER BALANCE SHEET SHOULD BE APPLIED T O DISALLOWANCE AS PER RULE 8D. IN OUR CONSIDERED VIEW, THE VIEW EXPRE SSED BY THE COORDINATE BENCH OF KOLKOTTA IS ON THE SAME SUBJECT AND WE AGREE WITH THE FINDINGS THAT IN APPLYING THE FORMULA PRES CRIBED UNDER RULE 8D(2)(III) OF THE RULES, THE AO HAS INCLUDED ALL IN VESTMENTS, WHETHER IT YIELDED ANY TAX FREE INCOME OR NOT. IT IS ONLY THE INVESTMENTS WHICH YIELD TAX FREE INCOME THAT HAS TO BE CONSIDERED FOR APPLYING THE FORMULA PRESCRIBED UNDER RULE 8D(2)(III). SIMILAR V IEW WAS ALSO TAKEN BY THIS BENCH IN OTHER CASES ALSO. CONSIDERING THIS VIEW, WE DIRECT THE AO TO CONSIDER ONLY THE INVESTMENTS, WHICH YIELDED THE EXEMPT INCOME IN THE FORMULA UNDER RULE 8D(2)(III) AND ACC ORDINGLY, DISALLOW THE EXPENSES RELATING TO EXEMPT INCOME. 11 ITA NO. 1846/H/2014 SRINIVASA CYSTINE P. LTD. 16. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON 18 TH JANUARY, 2017. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 18 TH JANUARY 2017 KV COPY TO:- 1) M/S SRINIVASA CYSTINE PVT. LTD., G-2, 6-3-658, C ONCORDE APARTMENTS, SOMAJIGUDA, HYDERABAD 500 082. 2) ITO, WARD 3(1), HYDERABAD. 3) CIT(A) - IV, HYDERABAD 4 CIT III, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE