Datta Chandra Hospitals Pvt.Ltd., Hyd (presently known as Yashoda Health Care Services Pvt.Ltd.), Hyderabad V. Addl. CIT, Range-1, Hyd, Hyderabad

ITA 74/HYD/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6267 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 25-07-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 18-01-2016
• Court: TRIBUNAL
• Department Lawyers: K J RAO
• Keywords: Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER I.T.A. NO. 74/HYD/2016 ASSESSMENT YEAR: 2008-09 DATTA CHANDRA HOSPITALS PVT. LTD., (PRESENTLY KNOWN AS YASHODA HEALTH CARE SERVICES PVT. LTD.,) HYDERABAD [PAN: AABCD6598G] VS THE ADDITIONAL CIT, RANGE-I, HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.C. DEVDAS, AR FOR REVENUE : SHRI K.J. RAO, DR DATE OF HEARING : 25-07-2016 DATE OF PRONOUNCEMENT : 27-07-2016 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-5, HYDERABAD, DATED 16-11-2015 ON THE ISSUE OF DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT [ACT]. 2. BRIEFLY STATED, ASSESSEE IS IN HEALTH CARE BUSINESS . IN ADDITION TO EARNING ITS REGULAR INCOME FROM THE MAINTEN ANCE OF HOSPITAL, IT ALSO EARNED DIVIDEND FROM MUTUAL FUNDS AN D UTI AMOUNT TO RS. 42,37,790/- AND CLAIMED EXEMPTION. ASSE SSING OFFICER (AO) INVOKED THE PROVISIONS OF SECTION 14A R. W.R. 8D AND MADE A DISALLOWANCE OF RS. 11,70,865/- CALCULATED UN DER THE RULE ITA NO.74/HYD/2016 :- 2 -: 8D OF THE ACT. IT WAS THE CONTENTION OF ASSESSEE THAT ASS ESSEE HAS NOT SPENT ANY DIRECT EXPENDITURE TO BE DISALLOWED UNDER RULE 8D(2)(I) AND ALSO THERE WAS NO INTEREST EXPENDITURE PE RTAINING TO INVESTMENTS AS IT HAS SUFFICIENT RESERVES AND SURPLUS A ND REGULAR INCOME OF THE BUSINESS WAS MORE THAN THE INVESTMENTS IN SUCH FUNDS. AO WHILE ACCEPTING THE EXPLANATION OF ASSESSEE WITH REFERENCE TO THE DIRECT EXPENDITURE HOWEVER, INVOKED RU LE 8D(2)(II) TO DISALLOW PROPORTIONATE INTEREST EXPENDITURE ON CERTAIN SECURED LOANS OBTAINED TO AN EXTENT OF RS. 11,49,176/- AND ALS O 0.5% OF AVERAGE VALUE OF INVESTMENTS AND RS. 21,189/- UNDER R ULE 8D(2)(III). ASSESSEE CONTESTED THE SAME BEFORE THE CI T(A) TO SUBMIT THAT THERE IS NO SATISFACTION RECORDED BY THE AO WHILE I NVOKING SECTION 14A AND FURTHER ALL THE BORROWALS ARE FOR SPEC IFIC PURPOSES AND NO PART OF THE BORROWED AMOUNT WAS DIVERTED TO IN VESTMENTS AND QUESTIONED THE DISALLOWANCE. IT WAS CONTENDED THAT A O CANNOT DISALLOW EXPENDITURE BY MAKING GENERAL OBSERVATIONS I N A MECHANICAL WAY AND RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF MAXCOPP INVESTMENT LTD., VS. CIT [ 15 TAXMANN.COM 390] (DELHI). SINCE ASSESSEE QUESTIONED THE VERY INVOKING OF SECTION 14A, LD. CIT(A) ELABORATELY DISC USSED THE PRINCIPLES GOVERNING SECTION 14A, RULE 8D IN HIS ORD ER. IN DOING SO, HE CONFIRMED THE DISALLOWANCE MADE UNDER RULE 8 D(2)(II) AND 8D(2)(III). HENCE, THE PRESENT APPEAL. 3. LD. COUNSEL REFERRING TO THE ANNUAL REPORTS, INCO MES EARNED AND DIVIDEND, FIXED DEPOSITS MADE IN EARLIER YEAR B UT WITHDRAWN DURING THE YEAR AND THE AMOUNT OF RESERVES AND SURPLU S AVAILABLE SUBMITTED THAT ASSESSEES ANNUAL INCOME DECLARED DURING THE YEAR ITSELF IS TO THE TUNE OF RS. 40.68 CRORES, WHEREAS IN VESTMENTS MADE ARE ONLY 10.45 CRORES AND RESERVES AND SURPLUS OF R S. 56.12 ITA NO.74/HYD/2016 :- 3 -: CRORES. IT WAS SUBMITTED THAT ASSESSEE HAS ITS OWN FUNDS FOR INVESTING IN THE MUTUAL FUNDS AND SISTER-COMPANIES. IT IS ALSO SUBMITTED THAT THE TERM LOANS ARE OBTAINED FOR SPECIFIC PURPOSES/PURCHASES OF HOSPITAL EQUIPMENT AND NO PART O F THE BORROWED FUNDS ARE DIVERTED FOR INVESTMENT. WITH REFE RENCE TO THE DISALLOWANCE UNDER RULE 8D(2)(III) OF ADMINISTRATIVE EXPENDITURE, IT WAS SUBMITTED THAT AO SHOULD BE DIRECTED TO DISALLOW ONL Y ON THE INVESTMENTS WHICH EARNED INCOME RELYING ON THE DECISI ON OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF ACB INDIA LTD., (FORMERLY M/S. ARYAN COAL BENEFICATIONS (P) LTD., IN ITA NO. 615/2014 DT. 24-03-2015. 4. LD. DR HOWEVER, RELIED ON THE DETAILED ORDER OF THE CIT(A). 5. WE HAVE EXAMINED THE RIVAL CONTENTIONS AND PERUSED THE CONTENTIONS. THERE IS NO DISPUTE WITH REFERENCE TO INV OKING OF RULE 14A WHICH, ASSESSEE HAS NOT CONTESTED BEFORE US, CON SEQUENTLY, THE ISSUE IS ONLY WHETHER DISALLOWANCE CAN BE MADE UN DER RULE 8D? THERE IS NO DIRECT EXPENDITURE WHICH CAN BE DISA LLOWED UNDER RULE 8D(2)(I). AS FAR AS THE EXPENDITURE INCURRED B Y WAY OF INTEREST, RULE 8D(II) CAN BE INVOKED ONLY IN A CASE W HERE THERE IS AN INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. IN THAT EVENT, PR OPORTIONATE AMOUNT IS TO BE DISALLOWED AS PROVIDED IN THE RULE. HOWEVER, AS SEEN FROM THE BALANCE SHEET, THERE ARE SECURED LOANS FROM THE BANKS. IT WAS SUBMITTED THAT NO PART OF IT WAS DIVERTED TO INVESTMENTS IN MUTUAL FUNDS ETC., EVEN AO HAS NOT CONSI DERED THE ENTIRE INTEREST ON ALL THE SECURED LOANS BUT SELECTIVEL Y SEGREGATED ONLY SECURED LOANS CATEGORISED AS CORPORATE LOANS AN D TERM LOANS WITH SBM IF BRANCH. NO FINDING WAS GIVEN BY THE AO THAT THESE ITA NO.74/HYD/2016 :- 4 -: FUNDS ARE UTILISED FOR THE INVESTMENTS. AS SEEN FROM THE BALANCE SHEET ALSO, AN AMOUNT OF RS. 4,96,00,000/- WAS INVES TED IN EARLIER YEAR IN BILL ROTH HOSPITALS LTD., AND AN AMOUNT OF RS. 75,96,688/- IN THE SHARES OF DR. REDDY LABS. THE SHARES OF DR. REDDY LABS WERE SOLD DURING THE YEAR. AN AMOUNT OF RS. 5.49 CRO RES WAS INVESTED IN BIRLA SUNLIFE MUTUAL FUND DURING THE YEAR AND AS EXPLAINED BY THE LD. COUNSEL, THE FIXED DEPOSITS TO TH E TUNE OF RS. 7.55 CRORES IN EARLIER YEAR WERE PARTLY CANCELLED. AS SEEN FROM THE BALANCE SHEET ALSO THERE WAS SUFFICIENT SHARE CAPITAL A ND RESERVES WHICH COVER MORE THAN THE INVESTMENTS MADE IN EARNING THE EXEMPT INCOMES. FOLLOWING THE PRINCIPLES LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. , [313 ITR 340] (BOM), WE ARE OF THE OPINION THAT NO PA RT OF THE INTEREST PAID ON THE BORROWED FUNDS CAN BE DISA LLOWED UNDER RULE 8D(2)(II). MOREOVER, IF AT ALL THERE IS ANY DIV ERSION OF FUNDS THAT SHOULD TRIGGER DISALLOWANCE U/S. 36(1)(III) I.E., FOR DIVERSION OF FUNDS FROM THE BUSINESS. AO HAS NOT DISALLOWED ANY AMOUNT U/S. 36(1)(III). IN VIEW OF THIS, WE ARE OF THE OPINION T HAT THE INTEREST PAID ON TERM LOANS OBTAINED CANNOT BE CONSIDERED AS IN TEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCO ME OR RECEIPT UNDER RULE 8D(2)(II). IN VIEW OF THIS, DISA LLOWANCE OF RS. 11,49,176/- INVOKING THE SUB-RULE 2(II) IS SET ASIDE. 5.1. COMING TO THE DISALLOWANCE OF RS. 21,189/- INV OKING SUB- RULE (2)(III) OF 0.5% OF AVERAGE VALUE OF INVESTMENT, IT WAS THE CONTENTION THAT THERE IS NO DIVIDEND EARNED FROM BILL ROTH HOSPITALS LTD., SO THAT AMOUNT HAS TO BE EXCLUDED FOR WH ICH LD. COUNSEL RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF ACB INDIA LTD., (FORMERLY M/S. ARYAN COAL BE NEFICATIONS (P) LTD., IN ITA NO. 615/2014 DT. 24-03-2015 (SUPRA). R ULE 8D(2) (III) ITA NO.74/HYD/2016 :- 5 -: SPECIFIES THAT AN AMOUNT EQUAL TO % OF THE AVERAGE VAL UE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FOR M PART OF THE TOTAL INCOME, AS APPEAR IN THE BALANCE SHEET OF ASSE SSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR HAS TO B E ATTRIBUTED. WORKING HAS TO BE MADE ON THE INVESTMENT AS SPECIFIED , WITHOUT SEGREGATING THEM ON INCOME YIELDING OR NON-INCOME YIE LDING DURING THE YEAR. THE INVESTMENT IN BILL ROTH HOSPITALS LTD., H AS POTENTIAL TO EARN DIVIDEND IN A LATER YEAR. THIS ISSUE WAS DIS CUSSED ELABORATELY BY THE CO-ORDINATE BENCH IN THE CASE OF BELLWETHER MICROFINANCE FUND PVT. LTD., IN ITA NO. 1743/HYD/2013 DT. 27-06-2014. THE RELEVANT PORTION OF THE SAID ORDER IS AS UNDER: 7. WE HAVE HEARD PARTIES AND PERUSED MATERIALS ON RECORD 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 EXE MPT INCOME AND FURTHER CONTENTION THAT DIVIDEND INCOME CANNOT BE C ONSIDERED AS EXEMPT INCOME AS IT IS SUBJECTED TO DIVIDEND DISTRIBUTION TAX U/S 115J AND 115-O OF THE ACT, IN OUR VIEW, IT IS NOT ACCEPTABLE SIMP LY BECAUSE OF THE FACT THAT THE ASSESSEE ITSELF RECOGNIZING THE FACT THAT IT HA S INCURRED EXPENDITURE TOWARDS EARNING OF EXEMPT INCOME HAS DISALLOWED EXP ENDITURE TO THE TUNE OF RS. 35,65,860/- U/S 14A READ WITH RULE 8D(2) OF THE ACT. THEREFORE, ASSESSEES CHALLENGE WITH REGARD TO APPLICABILITY O F SECTION 14A READ WITH RULE 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, A T THE STAGE OF ASSESSMENT PROCEEDING ITSELF ASSESSEE HAS STATED TH AT DISALLOWANCE UNDER RULE 8D(2)(I) SHOULD BE ONLY IN RELATION TO T HE INVESTMENT, WHICH HAS YIELDED ANY EXEMPT INCOME IN THE RELEVANT FY. EXPEN DITURE CANNOT BE IN RELATION TO THE TOTAL INVESTMENT IRRESPECTIVE OF TH E FACT WHETHER ANY INCOME IS EARNED OR NOT DURING THE YEAR. BEFORE GOING INTO THE MERITS OF ASSESSEES CONTENTIONS, IT IS DEEMED NECESSARY TO LOOK INTO TH E PROVISIONS CONTAINED UNDER RULE 8D(2) WHICH IS RELEVANT FOR OUR PURPOSE. THE SAME IS EXTRACTED HEREUNDER FOR THE SAKE 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 INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; ITA NO.74/HYD/2016 :- 6 -: (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FO RMULA, 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 A VERAGE 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. (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 EXPENDITURE 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 WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE THIRD PART AS PROVIDED UNDER SUB-RU LE 8D(2)(III) IS AN ARTIFICIAL FIGURE I.E. ONE-HALF PER CENT OF THE AVE RAGE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE T OTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON T HE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. AGGREGATE OF THESE T HREE COMPONENTS WOULD CONSTITUTE EXPENDITURE IN RELATION TO EXEMPT INCOME AND WOULD BE DISALLOWED U/S 14A OF THE ACT. THEREFORE, IF WE EX AMINE THE FACTS OF THE PRESENT CASE IN THE CONTEXT OF THE AFORESAID STATUT ORY PROVISION, 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 REGARD IS ACTUAL EA RNING OR RECEIPT OF INCOME WILL NOT BE A CONDITION FOR DISALLOWANCE OF SUCH EXPENDITURE UNDER THE PROVISIONS OF SECTION 14A AS IT SPEAKS ABOUT EX PENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . HE WAS OF THE VIEW THAT EVEN IF NO INCOME WAS RECEIVED, EXPENDITURE IN CURRED CAN BE DISALLOWED U/S 14A. HOWEVER, RULE 8D(2)(I) SPEAKS O F EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOT AL INCOME. THE TERM TOTAL INCOME HAS NOT BEEN DEFINED EITHER U/S 14A OR UNDER RULE 8D. THEREFORE, ONE HAS TO LOOK TO THE DEFINITION OF TO TAL INCOME AS APPEARING IN SECTION 2(45) OF THE ACT, WHICH READS AS UNDER: ITA NO.74/HYD/2016 :- 7 -: '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 IND IA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR AR ISE 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 FR OM WHATEVER SOURCE DERIVED WHICH (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN IND IA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR AR ISE 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 DEE MED 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 AS PER TH IS SECTION TOTAL INCOME IS OF ANY PREVIOUS YEAR AND WHICH INCLUDES INCOME FRO M WHATEVER SOURCE DERIVED WHICH IS RECEIVED OR DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON OR ACCRUES OR ARISES OR IS DEEMED TO ACCRUE ITA NO.74/HYD/2016 :- 8 -: OR ARISES TO HIM IN INDIA DURING SUCH YEAR OR ACCRU ES OR ARISE TO HIM OUTSIDE INDIA DURING SUCH YEAR. CONSIDERED IN AFORE SAID CONTEXT, EXPRESSION TOTAL INCOME REFERRED TO IN RULE 8D(2) (I) CANNOT BE IN ABSTRACT. IT MUST RELATE TO A PREVIOUS YEAR INCOME OF WHICH IS SOUGHT TO BE ASSESSED. THEREFORE, AS A NATURAL COROLLARY IT FOLLOWS THAT O NLY EXPENDITURE DIRECTLY RELATING TO INCOME WHICH IS EARNED EITHER ON RECEIP T BASIS OR ON ACCRUAL BASIS AND WHICH DOES NOT FORM PART OF TOTAL INCOME OF A PARTICULAR ASSESSMENT YEAR CAN BE DISALLOWED UNDER CLAUSE (I) OF RULE 8D(2). RULE 8D(2)(I) DOES NOT REFER TO THE INVESTMENT MADE BY T HE ASSESSEE. ON A CONJOINT READING OF CLAUSE (I) AND CLAUSE (III) OF RULE 8D(2), THE DIFFERENCE BETWEEN THEM IS CLEARLY DISCERNIBLE. WHILE CLAUSE (I) SPEAKS OF DISALLOWANCE OF EXPENDITURE DIRECTLY RELATING TO IN COME WHICH DOES NOT FORM PART OF TOTAL INCOME, CLAUSE (III) PROVIDES FO R DISALLOWANCE OF EXPENDITURE OF THE AVERAGE VALUE OF INVESTMENT, INC OME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR. THEREFORE, WHILE DISALLOWANCE OF EXPENDITURE UNDER CLAUSE (I) IS RELATED TO INCOME EARNED WHICH DOES NOT FORM PART O F TOTAL INCOME, CLAUSE (III) RELATES TO THE AVERAGE OF THE VALUE OF INVEST MENT APPEARING IN THE BALANCE SHEET. ON A PLAIN READING OF RULE 8D(2) AS A WHOLE THE LEGISLATIVE INTENT BECOMES CLEAR THAT THE DISALLOWANCE OF EXPE NDITURE CONTEMPLATED UNDER SUB-RULE(I) MUST RELATE TO THE INCOME WHICH D OES NOT FORM 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 DISALLOWAN CE UNDER RULE 8D(2)(III), THE AVERAGE OF THE TOTAL INVESTMENT 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 YIELDED INCOME OR NOT CAN BE CO NSIDERED FOR THE PURPOSE OF DISALLOWANCE. THE USE OF THE WORDS 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 P ART OF TOTAL INCOME AT ANY TIME. HAD IT BEEN THE INTENTION OF THE RULE FRA MING AUTHORITIES TO DISALLOW UNDER RULE 8D(2)(I) EXPENDITURE RELATING T O TOTAL VALUE OF INVESTMENT OR INCOME WHICH IS NOT EARNED DURING THE RELEVANT PREVIOUS YEAR, THEN, THEY WOULD HAVE USED THE EXPRESSION DO ES 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 TH E CASE, AO CANNOT DISALLOW EXPENDITURE RELATING TO INVESTMENT WHICH H AS NOT YIELDED ANY EXEMPT INCOME DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE. THEREFORE, WE DIRECT THE AO TO DISAL LOW THE EXPENDITURE RELATING TO INVESTMENTS RESULTING IN INCOME EARNED/ ACCRUED WHICH DOES NOT FORM PART OF TOTAL INCOME OF THE IMPUGNED ASSESSMEN T YEAR. HOWEVER, SO FAR AS AOS COMPUTATION OF EXPENDITURE TO BE DISALL OWED 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. ITA NO.74/HYD/2016 :- 9 -: IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT AO IS CORRECT IN DISALLOWING 0.5% OF THE AVERAGE INVESTMENTS AS AVAI LABLE IN THE BALANCE SHEET. TO THAT EXTENT, ASSESSEES CONTENTIONS AR E REJECTED. 6. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JULY, 2016 SD/- SD/- (LALIET KUMAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 27 TH JULY, 2016 TNMM COPY TO : 1. DATTA CHANDRA HOSPITALS PVT. LTD., (PRESENTLY KN OWN AS YASHODA HEALTH CARE SERVICES PVT. LTD.,) HYDERABAD. C/O. B. NARSING RAO & CO., CHARTERED ACCOUNTANTS, PLOT N O. 554, ROAD NO. 92, JUBILEE HILLS, HYDERABAD. 2. THE ADDL. CIT, RANGE-1, HYDERABAD. 3. COMMISSIONER OF INCOME TAX(APPEALS)-5, HYDERABAD , 4. THE PR. COMMISSIONER OF INCOME TAX-5, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.