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TMI Blog2014 (9) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 which 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' - AO cannot disallow expenditure relating to investment which has not yielded any exempt income during the previous year relevant to the AY – thus, the AO is directed to disallow the expenditure relating to investments resulting in income earned/accrued which does not form part of total income of the impugned assessment year – Decided in favour of assessee. - ITA No. 1743/Hyd/2013 - - - Dated:- 27-6-2014 - B. Ramakotaiah, AM and Saktijit Dey, JM,JJ. For the Appellant : Shri Deepak Chopra For the Respondent : Shri Solgy Joset T. Kottaram ORDER Per Saktijit Dey,J.M. This appeal of the assessee is directed against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er assets 3.1 The AO further noticed that while computing its income, assessee has disallowed expenditure of ₹ 35,65,860/- u/s 14A read with Rule 8D, out of the fund management fees claimed, which worked out as under: Rule Details of working Amount disallowed Rule 8D(2)(i) Average value of mutual funds 14,33,99,099 25,20,080 Add: Average value of investments income from which is exempt 6,50,00,000 Average value of Investments 20,832,99,099 1% on ₹ 20,83,99,099 2083999 Add: Performance pay 164421 Add: Service tax 271667 Rule 8D(2)(ii) Total interest expenditure Proportionate expenditure 14,394 3,785 Rule 8D(2)(iii) 0.5% of average value of investments (total assets adjusted by adding current liabilities) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inistrative convenience and cost effectiveness is collected from the paying company. It was further submitted that the situation is analogous to FBT paid on ESOP issued to non-resident. 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 the employer on ESOPs. It was submitted that in terms with Ruled 8D assessee has computed disallowance u/s 14A by arriving at the direct expenditure by considering fees attributable to those investments which have yielded income. AO rejecting each of the arguments of the assessee held that the assessee having not correctly computed disallowance u/s 14A, worked out the disallowance in the following manner and accordingly added ₹ 1,97,36,624/- to the income of 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): NIL Under Rule 8D(2)(iii): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A separately for exempt income and for taxable income. He disallowed only that part of expenditure which pertains to exempt income. It is also pertinent to mention that the Rule 8D(2)(iii) applies even in cases where there is no exempt income as the formula relates to investment and not to income earned. Meaning thereby certain disallowance has to be 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 Hon'ble 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, Hyderabad 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/2012-13 dated 14/02/2013. 7.2 In view of the above discussion the disallowance made by the AO of ₹ 1,97,36,624/- is sustained, therefore, the grounds of the appeal of the assessee on this issue are dismissed. 5. The learned AR reiterating the contentions raised before the revenue authorities submitted that d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lates to earning of exempt income and what amount was towards earning of 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 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 exempt income and further contention that dividend income cannot be considered 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 simply because of the fact that the assessee itself recognizing the fact that it has incurred expenditure towards earning of exempt income has disallowed expenditure to the tune of ₹ 35,65,860/- u/s 14A read with Rule 8D(2) of the Act. Therefore, assessee's challenge with regard to applicability of section 14A read with Rule 8D (2) cannot be sustained. However, so far as assessee's contention with regard to mode of computation of disallowance under Rule 8D(2), in our view, requires consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to any particular income or receipt. The 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 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. Aggregate of these three components would constitute 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 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 under consideration. The reasoning of the AO in this regard is actual earning or receipt of income will not be a condition for disallowance of such expenditure under the provisions of section 14A 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 no income was received, expenditure incurred can be disallowed u/s 14A. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 'total income' is of any previous year and which includes income from 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 or arises to him in India during such year or accrues or arise to him outside India during such year. Considered in aforesaid 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 only expenditure directly relating to income which is earned either on receipt 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 the 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 income which does not form part of total income, clause (iii) provides for disallowance of expenditure of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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