TMI Blog2017 (1) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... tial assessment year in which the assessee 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 grounds on this issue are accordingly allowed . See M/s Hyderabad Chemical Products Pvt. Ltd., Vs. ACIT [2016 (7) TMI 253 - ITAT HYDERABAD ] Disallowance u/s 14A - assessee is aggrieved because CIT(A) has sustained the disallowance u/r 8D(2)(iii) - whether the investment which has not generated income should also be considered to calculate the quantum of disallowance or the whole investment as per balance sheet should be applied to disallowance as per rule 8D? - Held that:- In applying the formula prescribed under rule 8D(2)(iii) of the Rules, the AO has included all investments, 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). 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 accordingly, disallow the expenses relating to exempt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have any 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 decisions 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 that these decisions had been rendered after considering the relevant 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 assessee and confirmed the disallowance made by the AO u/s 80IA of the Act. 6. Ld. AR submitted that the issue in dispute is squarely covered by the decision of the coordinate bench of ITAT Hyderabad 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. 7. Ld. DR neither controverted the submission of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears in certain cases) beginning from the year in which the undertaking commences operation, begins development or starts providing services etc. as stipulated therein. Sub-section (5) of section 801A further provides as under Notwithstanding anything contained in any other provision of this Act, 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 assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made . In the above sub-section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term 'initial assessment year'. It has been represented that some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year is not the year of operation or commencement of business, as interpreted by the Assessing 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 issue in favour of the assessee, and is binding on the Revenue authorities, we accept the contentions 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 assessee 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 grounds on this issue are accordingly allowed. As the issue under consideration is materially identical to that of the said case, we direct the AO to adjudicate the issue following the directions given by the coordinate bench in the said case. 9. As regards the issue relates to disallowance of ₹ 21,97,594/- u/s 14A, the AO computed the same as under: A. Interest expenditure (excluding the interest on Term loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of its own and surplus funds. The AR has submitted that while the investments had increased from ₹ 18.81 crores as on 31/03/2009 to ₹ 19.16 crores as on 31/03/2010, the share capital as on 01/04/2009 was ₹ 29.12. crores. 11.1 The CIT(A) held that it is clear from the facts as narrated above that the assessee had sufficient funds of its own to enable to make the investments without recourse to the borrowed funds. There is also no specific evidence on record that the assessee had utilized the borrowed funds to make the investment in shares. As a result, no nexus has been established between the interest bearing loans and these investments to enable a conclusion that interest expenditure has been incurred for these investments. He, therefore, directed the AO to delete the interest expenses of ₹ 12,48,230/-. 11.2 The CIT(A) observed that the disallowance u/s 14A in the assessee s case has two components: ₹ 12,48,230/- u/s 8D(2)(ii) and ₹ 9,49,364/- u/r 8D(2)(iii). The two components stand on different footings and need to be considered separately. A disallowance u/r 8D(2)(ii) requires that a nexus be established between the interest expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the AO is required to determine the amount of such expenditure only if the AO, having 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 not form part of the total income under the said Act. In other words, the requirement of the AO embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the AO returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition 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 record that he is not satisfied with the correctness of the claim of the assessee in 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 claims 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which does not form part of the total income under this Act in accordance with such method 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 earning exempt income is not accepted by the AO. If such an interpretation is adopted than that would result absurd results, as in the present case, the exempt income is a sum of ₹ 5,60,301/- and the disallowance u/s. 14A of the Act is a sum of ₹ 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 invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. If Rule 8D of the Rules is blindly by the AO sometimes it will lead to absurd results. The AO examining the claim of the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in dispute before us that it is only the investments which yield tax free income that has to be considered for applying the formula prescr ibed in Rule 8D(2)(ii) ( iii) of the rules as has been view held by this Tr ibunal in several cases. I f the formula prescribed by rule 8D(2)( iii) of the Rules is applied by consider ing the average value of investments of only UTI mutual fund which yielded tax free income then the calculation of disallowance u/r.8D(2) (iii) of the rules would be as follows: Average value of Investment , income from which does not form par t 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)( iii) One half percent of the average of the value of investment % of ₹ 8116731/- 40,583.66 13.2 He further brought to our notice the latest notification of CBDT dated 02/06/2016, wherein it has been mentioned as under: S.O. 1949(E)- In exercise of the powers conferred by section 295 read with subsection (2) of section 14A of the Income-tax Act, 1961 (43 of 1961), the Central Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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