TMI Blog2017 (3) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance in earlier years u/s. 14A. In view of that, the disallowance u/s. 8D(2)(ii) cannot be sustained. Coming to the issue of disallowance u/s. 8D(2)(iii) i.e., 0.5% on the average investments, assessee’s contention was that no such disallowance was warranted, as no income was earned during the year. However, it cannot be stated that assessee has not utilised its personnel and efforts to make investments in the shares. There will be some expenditure involved, which cannot be quantified. Therefore, Rule 8D(2)(iii) provides for estimation of expenditure for 0.5% of average investments. - I.T.A. No. 1211/HYD/2016 - - - Dated:- 22-3-2017 - Shri B. Ramakotaiah, Accountant Member For Assessee : Shri M.V. Anil Kumar, AR For Revenue : Shri V. Sreekar, DR ORDER This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-5, Hyderabad dated 30-06-2016. The issue in this appeal is with reference to disallowance made u/s. 14A r.w.r. 8D. 2. Assessing Officer (AO) has noticed that assessee has invested money in the equity shares of one M/s. Combat Drugs Ltd., to the tune of ₹ 3,22,40,000/-. He also noticed that assessee has cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed funds, no disallowance is warranted under rule 8D(2)(ii) It was the contention that borrowed funds were utilised in the business of assessee. Assessee s contention that AO has not disallowed any amount u/s. 36(1)(iii) has a valid point. Invoking Rule 8D(2) will only come with reference to other interest which was not directly related to the business. Since there is no finding by the AO that the interest claim is not for the purpose of business, in my opinion, invoking section 14A and disallowance on on a proportionate basis is not correct. As seen from the record also, most of the funds were borrowed in earlier years, substantial amount was also invested in earlier years. There seems to be no disallowance in earlier years u/s. 14A. In view of that, the disallowance u/s. 8D(2)(ii) cannot be sustained. 7. Coming to the issue of disallowance u/s. 8D(2)(iii) i.e., 0.5% on the average investments, assessee s contention was that no such disallowance was warranted, as no income was earned during the year. However, it cannot be stated that assessee has not utilised its personnel and efforts to make investments in the shares. There will be some expenditure involved, which cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 ; C = the average of total assets as appearing in the balance 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 average of the 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 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 contained 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-section (6)* of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total 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 arise to him in India during such year. Explanation 1.-Income accruing or arising outside India shall not be deemed to be received57 in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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 . That being the case, AO cannot disallow expenditure relating to investment which has not yielded any exempt income during the previous year relevant to the assessment year under dispute. Therefore, we direct the AO 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. However, so far as AO s 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 . 7 ..... 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