S. 14A/ Rule 8D: (i) The computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income tax Rules 1962, (ii) Only those investments are to be considered for computing the average value of investment which yielded exempt income during the year

The Special Bench had to consider the following two important questions of law:

(i) Whether the expenditure incurred to earn exempt income computed u/s 14A could not be added while computing book profits u/s 115JB of the Act? And

(ii) Whether investments which did not yield any exempt income should enter into the computation under Rule 8D while arriving at the average value of investment, income from which does not form part of the total income?

HELD by the Special Bench deciding both issues in favour of the assessee:

(i) We answer the question referred to us in favour of the assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income tax Rules 1962.

(ii) Only those investments are to be considered for computing the average value of investment which yielded exempt income during the year.