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September 27, 2022

In section 115JB book profit computation, the section 14A disallowance is not significant

by CA Shivam Jaiswal in Income Tax

In section 115JB book profit computation, the section 14A disallowance is not significant

Facts and issue of the case

This appeal by the assessee is arising out of the revision order u/s 263 of the Income Tax Act, 1961 (hereinafter ‘the Act’) of Principal Commissioner of Income Tax, Chennai-3 in Revision No. PCIT, Chennai-3/Revision-263/100000321493/2022 dated 30.03.2022. The Assessment was framed by Asst. Commissioner of Income Tax, Corporate Circle-6(2), Chennai for the relevant Assessment Year 2017-18 vide order dated 29.12.2019 u/s. 143(3) of the Act.

The only issue in this appeal of assessee is as regards to the revision order passed by PCIT u/s. 263 of the Act for re-computing the disallowance of expenses relatable to exempt income by invoking the provisions of s. 14A of the Act r/w Rule 8D(2) of the Income Tax Rules, 1962 (hereinafter ‘the Rules’) for computing book profit u/s. 115JB of the Act.

Court had heard the rival contentions and gone through the facts and circumstances of the case and also gone through the case records and the documents filed before us including the case laws referred. The assessment was completed by the ACIT, Corporate Circle-6(2), Chennai u/s. 143(3) of the Act vide order dated 29.12.2019, wherein the issue of disallowance u/s. 14A of the Act was considered by the A.O and he worked out the disallowance at Rs. 76.91 Lakhs. Subsequently, the PCIT, Chennai on perusal of profit and loss account noticed from the details of miscellaneous expenses and computation of taxable book profit that no amount was added towards the expenditure incurred to earn the exempt income. According to PCIT, the A.O failed to consider the disallowance of Rs. 76.91 Lakhs while computing the book profit u/s.115 JB of the Act and therefore, he issued show cause notice to the assessee as to why this amount of Rs. 76.91 Lakhs be not brought to tax while computing taxable book profit u/s. 115JB of the Act.

The assessee replied that the assessee-company has not incurred any expenses relating to exempt income as the dividend income itself was transferred as a result of approved scheme of demerger by National Company Law Tribunal, Chennai vide order No.CP/210/214/CAA/2017 Dated 12.01.2018. The PCIT was not convinced and according to PCIT, the assessment order passed by A.O u/s. 143(3) of the Act dated 29.12.2019 is erroneous on this point and therefore, he directed the A.O to compute the disallowance of expenses of Rs. 76.91 Lakhs while computing book profit u/s. 115 JB of the Act.

Observation by the court

Aggrieved, the assessee is in appeal before the Tribunal. Now before us, the Ld. Counsel for the assessee submitted that this issue is settled by the decision of Hon’ble Karnataka High Court and that is the solitary judgment till now in the case of Sobha Developers Ltd. v.DCIT, LTU, Bangalore [2021] 434 ITR 266 (Kar.), wherein the entire provision of s. 115JB of the Act was discussed in Para 7 and held that the provisions of s. 115JB of the Act will not apply while making disallowance u/s. 14A of the Act. 

Court also noted that exactly an identical issue, the Co-ordinate Bench of this Tribunal i.e., Special Bench in the case of ACIT Vs. Vireet Investment Pvt. Ltd. dated 16.06.2017 has considered this issue and held that the scheme of the Act is that the computation is first made under the normal provisions of the Act and, thereafter, under an alternate scheme provided u/s 115JB for computing total income as per the prescribed method. If the tax liability on the basis of total income as per MAT provisions is more than the tax computed under the normal provisions of the Act then the former becomes the final tax liability of the assessee. The mode of computation of book profit has been prescribed under MAT provisions.

Clause (f) of Explanation 1 to section 115JB(2) of the Act is in conformity to matching principles of accounting. As per the provisions of section 115JB(1) of the Act, a comparison of the total income computed under the normal provisions of the Act is to be made with the book profits as computed u/s 115JB of the Act. This makes it clear that total income as contemplated under normal provisions is inextricably linked with book profits under MAT provisions and it is wrong to suggest that both operate in entirely different fields.

The Tribunal further held that if different modes of computation are followed u/s 14A and in clause (f) of Explanation 1 to section 115JB(2) of the Act, then the comparison will not be on same footing and will produce absurd results. The phrase “in relation to” used in section 14A of the Act and the phrase “expenditure relatable to earning of exempt income”, under clause (f) of Explanation 1 to section 115JB(2) of the Act, the word “relatable to” has wider connotation than the words “in relation to”, where the proximate relationship is required. The computation under clause (f) of Explanation 1 to section 115JB(2) of the Act, is to be made without resorting to the computation as contemplated u/s 14A of the Act read with Rule 8D of the Rules.

The Ld. CIT-DR relied on the revision order. We have considered the facts and circumstances of the case and gone through the entire case laws and we are of the view that the issue is covered in favour of the assessee and against Revenue that no disallowance of expenses can be made in respect of exempt income by invoking the provisions of s. 14A of the Act r/w Rule 8D of the Rules while computing book profit u/s. 115JB of the Act. Since, the issue is covered by Special Bench of this Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd., supra, and by the decision of Hon’ble Karnataka High Court in the case of Sobha Developers Ltd. v. DCIT, LTU, Bangalore, supra, we quash the revision order passed by PCIT and allowed the appeal of the assessee.

Conclusion

In the result, the appeal of the assessee is allowed.

Sundaram-Finance-Holdings-Limited-Vs-ACIT-ITAT-Chennai-ITA-No.-312Chny2022.

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