S. 14A disallowance has to be applied while computing book profits under clause (f) of Explanation to s. 115JA

CIT vs. Goetze (India) Ltd (Delhi High Court)

In AY 2000-01 the assessee offered income on the basis of book profits u/s 115JA. The assessee had credited the P&L A/c with dividend income of Rs. 1.57 crore. It claimed that the said dividend had to be excluded while computing the book profits, which was accepted by the AO. The CIT thereafter passed an order u/s 263 in which she claimed that the expenditure incurred to earn the said dividend had to be disallowed under clause (f) of the Explanation to section 115JA while computing the book profits. She estimated the said expenditure at Rs. 1.83 crore. Before the Tribunal the assessee claimed that s. 14A did not apply to AY 2000-01 in view of the Proviso thereof and that in any event s. 14A disallowance could not be made on facts. The Tribunal accepted the contentions and held that (a) two views were possible as to whether s. 14A can apply to AY 2000-01 in view of the Proviso thereof and as the AO’s view is a possible view, the CIT cannot revise u/s 263, (b) clause (f ) of the Explanation to s. 115JA uses the words ‘expenditure relatable to any income’, while s. 14A uses the words ‘expenditure incurred by the assessee in relation to income’. These words have the same meaning. However, sub-sections (2) & (3) of s. 14A do not find a place in clause (f) and cannot be imported into clause (f) of the Explanation to s. 115JA, (c) the funds of the assessee were mixed. The investments were made in the past and there were no fresh investments during the year, (d) as the capital and free reserve far exceeded the investments, the prima facie presumption was that investment was made out of own funds, (e) the CIT did not bring any material evidence on record to show that the borrowed funds were deployed in the tax-free investments & (f) as no expenditure was incurred for earning dividend income, the same could not be estimated by working out certain formula. On appeal by the department to the High Court HELD reversing the Tribunal:

The assessee’s contention that in view of the Proviso to s. 14A, the said provision could not have been invoked for AY 2000-01 in a revision u/s 263 is not acceptable because the assessment order was passed after section 14A was enacted (Honda Siel Power Products 340 ITR 53 (Del) (approved by SC) followed). The failure of the AO to invoke s. 14A had resulted in the order being erroneous and prejudicial to the interests of the Revenue. On the question of quantum of deduction to be made u/s 14A, the Tribunal has not gone into the said question of quantum. The deduction or quantum has to be decided in light of Maxopp Investment 347 ITR 272 (Delhi)

Note: The argument that sub-secs (2) & (3) of s. 14A (which enact Rule 8D) do not apply to s. 115JB and that no disallowance can be made if the assessee has own funds & no fresh investments are made during the year was not specifically rejected. For the contra view that s. 14A does not apply to s. 115JB see Spray Engg 53 SOT 70 (Chd)