THE issues before the Bench are - Whether, for the purpose of Sec 14A, there is any difference between the expression 'expenditure relatable' and the expression 'expenditure incurred by the Assessee in relation to' and Whether, for the purpose of computing profits u/s. 115JB, both direct and indirect expenditures are to be disallowed. And the verdict goes against the assessee.
Facts of the case
The assessee is a property developer for housing projects in Indian metro cities. Under an arrangement with its sister company, M/s. Sobha Inner City Techno Qualis (STP), the assessee had developed a housing project, Sobha Daffodil, on land owned by STP. As the owner, STP had wholly conveyed the share of undivided interest in the land over which this project was developed by the assessee and the flats sold to prospective purchasers. The consideration payable by the purchasers of the flat from the assessee for the undivided share of land was appropriated to STP and the assessee. The assessee had shown profit on sale and development of land for its Sobha Daffodil project.
The AO observed that the assessee was only a builder of the project and development of land was carried out by the sister company and not by the assessee. The AO concluded that the assessee could not treat the profit on sale and development of land as part of the profits derived from developing the housing project and claim deduction on such projects u/s. 80IB(10). The AO thus denied the 80IB(10) deduction and made an addition against the assessee.
On appeal, CIT(A) found that similar issue was considered and decided by the Tribunal in assessee’s own case for the A.Y. 2005-06 in ITA No.965/Bang/2009 in favour of the assessee holding that profits on sale of land will also be eligible for deduction u/s. 80IB(10). Following the aforesaid decision of the Tribunal, the CIT(A) directed the AO to allow deduction u/s. 80IB(10) on a sum of Rs.1,15,18,769. On further appeal, Tribunal held that similar issue had been considered by this Tribunal in assessee’s own case for the A.Y. 2005-06 in ITA No.965/Bang/2009.
Computation of book profits u/s 115JB
The income of assessee was ultimately determined by applying the provisions of section 115JB. Tax payable under the normal provisions of the I.T. Act, 1961 was less than the tax computed u/s. 115JB and therefore total income and tax payable by the assessee was computed by the AO u/s. 115JB. While computing book profits u/s. 115JB, AO added to the profit as per P&L account prepared in accordance with the provisions of Part II of Schedule-VI to the Companies Act, 1956, an expenditure relatable to income to which provisions of section 10(35) and 10(2A) were applicable and therefore not forming part of the total income of the assessee. Assessee earned income in the form of dividends on units of mutual funds and also share income from a partnership firm in which it was a partner. Both the aforesaid items of income do not form part of total income under the Act, in view of provisions of sections 10(35) and 10(2A) respectively. According to the AO, in view of provisions of Explanation 1(f) to section 115JB(2), sum of Rs.24,64,632 which was expenditure incurred on earning the aforesaid exempt income should be added to the profits as per P&L account. A disallowance was also made u/s. 14A r.w. rule 8D of the I.T. Rules. The aforesaid computation of expenditure was made by the AO while computing income of the assessee under the normal provisions of the Act. It was noted that no direct expenses were attributable to earning of exempt income and disallowance was made only in respect of indirect expenses. It was also submitted that there has been an error in the computation of income u/s. 115JB in the revised return of income. On appeal, CIT(A) held that it was in agreement with the latter since the computation of book profit for purposes of Sec. 115JB for determining the MAT was done as per the book profit evident from the financial statements drawn under the Companies Act. Even where the book profit as per the Companies Act has been allowed to be adjusted by the IT Act, it has been done through very specific provisions in terms of the explanations to Sec. 115JB. When the language of the explanation was specific and unequivocal and mentions specific exempted incomes in explanation 1(f), there is no situation for reading in any other interpretation even if they were analogous to the specified sections. While Sec.14A deals with disallowance of expenditure related to exempt income, it cannot be equated in letter and spirit with exempted income u/s.10 and expenditure related to it which was provided in explanation 1(f) of Sec.115JB. Hence, the AO’s extension of these provisions to the amount disallowed u/s. 14A was not within the scheme of the legal provisions and the same was therefore, directed to be deleted.
Having heard the matter, the Tribunal held that,
++ in the present case we are concerned with one item which needs to be added to the total income laid down in the first part of Expln.1 clause (f) viz., the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply. Another item which needs to be excluded to the total income laid down in the second part of Expln.1 clause (ii) viz., the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the profit and loss account. On the issue of reducing/excluding the share of profits from the profit as per the P&L account, in view of clause (ii) to Explanation (1) to section 115JB(2), viz., the amount of income to which any of the provisions of section 10, we are of the opinion that the contentions put forth by the assessee are acceptable. In this regard, we are also of the view that decision rendered by the Bangalore Bench of the Tribunal referred to by the counsel for the assessee clearly supports the stand taken by the assessee. We, therefore, concur with the view of the CIT(Appeals) on this issue and find no merit in ground No.4 raised by the revenue;
++ as far as ground No.3 is concerned, viz., the addition to the net profit as per profit and loss account expenditure incurred in earning income which does not form part of the total income under the Act, u/s.10, it is seen that the quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. The provisions of section 115JB Explanation 1(f) lay down that the amount of expenditure relatable to income to which section 10 applies, should be added to the profit as per the P&L account. Section 14A r.w. Rule 8D of the Rules is a reasonable method of calculating the amount of expenditure, in a case where the Assessee has not been able to satisfy the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. If the Assessee satisfies the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act than that can be adopted for the purpose of addition under clause (f) of Expln.1 below Sec.115JB(2). Rule 8D of the rules come into play only when there is no other basis for arriving at the quantum of expenditure incurred in earning income which does not form part of the total income under the Act;
++ in our opinion, the question formulated by the CIT(A) whether Sec. 14A read with Rule 8D of the rules can be imported into the provisions of clause (f) to Explanation (1) to section 115JB of the Act, is itself erroneous. The question to be asked is as to how to give effect to the provisions of clause (f) to Explanation (1) to section 115JB. We do not think that there is any prohibition to adopt the disallowance made by the AO u/s.14A read with Rule 8D of the rules, while computing total income under the normal provisions of the Act. The argument of the counsel for the Assessee that section 14A is very specific and is applicable only for the purpose of computing total income under Chapter IV of the Act and that section 115JB appears in Chapter XIIB of the Act dealing with specific provisions relating to certain companies and therefore the provisions of Sec.14A read with Rule 8D of the Rules cannot be applied while making addition to net profit as per profit and loss account u/s.115JB Expln.1 clause (f) of the Act, because the expression "expenditure relatable" is used in sub-clause (f) of Explanation (1) to section 115JB of the Act whereas expression with the expression used in 14A is "expenditure incurred by the assessee in relation to" and therefore only direct expenditure attributable to earning of income which does not form part of the total income under the Act can be added under clause(f) of Expln.1 below Sec.115JB(2) cannot be accepted. In our view, there is no difference between the expression "expenditure relatable" and the expression "expenditure incurred by the Assessee in relation to". Both the expressions mean that whatever expenditure are incurred to earn income which does not form part of the total income under the Act, both direct and indirect expenditure, have to be disallowed. There is no basis for the argument u/s. 115JB, it is only direct expenses that are contemplated as capable of being added to the profits as per P&L account under clause (f) to Expln.1 below Sec.115JB(2). As we have already seen, the quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. In such circumstances, we do not see any reason why the same disallowance cannot be adopted while arriving at the book profits u/s.115JB (2) read with Explanation 1(f) thereto. In our view the CIT(A) has fallen into an error in coming to a conclusion contrary. We therefore reverse the order the CIT(A) and restore the order of the AO in this regard. In the result, appeal of the revenue is partly allowed.
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