Thursday, 5 November 2015

Whether for computing book profit u/s 115JB(2), expenditure incurred in relation to exempt income is to be disallowed by invoking Sec 14A read with Rule 8D - NO: ITAT

THE issue is - Whether for computing book profit u/s 115JB(2), expenditure incurred in relation to exempt income is to be disallowed by invoking Sec 14A read with Rule 8D. NO is the answer.
Facts of the case
Assessee company is engaged in the business of manufacturing of S.S. Billets, Angles, Flat Bars, Channels, S.S.Wire Rods etc. During the year under consideration, the assessee company derived income of Rs.28,19,03,964/- from Business & Profession after claiming deduction of Rs.1,20,36,43,184/- u/s 10B and Rs 67,03,000/- u/s 80G of the Act.
During the course of the assessment proceedings, the AO noticed that the assessee company has investments in equity shares of various companies totaling to Rs.51,03,59,701/- as on 31-03-2008. The assessee company was asked to explain as to why disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 should not be invoked in respect of the exempt income. In response, the assessee company submitted that the assessee company has not earned any exempt income during the relevant assessment year and with prejudice to the above contentions, the assessee company submitted the working of disallowance u/s 14A of the Act. The AO rejected the contentions of the assessee company and held that since the assessee company has blocked its funds in investments not yielding any income or yielding exempt income, the invocation of Section 14A of the Act is proper. The AO relied upon the decision of Special Bench, ITAT, Mumbai in ITA NO 8057/Mum/03 dated 20.10.2008 in the case of M/s Daga Capital Management Private Limited = 2008-TIOL-509-ITAT-MUM-SB and held that both direct and indirect expenses are disallowable u/s 14A of the Act which have any relation with the income not chargeable to tax under Act. The AO also relied upon the decision of Bombay High Court in Godrej & Boyce Manufacturing Company Limited v. DCIT 2010-TIOL-564-HC-MUM-IT and made disallowance of Rs.73,07,018/- u/s 14A of the Act read with Rule 8D(2)(ii) (Rs.58,87,196/-) and 8D(2)(iii)(Rs.14,19,892/-) of Income Tax Rules, 1962.

Similarly for computing book profits u/s 115JB of the Act, the AO added Rs.73,07,018/-being disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962 being expenditure in relation to the earning of exempt income to the book profit in accordance with clause (f) to explanation 1 to Section 115JB(2) of the Act.

With Respect to the re-computation of the book profit u/s 115JB of the Act by the AO by adding the sum of Rs.73,07,018/- disallowed u/s 14A of the Act, the assessee company submitted before the CIT(A) that disallowance u/s 14A of the Act cannot be added while computing the book profit u/s 115JB of the Act as the provisions of Section14A of the Act are limited for the purpose of computation of income under Chapter IV of the Act and the same cannot be extended to the MAT provisions u/s 115JB of the Act which is a self contained code. The assessee company submitted that no exempt income has been earned during the assessment year. The assessee company also submitted that no expenditure has been incurred by the assessee company in relation to the exempt income. The assessee company submitted that since no amount has been debited to the Profit and Loss Account as referred to in clause (f) to Explanation (1) to Section 115JB(2) of the Act the disallowance made by the AO by invoking the provision of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 amounting to Rs.73,07,018/- cannot be increased for the purpose of arriving at the book profit. The assessee company relied upon the judgments in the case of Apollo Tyres Limited v. CIT 2002-TIOL-185-SC-IT-LB; CIT v. HCL Connect Systems and Services Limited 2008-TIOL-182-SC-IT; ACIT v. Spray Engineering devices Limited 2012-TIOL-438-ITAT-CHD.
The CIT(A) allowed the appeal of the assessee company by holding that as observed in Apollo Tyres Limited v. CIT by Apex court that where Profit and Loss Account has been prepared in accordance with Part II and III of Schedule VI to the Companies Act,1956 and which has been scrutinized and certified by the statutory auditors and relevant authorities, the AO has no power to scrutinize the net profit and loss account except to the extent provided in the explanation to Section 115JB of the Act. The CIT(A) also held that the same view has been reiterated by Bombay High Court in Kinetic Motor Co. Ltd. v. DCIT wherein it has been held that there is no scope for the AO to make adjustment to Book Profits beyond what was authorized by the definition in Explanation1 to Section 115J of the Act. The term book profit has been defined as the net profit as per Profit and Loss Account as adjusted in accordance with the statutory additions and statutory deductions as provided. The CIT(A) held that the AO cannot go beyond the net profit as shown in the Profit and Loss Account except to the extent provided in the explanation to Section 115JB of the Act and hence the CIT(A) held that the AO while computing Book Profit u/s 115JB of the Act cannot make disallowance u/s 14A of the Act as such disallowances are not covered by the exceptions as provided in the explanation to Section115JB of the Act.

Aggrieved by the orders of the CIT(A), the Revenue is in appeal before Tribunal with respect to the orders of the CIT(A) deleting the additions of Rs.73,07,018/- made u/s 14A read with Section 115JB of the Act disregarding the provisions of Section 115JB(2) read with explanation 1 read with clause f of which requires any expenditure in relation to the exempt income also to be taken into consideration while computing the book profit u/s 115JB(2) of the Act.

Having heard the matter, the Tribunal held that,

++ the explanation 1 clause (f) to Section 115JB(2) of the Act stipulates that amount of expenditure relatable to any exempt income, other than Section 10(38) of the Act, is liable to be added back to net profit shown in Profit and Loss Account if the amount referred to therein is debited to Profit and Loss Account;

++ Perusal of Section 14A of the Act provides that it mandates disallowance of expenditure ‘in relation' to the income which does not form part of the total income under the Act while clause (f) in explanation1 to Section 115JB (2) of the Act mandates disallowance of expenditure ‘relatable' to the income to which Section 10 (other than Section 10(38) of the Act) or Section 11 or Section 12 of the Act applies. The close perusal of the both the above provisions reveals that more or less similar language is used in both the afore-stated provisions. The dividend income is declared on the share investment which is exempt u/s 10(33) of the Act (not Section 10(38) of the Act). The clause (f) to explanation 1 to Section 115JB(2) of the Act requires expenditure relatable to the exempt income to be disallowed provided the same is debited to Profit and Loss Account while Section14A(2) of the Act mandates that if the AO is not satisfied with the correctness of the claim of the assessee with regard to the expenditure incurred by the assessee in relation to the income which does not form part of the total income, then disallowance shall be computed in accordance with the prescribed method. Rule 8D of Income Tax Rules, 1962 prescribes the method for computing disallowance of expenditure in relation to earning of exempt income. The said Rule 8D is a machinery provision to compute disallowance of expenditure u/s 14 A of the Act in relation to the income which does not form part of the total income and is held to be applicable w.e.f. assessment year 2008-09 as held by Bombay High Court in Godrej and Boyce Manufacturing Limited decision. The impugned assessment year under appeal in present case is also assessment year 2008-09 and hence Section 14A of the Act read with Rule 8D of Income Tax Rules,1962 is applicable;

++ It is axiomatic to assume that the amount computed under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 shall have no reference to the amount debited to the Profit and Loss Account and there cannot be any disallowance u/s 14A of the Act unless the expenditure is debited to Profit and Loss Account and hence disallowance u/s 14A is always a part of expenditure debited to the Profit and Loss Account. In the instant case under appeal, the AO has disallowed the expenditure of Rs.73,07,018 computed u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 for computing normal taxable income which is upheld by the CIT(A) in the first appeal and the same amount of expenditure of Rs.73,07,018/- is added to compute book profit u/s 115JB of the Act which is computed u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962;

++ the AO cannot tinker with the profit and loss prepared by the assessee company in accordance with the Provisions of The Companies Act,1956 and which are certified by the statutory auditors and approved by the Company in Annual General Meeting and scrutinised by the Registrar of Companie to be so maintained in accordance with the Provisions of the Companies Act, 1956 . Perusal of Section 115JB of the Act will reveal that the tinkering with the Profit and Loss Account as prepared in accordance with the Provisions of The Companies Act, 1956 is permitted to the extent provided in explanation 1 to Section 115JB(2) of the Act. Clause (f) to explanation 1 to Section 115JB(2) of the Act permit the Book profit to be increased with the expenditure relatable to any income to which Section 10 (other than Section 10(38) of the Act), Section 11 or Section12 of the Act applies and hence the decision in Apollo Tyres Limited 2002-TIOL-185-SC-IT-LB is not applicable to the facts of the case;

++ In view of foregoing discussion, there is no infirmity with the orders of the AO and it was held that the AO has rightly disallowed the expenditure of Rs.73,07,018/- by invoking the provisions of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 for computing book profit u/s 115JB(2) of the Act read with clause (f) to explanation 1 to clause 115JB(2) of the Act. Therefore, the orders of the CIT(A) was set aside and restored the orders of the AO.

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