2016 (10) TMI 1021 - AT - Income Tax

Addition for earning exempt income under Section 14A read with Rule 8D(2)(iii) - Held that - It is not case where regular activities were undertaken by the Assessee in respect of the investments to earn income therefrom, there was no basis for the AO to hold that the expenditure as disclosed by the Assessee towards earning exempt income was insufficient. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the Commissioner of Income Tax (Appeals) confirming the addition of expenses incurred in earning exempt income under Section 14A of the Income-tax Act, 1961.
2. Appropriateness of the addition made while computing Book Profit under Section 115JB of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Legality of the Commissioner of Income Tax (Appeals) confirming the addition of expenses incurred in earning exempt income under Section 14A of the Income-tax Act, 1961:

The primary issue revolves around the addition of expenses incurred in earning exempt income under Section 14A of the Income-tax Act, 1961. The assessee challenged the confirmation of additions by the Commissioner of Income Tax (Appeals) for the assessment years 2009-10 and 2010-11. The Assessing Officer (AO) disallowed ?8,72,79,000/- for AY 2009-10 and ?15,63,49,582/- for AY 2010-11, applying Rule 8D of the Income Tax Rules, 1962. The assessee had already disallowed ?38,00,216/- and ?57,71,705/- respectively in their returns based on auditor certification.

The Tribunal noted that similar issues had been adjudicated in the assessee's favor in earlier years (AY 2008-09), where the AO's additions were deleted. The Tribunal emphasized that for invoking Rule 8D, the AO must record dissatisfaction with the assessee’s computation of expenses related to exempt income. The AO failed to provide cogent reasons for dissatisfaction with the assessee’s disallowance, which was based on detailed calculations and auditor certification. The Tribunal cited precedents, including the Delhi High Court's decision in the assessee's own case, which upheld the Tribunal's deletion of similar additions. Consequently, the Tribunal directed the deletion of the additions made by the AO under Section 14A for both assessment years.

2. Appropriateness of the addition made while computing Book Profit under Section 115JB of the Income-tax Act, 1961:

The second issue pertains to the addition made while computing Book Profit under Section 115JB of the Income-tax Act, 1961. The AO had included the disallowed expenses under Section 14A in the computation of Book Profit. The Tribunal referred to its earlier decision for AY 2008-09, where it directed the AO to restrict the disallowance while computing Book Profit to the amount computed by the assessee. This decision was also upheld by the Delhi High Court.

For the assessment years under consideration, the Tribunal applied the same rationale. Since the disallowance under Section 14A was directed to be deleted, the corresponding addition to Book Profit under Section 115JB was also deemed incorrect. The Tribunal directed the AO to restrict the disallowance to the amounts computed by the assessee, thereby allowing the appeals on this ground as well.

Conclusion:

The Tribunal allowed the appeals for both assessment years, directing the deletion of additions under Section 14A and restricting the disallowance while computing Book Profit under Section 115JB to the amounts computed by the assessee. The decision was pronounced in the open court on 6th Oct, 2016.