2013 (5) TMI 473 - AT - Income Tax

MAT - Adjustment on account of the expenditure incurred for exempt income for the purpose of computation of book profit u/s 115JB - disallowance of exemption u/s 10(23G) and 10(34) for interest income as well as dividend income - Held that - Though the authorities below have not given a finding that the assessee has incurred any expenditure exclusively for earning of the exempt income in the shape of interest and dividend, however, section 14A has an implicit principle of apportionment in the cases where the expenditure is incurred for composite/indivisible activity, in which taxation and non taxable income is received, therefore, following the order of M/s Godrej Agrovet Ltd 2010 (9) TMI 291 - ITAT, MUMBAI AO directed to restrict the disallowance on account of administrative expenditure u/s 14A to 2% of the total exempt income. As regards the addition of the amount of disallowance, as computed u/s 14A while computing the book profit u/s 115JB is concerned, this Tribunal in the case of Goetze (India) Ltd (2009 (5) TMI 615 - ITAT DELHI ) has held that for computation of adjusted book profit, the provisions of sec.14A cannot be imported into clause (f) of the Explanation to sec. 115JB. Also see case M/s Bengal Finance & Investments P Ltd (2013 (5) TMI 117 - ITAT MUMBAI) where it is clear that the amount disallowed u/s 14A cannot be considered while computing the book profit u/s 115JB of the Act. appeal of assessee partly allowed.

Summary

Issues:
- Disallowance of estimated expenses under section 14A of the Income Tax Act for earning exempt income.
- Adjustment of disallowance for computation of book profit under section 115JB.

Analysis:

Issue 1: Disallowance of estimated expenses under section 14A:
The assessee challenged the disallowance made by the Assessing Officer under section 14A for administrative expenses related to earning exempt income. The CIT(A) modified the disallowance by applying Rule 8D of the IT Rules, reducing the amounts for both assessment years. The assessee contended that no specific expenditure was incurred for earning the exempt income, citing a decision of the jurisdictional High Court. The Assessing Officer and the CIT(A) relied on the principle of apportionment under section 14A. The Tribunal considered the implicit principle of apportionment in cases of composite activities involving taxable and non-taxable income. Referring to a decision of the High Court, the Tribunal upheld a reasonable disallowance for administrative expenses related to exempt income.

Issue 2: Adjustment of disallowance for computation of book profit under section 115JB:
Regarding the adjustment of disallowance for book profit computation under section 115JB, the Tribunal noted that the provisions of section 14A cannot be imported into the computation of adjusted book profit. Citing decisions of other Tribunals, it was established that the disallowance under section 14A cannot be added to the book profit under section 115JB. The Tribunal followed the precedent set by previous decisions and ruled in favor of the assessee against the revenue.

In conclusion, the Tribunal partly allowed the appeal filed by the assessee, directing the Assessing Officer to restrict the disallowance for administrative expenses under section 14A and confirming that the disallowance under section 14A cannot be considered for computing book profit under section 115JB. The judgment was pronounced in open court on April 5, 2013.