2014 (1) TMI 1579 - AT - Income Tax

Disallowance u/s 14A - Held that - The assessee had sufficient interest free funds which it had invested in mutual funds and moreover the assessee instead of incurring expenditure in the form of interest has earned income - Ld CIT(A) has rightly deleted the interest component from the disallowance of Rule 8D - Decided against Revenue. Whether adjustment of disallowance u/s 14A be deleted while computing book profits u/s 14A - Held that -The provisions of clause (g) to section 115JB refers to the amount of expenditure incurred for earning exempt income which has to be added back to the profit as per P&L A/c for the purpose of calculation of book profits u/s 115JB - The assessee has not incurred any expenditure in earning exempt income - Disallowance u/s 14A has been deleted by the CIT(A) - Decided against Revenue. Whether income derived from operations & maintenance of SEZ be deleted from book profits when the same has not been claimed by the assessee - Held that - As per clause (6) of section 115JB - The provision of this section shall not apply to the income accrued or arising on or after the Ist day of April, 2005 from any business carried on or services rendered by an entrepreneur or a developer in a unit or SEZ - The assessee was eligible for exclusion of income from SEZ business for the purpose of section 115JB - The claim of assessee with respect to SEZ income has not been examined by the Assessing Officer or by ld CIT(A) - The issue has been restored for fresh adjudication.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Adjustment of disallowance under Section 14A in the book profit calculation under Section 115JB.
3. Exclusion of SEZ income from the book profit calculation under Section 115JB.
4. Whether the Assessing Officer has the power to scrutinize the accounts beyond what is specified under the Companies Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:

The revenue appealed against the CIT(A)'s decision to restrict the disallowance to Rs. 18.75 lakhs as opposed to Rs. 20.17 lakhs computed by the Assessing Officer (AO) under Section 14A read with Rule 8D. The CIT(A) found that the assessee had sufficient interest-free funds for making investments in mutual funds, and thus, no interest expenditure required disallowance. The CIT(A) restricted the disallowance to 0.5% of the average investment, amounting to Rs. 18.75 lakhs. The Tribunal upheld this decision, noting that the assessee had enough non-interest-bearing funds and had earned net interest income, thereby dismissing the revenue's appeal on this ground.

2. Adjustment of disallowance under Section 14A in the book profit calculation under Section 115JB:

The revenue contended that the disallowance under Section 14A should be added back to the book profit as per clause (f) of Explanation 1 to Section 115JB. The CIT(A) deleted the disallowance, relying on the Supreme Court's judgment in Apollo Tyres Ltd. v. CIT, which held that the AO cannot alter the book profits except as provided in the explanation to Section 115JB. The Tribunal agreed, noting that the disallowance under Section 14A was notional and not debited in the P&L account, thus upholding the CIT(A)'s decision to delete the disallowance from the book profit calculation.

3. Exclusion of SEZ income from the book profit calculation under Section 115JB:

The CIT(A) held that the income from SEZ operations should not be included in the book profit calculation under Section 115JB, as per Section 115JB(6), which exempts SEZ income from book profits. The Tribunal noted that the assessee, as a co-developer, qualifies as a developer under the SEZ Act, 2005, and is eligible for this exclusion. However, the Tribunal found that the AO had not examined the claim of SEZ income. Therefore, it remitted the issue back to the AO to verify the SEZ income and allow the exclusion accordingly.

4. Whether the Assessing Officer has the power to scrutinize the accounts beyond what is specified under the Companies Act:

The CIT(A) and the Tribunal relied on the Supreme Court's judgment in Apollo Tyres Ltd. v. CIT, which restricts the AO's power to scrutinize the accounts beyond what is specified under the Companies Act. The AO can only make adjustments as provided in the explanation to Section 115JB and cannot reassess the company's income. The Tribunal upheld the CIT(A)'s decision, affirming that the AO's adjustments beyond the specified provisions were not permissible.

Conclusion:

The Tribunal dismissed the revenue's appeal on the disallowance under Section 14A and the adjustment of this disallowance in the book profit calculation under Section 115JB. It remitted the issue of SEZ income exclusion back to the AO for verification. The appeals filed by the revenue were partly allowed for statistical purposes.