2018 (6) TMI 1674 - AT - Income Tax

Disallowance u/s.14A r.w.Rule 8D - HELD THAT - The issue under consideration is squarely covered by the decision of the ITAT Special Bench in case of Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that only those investments should be considered for computing average value of investment which yielded exempt income during the year. Respectfully following the same, we direct the AO to recompute the disallowance by excluding the investment on which assessee did not yield any exempt income. We direct accordingly. Addition u/s. 14A, while computing book profit u/s.115JB - This issue is also covered by the decision of Vireet Investment 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that only the expenditure debited in the P L account relating to exempt income should be considered and not the disallowance worked out by AO. It was held by Special Bench that computation under clause F of explanation 1 to Section 115JB(2) has to be made without resorting to the computation contemplated u/s.14A r.w.Rule 8D. Respectfully following the decision of the Special Bench, we do not find any merit in the action of the AO for adding the disallowance computed u/s.14A, while computing book profit u/s.115JB.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Addition of disallowance under section 14A while computing book profit under section 115JB.

Issue 1: Disallowance under section 14A of the Income Tax Act:
The appeal was filed against the order of CIT(A)-7, Mumbai for the A.Y.2008-09 regarding the disallowance of &8377; 12,86,148 under section 14A of the Income Tax Act. The AO had made a disallowance under section 14A r.w.Rule 8D during the scrutiny assessment. The CIT(A) confirmed the AO's action, leading to the appeal. The argument put forth was that only investments yielding exempt income should be considered for computing the disallowance. The ITAT Special Bench decision in the case of Vireet Investments was cited, where it was held that only investments generating exempt income should be taken into account for calculating the average value of investments. Following this precedent, the AO was directed to recompute the disallowance by excluding investments that did not yield any exempt income.

Issue 2: Addition of disallowance under section 14A while computing book profit under section 115JB:
The next grievance related to the addition of &8377; 12,86,148 as computed by the AO under section 14A while determining the book profit under section 115JB. Referring to the decision in the Vireet Investment case, it was established that only the expenditure debited in the P & L account related to exempt income should be considered, not the disallowance calculated by the AO. The Special Bench ruling emphasized that the computation under clause F of explanation 1 to Section 115JB(2) should be done without resorting to the computation under section 14A r.w.Rule 8D of the Income Tax Act 1961. Consequently, the action of the AO in adding the disallowance computed under section 14A while computing book profit under section 115JB was deemed to lack merit. As a result, the appeal of the assessee was allowed in part.

In conclusion, the ITAT Mumbai, comprising Shri R.C. Sharma, AM and Shri Amarjit Singh, JM, addressed the issues of disallowance under section 14A of the Income Tax Act and the addition of disallowance while computing book profit under section 115JB. The judgment provided detailed analysis and cited relevant legal precedents to arrive at the decision to partially allow the appeal of the assessee. The order was pronounced on 21/06/2018 in the open court.