2018 (11) TMI 1716 - AT - Income Tax

Disallowance u/s.14A made in computing the book profit u/s.115 JB - HELD THAT - We find that this issue has already been dealt with by the Special Bench of the Tribunal in the case of Vireet Investment Pvt. Ltd. and ANR. 2017 (6) TMI 1124 - ITAT DELHI as held that disallowance u/s.14A cannot be made in computing book profit u/s.115 JB. However, the Special Bench has the remitted the matter to the file of the assessing officer to make the disallowance for earning the exempt income in accordance with Explanation to section 115JB. In accordance with the above ruling of the special bench we remit this issue the file of the assessing officer. The assessing officer shall consider the issue Disallowance u/s.14A r.w.r 8D - HELD THAT - Disallowance under Rule 8D(2)(iii) is concerned, the Special Bench in the case of Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that for calculation of the average value of investment only those investment should be considered which have yielded exempt income. As regards the limit to the disallowance to the extent of expenditure debited is concerned, the same is also covered by the decision of the Iqbal M Chagala 2014 (7) TMI 1111 - ITAT MUMBAI . Accordingly, we modify the order of the ld. CIT(A) in this regard and direct the A.O. to give effect to the case laws as mentioned above in the computation. Accrual of income - Addition being interest on non-performing asset received from - HELD THAT - Assessee has claimed that it is an NBFC (Non Banking Finance Company). It has not accounted for interest on loan given to Portfolio Fashions Pvt Ltd as it has become a NPA (Non Performing asset) and the assessee following the RBI guidelines on prudential norms for income recognition on NPA has not accounted for the interest as the loan has become the NPA. A.O. has rejected the same by doubting the assessee s claim of being an NBFC and further holding that in view of the mercantile system of accounting and the loan appearing in the balance sheet of the assessee it was incumbent upon the assessee to account for the interest on accrual basis. We find that as against the above the ld. CIT(A) has given a finding that the assessee is duly registered with RBI as an NBFC. Furthermore, it has now been accepted by the higher courts that RBI guidelines on prudential norms of income recognition on NPA have to be accepted. This view is supported by the observation of the Hon ble Apex Court in the case of Southern Technologies Limited 2010 (1) TMI 5 - SUPREME COURT quoted by the ld. CIT(A). Once this view is accepted, the assessee being an NBFC was not required to account for interest on accrual basis on loans which have became NPA. This view also gets supported in the case of Vashisht Chay Vyapar Limited 2010 (11) TMI 88 - DELHI HIGH COURT . Hence, we do not find any infirmity in the order of the CIT(A). Accordingly, we uphold the same.

Summary

Issues Involved:
1. Disallowance under Section 14A in computing book profit under Section 115JB.
2. Disallowance under Section 14A in the Revenue's appeal.
3. Addition of interest on Non-Performing Asset (NPA).

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A in computing book profit under Section 115JB:
The core issue in the assessee's appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was correct in holding that disallowance under Section 14A should also be made in computing the book profit under Section 115JB. The Tribunal referred to the Special Bench decision in the case of Vireet Investment Pvt. Ltd., which held that disallowance under Section 14A cannot be made in computing book profit under Section 115JB. However, the matter was remitted to the Assessing Officer (AO) to make the disallowance for earning exempt income in accordance with the Explanation to Section 115JB. The Tribunal directed the AO to consider the issue as per the ITAT Special Bench's directions.

2. Disallowance under Section 14A in the Revenue's appeal:
The common issue raised by the Revenue was whether the CIT(A) was correct in granting relief regarding the disallowance under Section 14A. For A.Y. 2009-10, the CIT(A) found that the AO had not provided any reason to reject the assessee's claim and merely retained the disallowance made in the original return. The CIT(A) followed the jurisdictional ITAT's directions that disallowance under Rule 8D cannot exceed actual expenditure debited to the Profit & Loss (P&L) account. The AO was directed to recompute the disallowance under Rule 8D, restricting it to the administrative expenses actually claimed in the P&L account.

For A.Y. 2008-09, the CIT(A) noted that the AO had simply retained the disallowance made under Section 14A in the original assessment order. The CIT(A) directed the AO to compute the disallowance under Rule 8D(ii) after reducing interest income and interest otherwise disallowed in relation to interest-free advances from gross interest expense. The AO was also directed to adopt correct values of opening and closing investments for computation of disallowance.

The Tribunal upheld the CIT(A)'s decision, modifying it to direct the AO to give effect to the case laws mentioned, including the Special Bench decision in Vireet Investment Pvt. Ltd. and the decision in Iqbal M Chagala.

3. Addition of interest on Non-Performing Asset (NPA):
The issue was whether the CIT(A) erred in granting relief by deleting the addition of interest on NPA. The AO had added ?49,10,349 as undisclosed income, arguing that the assessee, following the mercantile system of accounting, should have accounted for the interest on an accrual basis. The assessee contended that as an NBFC, it followed RBI guidelines, which required income on NPAs to be recognized only upon actual realization.

The CIT(A) accepted the assessee's claim, referencing the RBI guidelines and the Supreme Court's decision in Southern Technologies Limited, which held that RBI directions on income recognition for NPAs override the provisions of Section 145 of the Income Tax Act. The CIT(A) deleted the addition, noting that the assessee had offered the income to tax in the year of realization and claimed TDS credit accordingly.

The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order and supporting the view that RBI guidelines on prudential norms for income recognition on NPAs should be accepted.

Conclusion:
The Tribunal partly allowed the appeals by the assessee and the Revenue, directing the AO to follow the specified case laws and guidelines in recomputing disallowances and recognizing income for NPAs. The order was pronounced in the open court on 22.11.2018.