2018 (9) TMI 1924 - AT - Income Tax

Additions u/s 14A - expenditure incurred towards earning of exempt income u/s 10(34) - CIT-A made the disallowance on the ad-hoc basis - Rule 8D are applicable from the assessment year 2008-09 - in present case, matter relates to AYs prior to 2008-09 - Held that - the disallowance as per the provision of Rule 8D cannot be made for the year under consideration. However, the possibility of incurring the expenses in relation to exempted income on account of administrative expenses cannot be ruled out. Therefore some expenses on reasonable basis should be disallowed in pursuance of the provision of section 14A of the Act. - AO directed to disallow administrative expenses at the rate of 1% of the exempted/dividend income. MAT - computation of book profit u/s 115JB - consideration of disallowances made u/s 14A r.w.r. 8D - Held that - ad-hoc disallowance will serve the justice to the Revenue and assessee. Therefore to put the dispute to rest in given facts circumstances, we direct for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. - onsidering the peculiar circumstances of the case, we propose to limit the disallowance on an ad-hoc basis @ 1% of the dividend/exempt income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. MAT - computation of book profit u/s 115JB - additions on account of amount written back - the amount of interest was waived off by the Vijaya bank - Held that - it can be safely presumed that the effect of provision created for interest expenses in the earlier years have been duly given and offer to tax under the provision of MAT. Accordingly, the assessee cannot be made liable for paying tax under the provision of MAT for the year in which it was written back. - Additions deleted. Interest liability u/s 234B and 234C - Held that - it is clear that there was a shortfall in the payment of advance tax on account of the retrospective amendment, but there will be no interest liability u/s 234B and 234C of the Act in terms of judgment as discussed above. Thus the ground of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Computation of book profit under Section 115JB of the Income Tax Act.
3. Taxability of provision for diminution in value of investment written back.
4. Applicability of interest under Sections 234B and 234C.
5. Deduction of Fringe Benefit Tax and Security Transaction Tax from book profit.

Detailed Analysis:

Disallowance under Section 14A:
1. Assessee's Appeal:
- The assessee contested the disallowance of ?25,00,000 on an ad-hoc basis for earning exempt income, arguing that no expenditure was incurred for earning such income.
- The AO had disallowed ?7,10,64,678 under Section 14A, which was reduced to ?25,00,000 by the CIT(A).
- The Tribunal held that Rule 8D is not applicable for AY 2007-08 but acknowledged the possibility of incurring administrative expenses. It directed the AO to disallow 1% of the exempt income as administrative expenses.

2. Revenue's Appeal:
- The Revenue challenged the reduction of disallowance from ?7,10,64,678 to ?25,00,000.
- The Tribunal upheld the CIT(A)'s decision, confirming that no interest expenses were to be disallowed as the investments were made from the assessee's own funds.

3. AY 2008-09:
- The Tribunal directed the AO to compute disallowance under Rule 8D after considering net investments (excluding NPA provisions and taxable investments).

4. AY 2009-10:
- The Tribunal reiterated its stance on disallowance under Rule 8D, directing the AO to consider net investments.

Computation of Book Profit under Section 115JB:
1. Disallowance under Section 14A:
- The Tribunal held that disallowances under Section 14A cannot be imported while determining book profit under Section 115JB.
- It directed the AO to make an ad-hoc disallowance of 1% of the exempt income for AY 2007-08 and subsequent years.

2. Provision for Diminution in Value of Investment Written Back:
- The Tribunal held that the provision written back should be excluded from book profit if it was added back in earlier years due to retrospective amendments.
- For AY 2007-08, the Tribunal directed the AO to exclude the provision written back for interest payable to Vijaya Bank from book profit.

Taxability of Provision for Diminution in Value of Investment Written Back:
1. Normal Computation of Income:
- The Tribunal held that the provision for diminution in value of investments, which was disallowed in earlier years, should not be taxed again when written back.

2. MAT Computation:
- The Tribunal directed the AO to exclude the provision written back from book profit under Section 115JB if it was added back in earlier years.

Applicability of Interest under Sections 234B and 234C:
1. Interest Liability:
- The Tribunal held that no interest under Sections 234B and 234C is chargeable due to retrospective amendments, following the Gujarat High Court's decision in CIT vs. National Dairy Development Board.

Deduction of Fringe Benefit Tax and Security Transaction Tax from Book Profit:
1. Fringe Benefit Tax:
- The Tribunal upheld the CIT(A)'s decision to allow the deduction of Fringe Benefit Tax from book profit, following CBDT Circular No. 8/2005.

2. Security Transaction Tax:
- The Tribunal held that Security Transaction Tax cannot be added to book profit under Section 115JB, following the Supreme Court's decision in CIT vs. Apollo Tyres Ltd.

Conclusion:
The Tribunal provided detailed directions on disallowances under Section 14A, computation of book profit under Section 115JB, taxability of provisions written back, and the applicability of interest under Sections 234B and 234C. It upheld the CIT(A)'s decisions on several issues, providing clarity on the treatment of various expenses and provisions in the computation of taxable income and book profit.