2016 (5) TMI 754 - AT - Income Tax

Disallowance u/s 14A - Held that - The Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that Rule 8D could not be considered as retrospective and the said Rule could be applied only with effect from the Assessment Year 2008-09. Further, the Bombay High Court also observed in the above-referred case that the Assessing Officer would first be required to check the concerned assessee s offer of disallowance and only after recording his dissatisfaction, if any, the Assessing Officer could commute the amount to be disallowed in accordance with sub-section (2) of section 14A. The abovereferred subsection (2) of section 14A was inserted by the Finance Act, 2006, with effect from the Assessment Year 2007-08. The Assessee s case being for the Assessment Year 2003-04, there cannot be any applicability of the above-referred subsection (2) of section 14A or Rule 8D in the Assessee s case for the Assessment Year 2006-07. Thus we hold that 1% of the exempt income alone should be disallowed u/s.14A of the Act. MAT applicability - Held that - provisions of section 115JB of the Act are not applicable to the assessee which is a banking company.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Applicability of Section 115JB of the Income Tax Act to a banking company.

Detailed Analysis:

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

The Assessee, a public sector bank, contested the disallowance of ?4,33,45,434 under Section 14A read with Rule 8D. Initially, the Assessing Officer (AO) disallowed ?4,98,28,693, which was upheld by the CIT(A). However, on further appeal, ITAT directed the AO to reassess the disallowance as per Rule 8D, which was considered retrospective based on the Special Bench decision in Daga Capital Management Pvt. Ltd. The AO, following ITAT's directive, disallowed ?4,33,45,024 using Rule 8D(2)(iii).

Before CIT(A), the Assessee argued that the retrospective application of Rule 8D was invalidated by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which stated Rule 8D applies from AY 2008-09. The Assessee also contended that only actual expenses incurred for earning exempt income should be disallowed, not potential income. CIT(A) agreed that Rule 8D was not retrospective but still upheld the disallowance using a 0.5% average value of investments.

Upon appeal, the Tribunal noted the Bombay High Court's ruling in Godrej & Boyce and other ITAT Kolkata decisions which consistently held that 1% of exempt income should be disallowed under Section 14A for years prior to AY 2008-09. Consequently, the Tribunal ruled that only 1% of the exempt income should be disallowed, partially allowing the Assessee's appeal.

2. Applicability of Section 115JB of the Income Tax Act to a banking company:

The Assessee challenged the application of Section 115JB (Minimum Alternate Tax) on the grounds that, as a banking company, it was exempt from preparing accounts as per Schedule VI of the Companies Act. The CIT(A) upheld the AO's application of Section 115JB, but the Assessee cited various judicial pronouncements, including ITAT Mumbai's decision in Krung Thai Bank, which held that Section 115JB does not apply to banking companies due to their exemption under Section 211(2) of the Companies Act.

The Tribunal agreed with the Assessee, referencing the ITAT Mumbai decision in Krung Thai Bank and other similar cases, concluding that Section 115JB is inapplicable to banking companies. Consequently, the Tribunal allowed the Assessee's appeal on this issue, rendering the grounds on the computation of book profits under Section 115JB moot.

Conclusion:

The Tribunal's judgment partially allowed the Assessee's appeal regarding the disallowance under Section 14A, limiting it to 1% of the exempt income. Additionally, it fully allowed the appeal concerning the applicability of Section 115JB, ruling it inapplicable to banking companies. The appeal was thus allowed in favor of the Assessee.