2017 (1) TMI 675 - AT - Income Tax

Disallowance under section 14A to book profits - Computation of tax liability under section 115JB - Held that - In the present case, clause (i) of Explanation to 115JB(2) permits amount of deduction by the amount withdrawn if any such amount is credited to the P&L A/c only. Proviso to said clause (i) further provides that such reduction is possible only in case the amount of provision is added back to book profits in the year of creation of reserve. It is undisputed fact that this condition is not satisfied by the assessee-company. It is settled principle of interpretation of fiscal law that taxing statute should be construed strictly. When the provision is free from doubt or ambiguity, there is no need to draw any analogy. If the subject comes within the letter of the provision, then it must be taxed however great the hardship appears to be to the mind of the court. Reliance in this regard can be had to the decision in the case of Karamchari Union v. UOI (2000 (2) TMI 11 - SUPREME Court ). Therefore, in our considered opinion, the findings of the CIT(A) are in accordance with settled principles of law and we do not find any reason to interfere with the order of the CIT(A). The amount of disallowance under section 14A should be added back to book profits for the purpose of computing tax liability. However, we make it clear that the amount of addition should be restricted to the actual disallowance made under section 14A read with rule 8D of the IT Rules, 1962. Therefore, we do not find any reason to interfere with the finding of the CIT(A) that this amount is required to be added to the book profits for the purpose of computing tax liability under section 115JB of the Act. Ground No.2(b) is dismissed. Computing the tax liability u/s 115JB - whether amount of capital exempt u/s 10(38) should alone be considered? - Held that - We hold that the amount of profit eligible u/s 10(38) should alone be considered for the purpose of tax liability u/s 115JB of the Act. The assessee-company is entitled to the benefit of indexation while calculating long term capital gains which are to be considered for the purpose of computing tax liability u/s 115JB of the Act. Allowable deduction u/s 37 - contribution made by the assessee-company to flood relief fund of CM - Held that - Contribution was made pursuant to the objectives for which the company was set up. The fact that the amount of contribution is eligible for deduction u/s 80G cannot take away the right of the assessee-company to claim it as a deduction u/s 37 of the Act. Furthermore, since the assessee-company is a Government of Karnataka undertaking, the contribution made to the CM Relief Fund cannot be held to be inadmissible. The Hon ble Supreme Court in the case of Sri Venkata Satyanarayana Rice MillContractors Co. v. CIT (1996 (10) TMI 2 - SUPREME Court) held that any contribution made by an assessee to public welfare found (Andhra Pradesh Welfare Fund) which is directly connected or related with the carrying on of the assessee s business or which results in the benefit to the assessee s business has to be regarded as an allowable deduction under Section 37 (1) of the Act. Addition u/s 14A - Held that - AO has failed to establish direct nexus between borrowed fund and tax-free investments, no disallowance can be made towards interest u/s 14A of the Act read with rule 8D of the IT Rules. See (CIT vs. Karnataka State Industrial & Infrastructure Development Corpn Ltd.) reported in 2015 (11) TMI 1631 - KARNATAKA HIGH COURT

Issues Involved:
1. Disallowance under Section 14A.
2. Provision for bad and doubtful debts written back.
3. Computation of long-term capital gains under Section 115JB.
4. Deduction of donations to the CM Relief Fund under Section 37.

Detailed Analysis:

1. Disallowance under Section 14A:
The AO disallowed ?1,02,74,566/- under Section 14A to the book profits, which was contested by the assessee. The CIT(A) held that no disallowance should be made as there was no nexus between borrowed funds and tax-free investments. The CIT(A) noted, "The appellant has sufficient funds to make these tax-free investments... There is no material on record to prove the nexus between the borrowed funds and tax-free investments."

The Tribunal upheld the CIT(A)’s decision, referencing the case of DCIT v. Viraj Profiles Ltd., which held that the amount of disallowance under Section 14A should be added back to book profits under Section 115JB. The Tribunal stated, "The amount of disallowance made u/s 14A should be added back to book profits u/s 115JB."

2. Provision for Bad and Doubtful Debts Written Back:
The AO did not allow the deduction of ?16,11,65,105/- being the provision for bad and doubtful debts written back. The CIT(A) upheld this, relying on several case laws, including CIT v. Mysore Breweries Ltd. and CIT v. Hutchison Max Telecom (P) Ltd.

The Tribunal agreed with the CIT(A), stating, "The findings of the CIT(A) are in accordance with settled principles of law and we do not find any reason to interfere with the order of the CIT(A)."

3. Computation of Long-Term Capital Gains under Section 115JB:
The AO computed long-term capital gains without considering the indexed cost of acquisition, which was contested by the assessee. The CIT(A) upheld the AO’s view.

The Tribunal allowed the assessee's appeal, stating, "The assessee-company is entitled to the benefit of indexation while calculating long-term capital gains which are to be considered for the purpose of computing tax liability u/s 115JB of the Act."

4. Deduction of Donations to CM Relief Fund under Section 37:
The AO disallowed ?4,99,13,000/- spent on donations to the CM Relief Fund, stating it was not incurred wholly and exclusively for business purposes. The CIT(A) confirmed this disallowance.

The Tribunal reversed the CIT(A)’s decision, stating, "The contribution made by the assessee-company to flood relief fund of CM is eligible for deduction as business expenditure u/s 37 of the Act."

Conclusion:
The Tribunal provided a comprehensive judgment addressing each issue in detail. The disallowance under Section 14A was upheld, the provision for bad and doubtful debts written back was not allowed as a deduction, the computation of long-term capital gains was to include the benefit of indexation, and the donation to the CM Relief Fund was allowed as a business expenditure under Section 37. The appeals of the assessee were partly allowed, and the appeals of the revenue were dismissed.

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