2018 (5) TMI 1020 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - suo moto disallowance - Held that - While computing such disallowance, the amount already disallowed by the assessee in the sum of ₹ 5,13,033/- should be reduced. We also hold that the disallowance of indirect expenses under the third limb, cannot by any stretch of imagination exceed the total indirect expenses debited by the assessee in its profit and loss account. The total indirect expenses debited by the assessee in the profit and loss account is ₹ 52,91,969/-. In view of this we hereby direct the AO to re-compute the disallowance under the third limb of Rule 8D(2) by considering 0.5% of the dividend bearing investments as reduced by ₹ 5,13,033/- subject to maximum of total indirect expenses of ₹ 52,91,969/- under the normal provisions of the Act. Accordingly grounds raised by the assessee are allowed for statistical purposes. Disallowance u/s 14A made while computing the book profits u/s 115JB - MAT - Held that - This issue is now settled by the recent Special Bench decision of Delhi Tribunal in the case of ACIT vs Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that no disallowance u/s 14A of the Act could be made by resorting to computation mechanism provided under Rule 8D of the rules. The ld. AO should make disallowance u/s 14A having regard to the books of account on some rational basis as expenditure incurred for earning exempt income in terms of clause (f) of section 115JB of the Act. The disallowance already made by the assessee in the sum of ₹ 5,13,033/- should be made u/s 14A while computing book profits u/s 115JB of the Act. We direct the AO accordingly.

Issues involved:
1. Disallowance under section 14A r.w.r. 8D of the Rules
2. Disallowance of expenses linked to exempt income
3. Disallowance under normal provisions of the Act
4. Disallowance while computing book profits u/s 115JB of the Act

Issue 1: Disallowance under section 14A r.w.r. 8D of the Rules
The case involved an appeal regarding disallowance under section 14A r.w.r. 8D of the Rules. The assessee, a non-banking finance company, earned dividend income and claimed it as exempt. The Assessing Officer (AO) computed the disallowance under Rule 8D(2) of the Rules, resulting in a specific amount. The Commissioner of Income Tax (Appeals) upheld part of the disallowance under normal provisions but deleted a portion while computing book profits u/s 115JB. The Tribunal directed the AO to re-compute the disallowance under Rule 8D(2) considering specific factors and reducing the amount already disallowed by the assessee.

Issue 2: Disallowance of expenses linked to exempt income
The AO had disallowed a specific amount under section 14A of the Act while computing book profits u/s 115JB. However, a Special Bench decision clarified that disallowance under Rule 8D of the Rules could not be made for book profit computation. The Tribunal directed the AO to make disallowance u/s 14A based on rational basis as expenditure incurred for earning exempt income, adjusting the amount already disallowed by the assessee.

Issue 3: Disallowance under normal provisions of the Act
The Tribunal noted that the assessee had already disallowed certain amounts under section 14A of the Act under normal provisions. The Tribunal directed the AO to delete the duplication of disallowance and re-compute the disallowance considering specific indirect expenses and investments that yielded dividend income. The Tribunal provided detailed directions for the correct computation of disallowance under Rule 8D(2).

Issue 4: Disallowance while computing book profits u/s 115JB of the Act
The Tribunal addressed the issue of disallowance u/s 14A while computing book profits u/s 115JB of the Act. Following the Special Bench decision, the Tribunal directed the AO to make disallowance u/s 14A based on rational basis for earning exempt income, adjusting the amount already disallowed by the assessee. The Tribunal partially allowed the revenue's appeal in this regard.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes and partially allowed the revenue's appeal. The judgment provided detailed directions for the correct computation of disallowance under section 14A r.w.r. 8D of the Rules and clarified the treatment of expenses linked to exempt income under normal provisions and while computing book profits.

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