2019 (8) TMI 809 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - addition of expenditure incurred in relation to exempt dividend income - provision for non-performing assets allowability - transfer to special reserve in terms of section 45-IC of the Reserve Bank of India Act 1934 was to be excluded from total income under the normal computation provisions - MAT applicability - capital profit/loss on account of sale of investments, transfer of business and sale of assets to be considered in computing the book profit under section 115JB - sum as transferred to special reserve out of statutory compulsion in accordance with section 45-IC of the Reserve Bank of India Act, 1934 was required to be excluded in computing the book profit under section 115JB - HELD THAT - We are of the view that interest of justice would be subserved if the matter is remanded back to the tribunal to reconsider the above issues afresh upon hearing the parties and by passing a reasoned order within six months of communication of this order. Only that part of the order of the tribunal dated 27th February 2019 dealing with the above questions is set aside.

Issues:
1. Challenge to tribunal order on grounds of perversity in findings related to specific issues.
2. Disallowance under section 14A of the Income Tax Act, 1961 and rule 8D.
3. Legitimacy of provision for non-performing assets.
4. Treatment of transfer to special reserve under section 45-IC of the RBI Act.
5. Deduction of education cess as business expenditure.
6. Applicability of section 115JB of the Income Tax Act, 1961.
7. Consideration of capital profit/loss under section 115JB.
8. Addition of provision for non-performing assets to book profit under section 115JB.
9. Exclusion of transfer to special reserve from book profit under section 115JB.

Analysis:

1. The appellant challenged the tribunal order on the grounds of perversity in findings related to specific issues. The questions of law formulated included the disallowance under section 14A of the Income Tax Act, 1961, and rule 8D. The appellant argued that the findings of the tribunal were arbitrary, unreasonable, and perverse. The tribunal's decision to uphold the disallowance of expenditure incurred in relation to exempt dividend income was also contested as ignoring the materials on record.

2. The legitimacy of the provision for non-performing assets made by the appellant in accordance with the provisions of the Non-banking Financial Companies Prudential Norms was questioned. The appellant sought clarification on whether this provision was a legitimate business deduction, emphasizing compliance with the RBI Directions.

3. Another issue raised was the treatment of the transfer of funds to a special reserve under section 45-IC of the Reserve Bank of India Act, 1934. The appellant argued that this transfer should be excluded from the total income under normal computation provisions. The tribunal's failure to adjudicate or reject this claim was deemed arbitrary and unreasonable.

4. The appellant also contested the deduction of education cess as a business expenditure, relying on a coordinate Bench decision following the judgment of the Rajasthan High Court. The rejection of this claim was challenged based on established precedents.

5. The applicability of section 115JB of the Income Tax Act, 1961, in the appellant's case was disputed. The appellant argued that their profit and loss account preparation, in compliance with RBI Act and NBFC Prudential Norms, should take precedence over the Companies Act provisions. The tribunal's failure to adjudicate on this claim was deemed arbitrary and unreasonable.

6. The consideration of capital profit/loss on account of various transactions in computing the book profit under section 115JB was another issue raised. The appellant sought clarification on whether these factors should be included in the book profit calculation.

7. Additionally, the appellant questioned whether the provision for non-performing assets and the transfer to special reserve were required to be added or excluded from the book profit under section 115JB. These issues required further examination and clarification.

8. In light of the arguments presented, the court found substance in the contentions raised by the appellant. To ensure justice, the matter was remanded back to the tribunal for a fresh consideration of the issues mentioned, with a directive to pass a reasoned order within six months. The specific part of the tribunal's order dealing with the identified questions was set aside, and the appeal was disposed of accordingly.

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