2019 (10) TMI 249 - AT - Income Tax

Disallowance made under section 14A r.w.r. 8D for determining the book profit u/s 115JB - HELD THAT - None of the judgments deals with the determination of income under the provisions of section 115JB of the Act. Therefore, we find that there is no precedent available to resolve the controversy on hand. However, we are also conscious to the fact that the above judgment was rendered in connection with the income determined under normal computation of income but to our mind the same principles can also be applied to the case on hand. It is because, the provisions of section 115JB of the Act require to make the disallowance of the expenditure related to any income to which section 10 applies other than section 10(38) of the Act. Accordingly, we hold that the expenses incurred in connection with the exempted income cannot exceed the amount of such exempted income under the provisions of section 115JB of the Act. Accordingly, we limit the disallowance to the extent of rupees 43,150.00 under the clause (f) to section 115 JB of the Act. Hence the ground of appeal of the assessee is partly allowed.

Issues Involved:
1. Validity of the Impugned Assessment Order.
2. Addition to Book Profit under Section 115JB.
3. Disallowance of Interest Expenditure under Section 14A read with Section 115JB.
4. Charging of Excessive Interest under Sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Validity of the Impugned Assessment Order:
The assessee challenged the validity of the assessment order passed by the Assessing Officer (AO), arguing that it was void and deserved to be quashed. However, the judgment does not provide a detailed analysis of this issue, indicating that the primary focus was on the substantive issues related to additions and disallowances.

2. Addition to Book Profit under Section 115JB:
The key issue was whether the interest expenditure of ?17.19 crores should be added back to the book profit under Section 115JB. The AO argued that the interest expenditure, being capital in nature, should be capitalized and not deducted from the book profit. The assessee contended that only specific adjustments are allowed under Section 115JB and that the interest expenditure should not be added back.

3. Disallowance of Interest Expenditure under Section 14A read with Section 115JB:
The AO disallowed the interest expenditure under Section 14A read with Rule 8D, arguing that the borrowed funds were used to invest in shares that generate exempt income. The CIT(A) upheld this disallowance, noting that the assessee earned ?43,150 in exempt income and that the investments were made from borrowed funds. The Tribunal, however, referred to the Delhi Tribunal Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd., which held that disallowances under Section 14A read with Rule 8D cannot be applied while determining book profit under Section 115JB. The Tribunal concluded that the disallowance under Section 14A cannot be equated with clause (f) of Explanation 1 to Section 115JB.

4. Charging of Excessive Interest under Sections 234B and 234C:
The assessee argued against the excessive interest charged under Sections 234B and 234C. However, the judgment does not provide a detailed analysis of this issue, focusing instead on the primary issues of additions and disallowances.

Conclusion:
The Tribunal held that the disallowance under Section 14A read with Rule 8D cannot be imported into the computation of book profit under Section 115JB. It emphasized that the expenses related to exempt income, other than those specified under Section 10(38), should be added back to the book profit. However, it noted the absence of a mechanism to quantify such expenses under Section 115JB. The Tribunal limited the disallowance to ?43,150, the amount of exempt income earned by the assessee, thereby partly allowing the appeal.

Order:
The appeal was partly allowed, with the disallowance under clause (f) to Section 115JB limited to ?43,150. The order was pronounced on 03/10/2019 at Ahmedabad.

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