2024 (3) TMI 826 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Addition of interest and administrative expenses - HELD THAT - As decided in Gujarat Flurochemicals Ltd 2023 (12) TMI 713 - GUJARAT HIGH COURT has held that the disallowance u/s 14A r.w. Rule 8D of Income Tax Rules cannot exceed the amount of exempted income. Also decided in Craft Builder Construction private limited 2020 (1) TMI 135 - SC ORDER disallowance under section 14A cannot exceed exempt income of relevant year. Thus as coming to the facts of the case on hand, admittedly the exempted income is of Rs. 1,08,650/- only and therefore, respectfully following the judgments as discussed above, the disallowance cannot exceed the amount of exempted income. Hence, the ground of appeal of the assessee is partly allowed. Addition to the book profit u/s 115JB for the amount disallowed u/s 14A r.w. Rule 8D - HELD THAT - We note that the in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that the disallowance made u/s 14A r.w.r. 8D cannot be the subject matter of disallowance while determining the net profit u/s 115JB of the Act. Thus, it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expense as mentioned under clause (f) to explanation 1 to section 115JB of the Act. Disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - We feel that an ad-hoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus, we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore, our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus, we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus, the ground of appeal of the Revenue is partly allowed.

Summary

Issues Involved:
The appeal against the order of the Learned Commissioner of Income Tax (Appeals), Vadodara under section 143(3) of the Income Tax Act, 1961 for Assessment Year 2014-15.

Issue 1: Disallowance under Section 14A r.w. Rule 8D:
The assessee challenged the addition of Rs. 99,34,511/- under section 14A r.w. Rule 8D of Income Tax Rules.

During assessment, the AO found exempted income of Rs. 1,08,650/- but made a disallowance of Rs. 99,34,511/- under section 14A r.w. Rule 8D. The Ld. CIT(A) upheld this decision.

The AR contended that the disallowance cannot exceed the exempted income. Citing relevant case law, the Tribunal held that the disallowance cannot exceed the exempted income of Rs. 1,08,650/-. As a result, the appeal of the assessee was partly allowed.

Issue 2: Addition to Book Profit under Section 115JB:
The assessee disputed the addition to book profit under section 115JB for the disallowed amount under section 14A r.w. Rule 8D.

The AO disallowed Rs. 99,34,511/- under section 14A r.w. Rule 8D, which was added to the book profit under section 115JB. The Ld. CIT(A) affirmed this decision.

The AR argued that the disallowed amount cannot impact the book profit calculation under section 115JB. Citing precedent, the Tribunal held that the disallowance under section 14A r.w. Rule 8D cannot be considered while determining the net profit under section 115JB. However, it was noted that a disallowance must be made with respect to the exempted income independently. To avoid further litigation, an ad-hoc disallowance of 1% of the exempted income was directed under clause (f) to Explanation-1 of Sec. 115JB. Consequently, the appeal of the Revenue was partly allowed.

In conclusion, the Tribunal partially allowed the appeal of the assessee regarding the disallowance under section 14A r.w. Rule 8D and the addition to book profit under section 115JB. The judgment was pronounced on 15/03/2024 at Ahmedabad.