2024 (12) TMI 248 - AT - Income Tax

Disallowance u/s 14A - expenditure attributable to the exempt income in respect of profits earned by the assessee from investments - HELD THAT - We hold that the suo-moto disallowance made by assessee u/s. 14A of the Act is reasonable. Learned assessing officer is directed to restrict the disallowances to that extent only. The aforesaid first point is determined in favour of the assessee and against the revenue accordingly. Disallowance u/s 14A added in the book profit of the assessee u/s. 115JB for the purpose of Minimum Alternate Tax (MAT) liability - In view of the decisions rendered by special bench in Vireet 2017 (6) TMI 1124 - ITAT DELHI and Radha Madhav 2018 (7) TMI 1849 - ITAT MUMBAI we hold that the adjustment of disallowance u/s.14A of the Act r/w rule 8D of the IT rules, was not required to be made in the book profit for MAT liability by resorting to section 115JB of the Act. Disallowance to Investors Service Fund (ISF), which is 20% of the listing fees received for Investors Service Fund (ISF) - HELD THAT - SEBI s circular depicts the manner in which such funds are to be utilized primarily for the promotion of investor education and investor awareness programme. Through seminars, lectures, workshops, publications, training programmes, etc. for enhancing securities market literacy. According to this circular, in case the assessee company is wound up or derecognized, than the balance in the above fund lying unutilized could be transferred to the similar funds of SEBI. CIT(A) has thus rightly held that the contribution and utilization of the funds is mandatory for aforesaid purposes, which are directly related to the business activity of the appellant, hence allowable u/s. 37(1) - Decided in favour of the assessee. Disallowance of club entrance fees and subscriptions - Addition made as such expenses are not specified or clarified to be linked with assessee s business activities and further on the basis, that the appellant s auditor has qualified such expenses as being personal in nature - HELD THAT - CIT(A) has rightly observed that learned assessing officer has failed to bring on record any instance which could indicate that the subscriptions to the aforesaid clubs were meant for personal purposes of directors or shareholder of the appellants company. Further, that the auditors of the appellant did not report this amount in the column of personal expense in form 3CD of report but the prescribed column of expenses on club etc, which is only for the reporting purposes. CIT(A) has thus rightly deleted the aforesaid additions. - Decided in favour of the assessee

Issues Involved:

1. Disallowance of Rs. 17,83,25,426/- under Section 14A of the Income Tax Act.
2. Inclusion of disallowance under Section 14A in the book profit calculation under Section 115JB for Minimum Alternate Tax (MAT) liability.
3. Deletion of disallowance of Rs. 3,83,99,537/- to Investors Service Fund (ISF).
4. Deletion of disallowance of club entrance fees and subscriptions amounting to Rs. 19,35,782/-.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A:

The primary issue was whether the disallowance of Rs. 17,83,25,426/- as expenditure attributable to exempt income is tenable under law. The assessee argued that the assessing officer did not record satisfaction regarding the correctness of the assessee's method for disallowance. The assessee referenced previous ITAT orders and a Bombay High Court decision which favored their method of calculating disallowance, which involved considering the area occupied by the treasury department. The Tribunal noted that the assessing officer's dissatisfaction was not tenable and directed that the disallowance be restricted to the amount of Rs. 1,44,72,705/- as calculated by the assessee.

2. Inclusion of Disallowance in Book Profit under Section 115JB:

The second issue was whether the disallowance under Section 14A should be added to the book profit for MAT purposes under Section 115JB. The Tribunal referred to a Special Bench decision in Vireet Investment (P) Ltd and a coordinate bench decision in Radha Madhav Investments Limited, which held that the computation under Section 115JB should not include the disallowance under Section 14A. The Tribunal ruled in favor of the assessee, stating that the disallowance should not be added to the book profit.

3. Deletion of Disallowance to Investors Service Fund (ISF):

The revenue challenged the deletion of the disallowance of Rs. 3,83,99,537/- to the ISF. The assessee argued that the contribution to ISF is mandatory as per SEBI's circular and has been allowed in previous years. The Tribunal noted that the contribution is mandatory and directly related to the business activity, thus allowable under Section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision to delete the disallowance.

4. Deletion of Disallowance of Club Entrance Fees and Subscriptions:

The revenue also challenged the deletion of the disallowance of club entrance fees and subscriptions. The Tribunal found that the assessing officer did not provide evidence that these expenses were personal in nature. The CIT(A) had noted that the expenses were reported in the prescribed column for club expenses in the audit report, not as personal expenses. The Tribunal agreed with the CIT(A) and upheld the deletion of the disallowance.

Conclusion:

The Tribunal allowed the assessee's appeal, directing the assessing officer to restrict the disallowance under Section 14A to the amount calculated by the assessee and not to include it in the book profit for MAT purposes. The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the disallowances related to ISF and club fees.

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