2015 (11) TMI 277 - AT - Income Tax

Addition made under section 14A r.w. 115JB - MAT computation - CIT(A) deleted the addition - whether the provisions of section 115JB(2) r.w. Explanation-1 r.w. clause of which requires any expenditure in relation to the exempt income also to be taken into consideration while computing the book profit under section 115JB? - Held that - No infirmity with the orders of the AO and we hold that the AO has rightly disallowed the expenditure of ₹ 73,07,018/- by invoking the provisions of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 for computing book profit u/s 115JB(2) of the Act read with clause (f) to explanation 1 to clause 115JB(2) of the Act. - Decided in favour of revenue.

Issues Involved:
1. Deletion of addition under Section 14A read with Section 115JB.
2. Computation of book profit under Section 115JB.
3. Disallowance of expenditure related to exempt income.

Issue-Wise Detailed Analysis:

1. Deletion of Addition under Section 14A read with Section 115JB:
The Revenue appealed against the CIT(A)'s decision to delete the addition made under Section 14A read with Section 115JB. The AO had disallowed Rs. 73,07,018/- under Section 14A read with Rule 8D, arguing that the assessee had investments capable of yielding exempt income. The CIT(A) upheld the disallowance under Section 14A but deleted the addition for computing book profit under Section 115JB, stating that the AO cannot adjust the book profit beyond the provisions of Explanation 1 to Section 115JB. The Tribunal, however, disagreed with the CIT(A) and restored the AO's decision, emphasizing that Section 115JB has an overriding effect and mandates disallowance of expenditure related to exempt income as per clause (f) of Explanation 1 to Section 115JB(2).

2. Computation of Book Profit under Section 115JB:
The AO added the disallowed expenditure under Section 14A to the book profit under Section 115JB. The CIT(A) reversed this, relying on precedents like Apollo Tyres Limited v. CIT and HCL Connect Systems and Services Limited v. CIT, which restrict the AO from altering the book profit except as provided in Explanation 1 to Section 115JB. The Tribunal, however, upheld the AO's addition, citing that Section 115JB starts with a non-obstante clause and has an overriding effect over other provisions, including Section 14A, thus mandating the inclusion of disallowed expenditure in the book profit.

3. Disallowance of Expenditure Related to Exempt Income:
The AO disallowed Rs. 73,07,018/- under Section 14A, arguing that the assessee had investments capable of yielding exempt income. The CIT(A) upheld this disallowance, stating that Section 14A applies even if no exempt income is earned during the year, as long as the expenditure is related to investments capable of generating exempt income. The Tribunal agreed, referencing the CBDT Circular No. 5/2014 and the Special Bench decision in Cheminvest Limited, which clarify that disallowance under Section 14A applies irrespective of actual receipt of exempt income.

Conclusion:
The Tribunal allowed the Revenue's appeal, restoring the AO's decision to disallow Rs. 73,07,018/- under Section 14A and include it in the computation of book profit under Section 115JB. The Tribunal emphasized the overriding effect of Section 115JB and the applicability of Section 14A disallowance, even in the absence of actual exempt income, as long as the investments are capable of yielding such income.

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