2018 (12) TMI 916 - AT - Income Tax

Revision u/s 263 - directions to AO to determine the expenses relatable to exempt income u/s 14A and disallowance of such expenses while computing the book profit under section 115JB - Held that - the Special bench in the case of Vireet Investments (P. ) Ltd. 2017 (6) TMI 1124 - ITAT DELHI has finally taken the view that the view beneficial to the assessee is to be taken while deciding the issue in term of the decision of Hon ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT . In view of the above given facts and circumstances of the case, we are of the view that the AO has considered the issue during the original assessment proceedings and form a view permissible under law that no disallowance relatable to exempt income can be made under section 14A read with Rule 8D of the Rules while computing the book profit under section 115JB of the Act. We find that this issue is squarely covered in favour of assessee and against Revenue by the decision of Special Bench of this ITAT Delhi in the case of Vireet Investments (P. ) Ltd. (supra) and considering the facts in entirety, we quash the revision proceedings as the assessment order is neither erroneous nor prejudicial to the interest of the Revenue. Accordingly, we quash the revision order - decided in favour of assessee.

Summary

Issues Involved: Legality of the revision order under Section 263 of the Income Tax Act; Determination of expenses related to exempt income; Computation of book profit under Section 115JB of the Income Tax Act.

Issue 1: Legality of the Revision Order under Section 263 of the Income Tax Act

The core issue in this appeal is the assessee's challenge against the Principal Commissioner of Income Tax's (PCIT) revision order under Section 263 of the Income Tax Act. The PCIT directed the Assessing Officer (AO) to determine the expenses related to exempt income and disallow such expenses while computing the book profit under Section 115JB of the Act. The assessee contended that the PCIT's order exceeded his jurisdiction as it amounted to passing a fresh assessment order. The assessee argued that the AO had already determined the expenses related to exempt income by invoking Section 14A read with Rule 8D, and the PCIT did not establish that the expenses determined by the AO were incorrect.

Issue 2: Determination of Expenses Related to Exempt Income

The assessee had claimed exempt income of ?3403.90 crores on an investment of ?38378.03 crores and had suo moto disallowed ?873.24 crores as expenditure related to exempt income. During the assessment proceedings, the AO recomputed the disallowance under Rule 8D(2)(ii) & (iii) read with Section 14A of the Act, amounting to ?302.46 crores, apart from the disallowance made by the assessee. The AO noted that no disallowance could be made while computing book profit under Section 115JB of the Act, relying on certain judicial decisions.

Issue 3: Computation of Book Profit under Section 115JB of the Income Tax Act

The PCIT issued a show cause notice for revising the assessment order due to the AO's failure to include the disallowance under Section 14A in computing the book profit under Section 115JB. The PCIT observed that the expenses related to exempt income should be added to the book profit as per clause (f) of Explanation 1 to Section 115JB(2). The PCIT noted conflicting judicial decisions on this issue but concluded that the expenses related to exempt income should be added while computing the book profit.

Tribunal's Analysis:

The Tribunal noted that the AO had specifically taken a view not to apportion any expense to the exempt income while computing the book profit under Section 115JB of the Act. This view was permissible under law, as supported by conflicting decisions of the Delhi High Court in the cases of Goetze (India) Ltd. and Bhushan Steels And Strips Ltd. The Tribunal also referred to the Special Bench decision in Vireet Investments (P.) Ltd., which held that no disallowance of expenses related to exempt income should be made while computing book profit under Section 115JB.

The Tribunal concluded that the AO had considered the issue during the original assessment proceedings and formed a permissible view. Therefore, the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. Consequently, the Tribunal quashed the revision order passed by the PCIT and allowed the appeal of the assessee.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the revision order under Section 263, and held that the AO's original assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal's decision was based on the permissible view taken by the AO and supported by judicial precedents, including the Special Bench decision in Vireet Investments (P.) Ltd.