2019 (7) TMI 1494 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - suo moto disallowance by assessee - HELD THAT - AO cannot mechanically apply the formula under Rule 8D(2)(iii) without examining the merits of the assessee s stand. We, however, agree with the plea on behalf of the Revenue that conditions of regarding satisfaction under s. 14A(2) was satisfied for invoking the provision. We are of the considered view that under the circumstances the disallowance of 50% of the expenditure incurred on professional that is 50% of 6,61,800/- would be sufficient to cover appropriate disallowance towards administrative expenses. The assessee has already disallowed 10% thereof. Therefore, another disallowance of 40% on the aforesaid amount which works out to ₹ 2,64,720/- would thus meet the object in this regard. The assessee accordingly, gets partial relief. Adjustments made on account of disallowance computed u/s 14A while computing book profit u/s 115JB - HELD THAT - We find merit in the plea of the assessee on this score. The Special Bench of Tribunal in the case of CIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has observed that disallowance computed u/s 14A cannot be imported to the provisions of sec. 115JB. However, at the same time, the claim of the assessee that no adjustment is called for while computing book profit is voilative of Explanation 1 (f) referred to in sec. 115JB of the Act and thus cannot be entertained. No blanket exemption can be read in the Special Bench decision in Vireet s case in this regard. Thus, the adjustment to the tune of ₹ 3,30,900 shall be taken into account by the AO for the purposes of Clause (f) to sec. 115JB in tune with disallowance sustained under normal provision. The second issue is accordingly allowed in partly.

Summary

Issues:
- Disallowance of administrative expenses attributable to exempt income
- Adjustment of disallowance under s. 14A while computing book profits under s. 115JB

Analysis:

Issue 1: Disallowance of Administrative Expenses
The appeal was filed against the order of the CIT(A) concerning the disallowance of ?11,48,205 sustained by the CIT(A) towards administrative expenses attributable to exempt income. The assessee had earned dividend income of ?29,30,083 during the year, claimed as exempt on investments amounting to ?29,82,54,378. The assessee had engaged a Chartered Accountant for supervisory services and paid ?6,61,800 for the same. The assessee had suo moto estimated 10% of this amount as an expense attributable to exempt income. The contention was that the AO could not have mechanically applied Rule 8D(2)(iii) for disallowance when the assessee had already made a suo moto disallowance. The Revenue supported the AO's order and argued that the AO was justified in applying Rule 8D(2)(iii) for disallowance. The Tribunal noted the assessee's actions and held that a substantial disallowance of ?14,26,648 computed under Rule 8D(2)(iii) could not be justified, especially when the assessee had already disallowed ?66,180. The CIT(A) reduced the disallowance to ?11,48,025 after excluding taxable investments. The Tribunal agreed that the AO cannot mechanically apply Rule 8D(2)(iii) without examining the merits but held that the conditions regarding satisfaction under s. 14A(2) were met, allowing a partial relief to the assessee.

Issue 2: Adjustment under s. 14A while computing book profits under s. 115JB
The assessee objected to adjustments made by the AO under s. 14A while computing book profits under s. 115JB. The Tribunal referred to the Special Bench decision in CIT vs. Vireet Investment Pvt. Ltd. and noted that disallowance under s. 14A cannot be imported into the provisions of sec. 115JB. However, the claim that no adjustment is required while computing book profit was found to be violative of Explanation 1 (f) under sec. 115JB. The Tribunal held that no blanket exemption could be inferred from the Special Bench decision and directed an adjustment of ?3,30,900 under Clause (f) to sec. 115JB in line with the disallowance sustained under normal provisions. Consequently, the second issue was partly allowed, and the overall appeal of the assessee was partly allowed.

This detailed analysis of the judgment provides insights into the disallowance of administrative expenses attributable to exempt income and the adjustments under s. 14A while computing book profits under s. 115JB.