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2019 (12) TMI 139 - AT - Income TaxDisallowance of depreciation on fixed assets to the book profits computed under section 115JB - HELD THAT - Since, the books of accounts of the assessee have been audited and also have been approved in AGM, the AO cannot alter book profit for any items other than as provided as in explanation (1) to section 115JB - AO has accepted the claim of the assessee in preceding financial years when the assessee has claimed depreciation on alleged bogus fixed assets without any adjustment to book profit. Once the claim of the assessee has been accepted in earlier financial years, then there is no reason for the AO to disturb the settled position unless otherwise there is a complete change in facts for the year under consideration. Although, resadjudicata is not strictly applicable to income tax proceedings, but rule of consistency is to be followed as held in the case of CIT vs. Radhasoami Sathsung vs CIT 1991 (11) TMI 2 - SUPREME COURT wherein it was held that rule of consistency has to be followed in income tax proceedings even though resadjudicata is not strictly applicable. AO as well as CIT(A) were erred in making additions towards depreciation on alleged fixed assets to book profit computed u/s 115JB. We direct the AO to delete additions made to book profit under section 115JB towards depreciation claim on fixed assets. Disallowance of expenditure incurred in relation to exempt income u/s 14A read with rule 8D of Income Tax Rules, 1962 and consequent additions made to book profit computed under section 115JB - HELD THAT - CIT(A) has directed the AO to exclude investments in mutual funds, because dividend from mutual funds and long term capital gains on redemption of units in respect of debt oriented funds is chargeable to tax. CIT(A) has set aside the issue to the file of the AO and directed him to consider working furnished by the assessee determining the disallowances under section 14A. Therefore, we are of the considered view that the issue needs to go back to the file of the AO to decide afresh in light of our discussions given hereinabove. We set aside the issue to the file of the AO and direct him to recompute disallowances contemplated under section 14A in accordance with law in terms of our observations given hereinabove. Coming to the recomputation of book profit under section 115JB in respect of disallowance of expenditure under section 14A - We find that this issue has been covered in favour of the assessee in the case of ACIT vs. Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that computation under clause (f) of explanation (1) to section 115JB(2) is to be made without resorting to computation as contemplated under section 14A read with rule 8D. AO was erred in making additions towards book profit u/s 115JB in respect of disallowances of expenditure under section 14A by invoking rule 8D. Hence, we direct the AO to delete the additions made towards book profit computed under section 115JB in respect of disallowance of expenditure under section 14A.
Issues Involved:
1. Addition of disallowed depreciation to book profits under Section 115JB of the Income Tax Act, 1961. 2. Disallowance under Section 14A of the Income Tax Act, 1961, and its impact on book profits under Section 115JB. Issue-wise Detailed Analysis: 1. Addition of Disallowed Depreciation to Book Profits under Section 115JB: The assessee challenged the addition of ?2,13,83,915/- on account of disallowed depreciation to the book profits under Section 115JB. The AO had made this addition based on the discovery of bogus purchase bills during a survey action, which led to the detection of unsupported purchases and a consequent disallowance of depreciation on these assets. The CIT(A) upheld the AO's decision, stating that the AO has the power to alter the net profit if it is found that the profit and loss account is not prepared in accordance with the Companies Act, 1956. The assessee argued that once the books of accounts are audited and approved by the shareholders in the AGM, the AO does not have the power to alter the book profits unless specified under explanation (1) to Section 115JB. This argument was supported by the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT. The tribunal noted that the AO did not make any observations regarding the incorrectness of the books of accounts as per the Companies Act, 1956. Therefore, the tribunal concluded that the AO and CIT(A) erred in making additions to the book profit under Section 115JB for the disallowed depreciation. The tribunal directed the AO to delete these additions. 2. Disallowance under Section 14A and Its Impact on Book Profits under Section 115JB: The assessee contested the disallowance of ?77,41,478/- under Section 14A read with Rule 8D, arguing that no expenditure was incurred in relation to exempt income and that its own funds exceeded the investments made. The CIT(A) partially accepted the assessee's arguments, excluding investments in foreign subsidiaries from the disallowance calculation but upheld the disallowance for investments in domestic subsidiaries, citing the Delhi High Court's decision in Maxopp Investment vs. CIT. The tribunal noted that the AO correctly applied Rule 8D for determining the disallowance under Section 14A. However, it agreed with the CIT(A) on excluding investments in foreign subsidiaries and mutual funds from the disallowance calculation. The tribunal directed the AO to recompute the disallowance under Section 14A after excluding these investments. Regarding the addition of the Section 14A disallowance to book profits under Section 115JB, the tribunal referred to the ITAT Special Bench's decision in ACIT vs. Vireet Investments Pvt. Ltd., which held that computation under clause (f) of explanation (1) to Section 115JB(2) should be made without resorting to Section 14A read with Rule 8D. Consequently, the tribunal directed the AO to delete the additions to book profits under Section 115JB related to the Section 14A disallowance. Conclusion: The tribunal partly allowed the appeal, directing the AO to delete the additions made to book profits under Section 115JB for the disallowed depreciation and to recompute the disallowance under Section 14A, excluding investments in foreign subsidiaries and mutual funds. The tribunal also directed the deletion of additions to book profits under Section 115JB related to the Section 14A disallowance.
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