2020 (6) TMI 608 - AT - Income Tax

Rectification of mistake - disallowance u/s 14A - Computation of book profits u/s. 115JB - amount to be added to the profit as per P L account u/s. 115JB towards expenditure incurred in earning income exempt u/s. Chapter III of the Act - plea of the assessee was that the disallowance u/s. 14A of the Act made while computing total income under the normal provisions of the Act should not be automatically added while determining the book profits u/s. 115JB - HELD THAT - The amount to be added while computing book profits u/s. 115JB AO cannot in terms of Explanation 1(f) to Sec.115JB(2) to the Act, add the sum determined as disallowance u/s. 14A of the Act while computing total income under the normal provisions of the Act and he has to adopt a basis as laid down by VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI viz., direct expenditure associated with earning of income. The grievance of the revenue in this appeal as projected in ground No.2 is that the CIT(A) ought to have followed the decision in the case of DCIT Vs. Sobha Developers 2015 (2) TMI 940 - ITAT BANGALORE rendered by ITAT Bangalore Bench wherein it was held that the disallowance u/s.14A of the Act made while computing total income under the normal provisions of the Act can also be adopted while determining book profits u/s.115JB in terms of Explanation- 1(f) to Sec.115JB(2) of the Act. The ratio laid down in the said decision of the Bangalore Bench has not been approved in the case of Vireet Investments (supra), which decision was rendered after the decision rendered by the Bangalore Bench of ITAT. As far as the grievance of the revenue projected in Gr.No.3 is concerned, the subject matter of the impugned order is only as to, whether there was a mistake apparent from the record in the order of CIT(A) dated 2.4.2019 and not the issue whether not making addition of disallowance u/s.115JB(2) explanation-1(f) of expenses incurred to earn income which is exempt u/s.10 is a mistake apparent from the record or not. In other words, the issue sought to be raised by the revenue in ground No.3 can arise only in an appeal against the order dated 2.4.2019 and not in an appeal against the impugned order.

Summary

Issues:
1. Rectification of order u/s.154 of the Income-Tax Act, 1961 regarding disallowance u/s. 14A while computing book profits u/s.115JB.
2. Whether disallowance u/s. 14A can be added back to book profit u/s. 115JB.
3. Jurisdictional conflict between ITAT Bangalore and Special Bench ITAT Delhi regarding the treatment of disallowance u/s. 14A while computing book profits u/s. 115JB.

Issue 1: Rectification of order u/s.154 of the Income-Tax Act, 1961
The appeal was against an order by CIT(A) dismissing a revenue application for rectification u/s.154 of the Act seeking to rectify an order allowing an Assessee's appeal against the AO's order. The AO had initiated proceedings u/s.154 to rectify a mistake in adding back disallowed expenses u/s. 14A while computing book profits u/s.115JB. The Assessee contended that the issue was debatable and not a mistake apparent on record, citing legal precedents. The CIT(A) allowed the appeal, stating that the issue was debatable and not suitable for rectification u/s.154.

Issue 2: Disallowance u/s. 14A added back to book profit u/s. 115JB
The dispute revolved around whether disallowance u/s. 14A could be added back to book profit u/s. 115JB. The Special Bench ITAT Delhi held that disallowance u/s. 14A could not be added while computing book profits u/s. 115JB as it was not specifically mentioned in the Explanation to the section. The CIT(A) allowed the Assessee's appeal, emphasizing that the issue was debatable and not suitable for rectification u/s.154.

Issue 3: Jurisdictional conflict between ITAT Bangalore and Special Bench ITAT Delhi
The revenue challenged the CIT(A)'s decision based on a jurisdictional conflict between ITAT Bangalore and Special Bench ITAT Delhi regarding the treatment of disallowance u/s. 14A while computing book profits u/s. 115JB. The revenue contended that the disallowance should be added back to book profits based on the ITAT Bangalore decision. However, the CIT(A) dismissed the revenue's application, upholding the earlier decision that the issue was debatable and not a mistake apparent on record.

In conclusion, the Tribunal dismissed the revenue's appeal, stating that the AO cannot add the disallowance u/s. 14A while computing book profits u/s. 115JB, as per the Special Bench decision. The Tribunal emphasized that the issue was debatable and not a mistake apparent on record, aligning with the CIT(A)'s decision. The jurisdictional conflict between ITAT Bangalore and Special Bench ITAT Delhi highlighted the differing interpretations regarding the treatment of disallowance u/s. 14A, underscoring the complexity and debate surrounding this issue in tax law.