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2024 (6) TMI 1291 - AT - Income TaxIssues Involved: 1. Applicability of disallowance under Section 14A of the Income Tax Act when no exempt income is earned. 2. Deletion of disallowance under Section 14A read with Rule 8D for the purpose of computing book profit under Section 115JB. Detailed Analysis: Issue 1: Applicability of Disallowance under Section 14A of the Income Tax Act The primary issue revolves around whether the disallowance under Section 14A of the Income Tax Act, 1961, is applicable when the assessee has not earned any exempt income during the relevant assessment years (A.Y. 2017-18 and A.Y. 2018-19). The department argued that the disallowance should still apply due to the potential of earning exempt income from the investments held by the assessee. The Assessing Officer (AO) relied on CBDT Circular No. 5/2014, which suggests that disallowance under Section 14A read with Rule 8D is applicable even if no exempt income is earned during the financial year. The assessee contended that no exempt income was earned during the relevant years, and therefore, the provisions of Section 14A should not be invoked. The CIT(A) agreed with the assessee, referencing various judicial precedents, including the Delhi High Court's decision in Pr. Commissioner of Income Tax Vs. IL & FS Energy Development Company Ltd., which held that no disallowance under Section 14A is warranted if no exempt income is earned. Issue 2: Deletion of Disallowance under Section 14A read with Rule 8D for the Purpose of Computing Book Profit under Section 115JB The second issue concerns whether the disallowance under Section 14A read with Rule 8D should be added back to the book profit for the purpose of computing Minimum Alternate Tax (MAT) under Section 115JB of the Act. The AO added the disallowed amount to the book profit, relying on the decision in Dy. CIT Cen. Cir. 18 & 19, Mumbai Vs. Viraj Profiles Ltd. The CIT(A) disagreed, citing the Bombay High Court's decision in the case of M/s. Bengal Finance Investment Pvt. Ltd., which held that the amount disallowed under Section 14A cannot be added back to compute book profit under Section 115JB. Tribunal's Findings: 1. Section 14A Disallowance: The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not earn any exempt income during the relevant assessment years. The Tribunal referenced the Delhi High Court's ruling in Cheminvest Ltd. vs. CIT, which clarified that Section 14A would not apply if no exempt income is received or receivable during the relevant previous year. 2. Book Profit under Section 115JB: The Tribunal also agreed with the CIT(A) that the disallowance under Section 14A cannot be added back to the book profit for MAT computation. This conclusion was supported by the Bombay High Court's ruling in M/s. Bengal Finance Investment Pvt. Ltd. Conclusion: The Tribunal found no merit in the department's appeal and upheld the CIT(A)'s order, which set aside the AO's disallowance under Section 14A and its addition to the book profit under Section 115JB. The appeals for both A.Y. 2017-18 and A.Y. 2018-19 were dismissed. The Tribunal's decision aligns with established judicial precedents, confirming that disallowance under Section 14A is not applicable in the absence of exempt income and cannot be added back for MAT computation under Section 115JB.
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