2024 (7) TMI 344 - AT - Income Tax

Exemption u/s 14A r.w.r. 8D - disallowance as expenditure attributable to the exempt income in respect of profits earned by the assessee from investments made in the partnership firms - HELD THAT - Profit from the partnership firm is taxable in the hands of the firm and it is excluded from the total income of partners u/s. 10(2A) of the Act. AO has rightly invoked section 14A of the Act and computed the expenditure on assessee s exempt income by resorting to rule 8D of the rules after prudently recording his dissatisfaction, which is sine qua non before invoking rule 8D(2) of the rules, In Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT has held that the objective of holding the investment are immaterial and disallowance has to be applied in all cases irrespective of the fact whether the same was held as stock in trade or as an investment. The figures taken by the AO from the accounts of the assessee company, in making computation as provided under aforesaid rule 8D(2) are in consonance with the details submitted by assessee in his paper book as stated above. This computation mechanism has been brought into the Act by IT (14th amendment) Rules 2016. with effect from 02.06.2016 and is attracted in the instant case which relates to the A.Y. 2017-18. AO has thus rightly worked out disallowance as expenses incurred on profit from the partnership firm, claimed by the assessee as exempt from tax u/s. 10(2A) of the Act after the aforesaid adjustment of suo moto disallowances made by the assessee. CIT(A) has partly erred in passing impugned order to the extent of deleting aforesaid disallowance made by AO. Revenue s referred ground is answered accordingly. The first point is thus determined in favour of the revenue and against the assessee. MAT adjustment u/s 115JB with regard to addition u/s 14A - HELD THAT - In view of the decisions rendered by special bench in Vireet 2017 (6) TMI 1124 - ITAT DELHI and Radha Madhav 2018 (7) TMI 1849 - ITAT MUMBAI we hold that learned CIT(A) was partly right in holding that the adjustment of disallowance u/s. 14A of the Act r/w rule 8D of the rules was not required to be made in the book profit for MAT liability by resorting to section 115JB of the Act.

Summary

Issues Involved:
1. Disallowance of Rs. 1,93,99,965/- as expenditure attributable to exempt income from partnership firms.
2. Addition of the disallowance amount to the book profit of the assessee under section 115JB for MAT liability.

Issue-Wise Detailed Analysis:

1. Disallowance of Rs. 1,93,99,965/- as expenditure attributable to exempt income from partnership firms:

The assessee company, engaged in trading commodities and financing, filed its return of income for A.Y. 2017-18, declaring a total income of Rs. 6,33,44,790/- and book profit of Rs. 9,41,64,555/- under section 115JB of the Income-tax Act, 1961. The return was revised to rectify an arithmetical error, declaring the same total income but a revised book profit of Rs. 9,17,03,453/-. During scrutiny, the Assessing Officer (AO) noticed that the assessee earned exempt dividend income and profits from partnership firms, claiming Rs. 8,16,949/- as disallowance under section 14A of the Act. The AO found that the assessee only considered investments yielding dividend income for disallowance and not those in partnership firms, despite claiming profits from these firms as exempt under section 10(2A).

The AO worked out the expenses attributable to exempt income using section 14A read with rule 8D, arriving at Rs. 2,02,39,996/-. After adjusting the assessee's suo-moto disallowance, the disallowance was restricted to Rs. 1,93,99,665/-. The CIT(A) deleted this addition, prompting the revenue to appeal.

The Tribunal noted that section 14A requires disallowance of expenditure incurred in relation to exempt income. The AO must record dissatisfaction with the assessee's claim before invoking rule 8D. The AO prudently recorded dissatisfaction, noting that the assessee did not consider expenses related to profits from partnership firms, which are exempt under section 10(2A). The Tribunal upheld the AO's disallowance, stating that the assessee's claim of no expenses incurred for exempt income was not satisfactory. The first point was determined in favor of the revenue, supporting the disallowance of Rs. 1,93,99,665/-.

2. Addition of the disallowance amount to the book profit of the assessee under section 115JB for MAT liability:

The second issue concerned whether the disallowance of Rs. 1,93,99,665/- should be added to the book profit under section 115JB for MAT liability. Section 115JB mandates that if the income-tax payable on total income is less than a specified percentage of book profit, the book profit shall be deemed total income, and tax shall be payable on it.

The Tribunal referred to the decision of the Special Bench of ITAT Delhi in Vireet Investment (P) Ltd., which held that the computation under clause (f) of Explanation 1 to section 115JB(2) should be made without resorting to the computation under section 14A read with rule 8D. Similarly, the ITAT Mumbai in Radha Madhav Investments Limited held that disallowance under section 14A should not be adjusted in book profits for section 115JB purposes.

Following these precedents, the Tribunal held that the CIT(A) was correct in not adding the disallowance under section 14A to the book profit for MAT liability. This point was determined against the revenue and in favor of the assessee.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the disallowance of Rs. 1,93,99,665/- under section 14A but ruled that this disallowance should not be added to the book profit under section 115JB for MAT liability. The order was pronounced on 04.07.2024.