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TMI Blog2019 (10) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... it u/s 115JB on the basis that interest expenditure falls under clause (f) to Explanation 1 to section 115JB. 2.1 In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) erred in applying clause (f) to section 115JB(1) without appreciating the fact that investments made by appellant is capable of earning capital gain and such gajn whether exempt or not as per normal provisions of the Act is taxable for the purpose of computing book profit u/s 115 JB of the Act. 2.2 In law and in the facts and circumstances of the appellant's case, Ld . CIT{A) ought to have appreciated that clause (f) to section 115JB(1) relates to expenditure relatable to any income to which provision of section 10 applies other than exempt income u/s 10(38) and as appellant has not earned any exempt dividend income on investments considered for making disallowance u/s 14A r.w.s 115JB and such investments even if would earn exempt income u/s 10(38), same is liable to be taxed u/s 115JB which means that entire expenditure incurred by appellant is for earning taxable income for the purpose of computing book profit u/s 115JB and such expenditure is beyond the scope of adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Furthermore, there is no provision to make the adjustment on account of interest expenses being capital in nature claimed by the assessee in the profit and loss account under the provisions of section 115JB of the Act. 2.3 However, the AO during the assessment proceedings was not convinced with the reply of the assessee and made certain observations as detailed below: i. The provisions of section 211 of the companies Act requires the assessee to prepare the accounts so as to give true and fair picture of the financial statements. Accordingly such financial statements should be prepared in accordance with the requirement of the companies Act as well as generally accepted accounting principles and policies, more particularly accounting standard 16 namely borrowing cost. Once the assessee has not capitalized the impugned interest expenditure in its books of accounts, then the auditor should have furnished qualified audit report but it has not been done so. Accordingly, the claim of the assessee that the impugned interest needs to be capitalized was not sustainable. ii. Similarly, the impugned interest is also not to be capitalized as per the provisions of section 36(1)(iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of accounting standard 16 borrowing cost are not applicable to the impugned investment made by the assessee. As such it is applicable to the qualifying assets, which takes substantial period of time to get ready. The assessee claimed that the accounting standard 13 namely accounting for investment is applicable to the impugned investments, which does not require the assessee to capitalize the recurring interest expenses to the cost of investments. 3.5 The assessee also claimed that there can be 2 kinds of exempted income out of such investments namely dividend income and secondly long-term capital gain if holding period is more than 12 months with respect to the listed securities. But there was no dividend income received with respect to the investments made out of the borrowed fund namely Arvind product Ltd and Amazon textiles private Ltd and therefore, there cannot be disallowance of the expenses under normal and MAT computation of Income. Similarly, in case of long-term capital gain, the same is exempted under normal computation of income but liable to be taxed under MAT provisions. Accordingly the assessee claimed that there cannot be any disallowance of the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d below: "In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962." 7.1 The ratio laid down by the Hon'ble Tribunal is squarely applicable to the facts of the case on hand. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act. 7.2 As such, the disallowance if any needs to be made while computing the book profit, the only resort available to the revenue is clause (f) of explanation 1 to section 115JB of the Act which reads as under: "the amount or amounts of expenditure relatable to any income to which [ section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply; or]" On perusal of the above clause, it reveals the fact that the expenses relatable to exempted income other than the income specified under section 10(38) of the Act will be added back to the book profit. 7.3 However, there is no mechanis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has earned dividend income against the investment made in the companies namely Prism Cement Ltd. and Amol Decalite Ltd. amounting to Rs. 43,150.00 only as evident from the ledger of dividend income placed on page 77 of the PB. 8. The next question arises whether the entire amount of interest expenses incurred by the assessee can be disallowed under clause (f) of explanation 1 of section 115JB of the Act while computing the profit against such amount of exempted income. 8.1 In this regard, we find that there are judgments on the issue which mandates that the disallowance of the expenses cannot exceed the exempted income i.e. CIT Vs. Vision Finstock Ltd. of Hon'ble Gujarat High Court in 486 of 2017 or only those investments should only be considered for the purpose of the disallowance which have resulted the dividend income. However, we note that although judgments are in relation to the determination of income under the normal computation of income. None of the judgments deals with the determination of income under the provisions of section 115JB of the Act. Therefore, we find that there is no precedent available to resolve the controversy on hand. However, we are also consci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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