Rule 8D applies from AY2008-09; s.14A disallowance under Rule 8D included in s.115JB; s.88E rebate subject to s.87(2)

ITAT MUMBAI (AT) held that Rule 8D applies from AY 2008-09 and disallowance under s.14A must be computed under Rule 8D; the assessee's attribution of expenses to tax-free income and a 0.5% disallowance for non-interest expenses were rejected, decision against the assessee. For book profits under s.115JB, the s.14A disallowance forms part of expenses under Explanation (1)(f) to s.115JB(2), decision against the assessee. On rebate under s.88E, the tribunal directed allowance subject to s.87(2) provisions, decision against Revenue.

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Issues:
1. Disallowance under section 14A read with rule 8D.
2. Addition of disallowance amount while computing book profit under section 115JB.
3. Allowing rebate under section 88E on tax computed under section 115JB.

Issue 1: Disallowance under section 14A read with rule 8D:
The case involved cross-appeals by the assessee and the Revenue regarding the disallowance of Rs. 7,39,752 under section 14A read with rule 8D for the assessment year 2008-2009. The Assessing Officer made the disallowance as a percentage of expenses claimed by the assessee attributable to tax-free income. The Tribunal upheld the disallowance as it was computed in accordance with the mandate of Rule 8D applicable for the year under consideration, following the decision in Godrej & Boyce Ltd. Mfg. Co. vs. DCIT. The Tribunal found no reason to interfere with the order on this issue.

Issue 2: Addition of disallowance amount while computing book profit under section 115JB:
The second ground of the assessee's appeal questioned the addition of the disallowance amount to the book profit under section 115JB. The Tribunal noted that this issue was not raised before the CIT(A) and was presented for the first time at the Tribunal level. However, the Tribunal proceeded to address the issue on its merits. The Tribunal analyzed the legal aspect of whether the disallowed amount under section 14A could be added to the net profit for computing book profit under section 115JB. The Tribunal concluded that as per the provisions of Explanation (1) to section 115JB(2), the amount of expenditure related to exempt income must be added back to the net profit. Since the disallowance under section 14A was part of the expenses debited to the profit and loss account, it fell under the ambit of clause (f) of Explanation (1) to section 115JB(2). The Tribunal referred to a previous order supporting this interpretation and upheld the addition of the disallowance amount to the book profit under section 115JB.

Issue 3: Allowing rebate under section 88E on tax computed under section 115JB:
The Revenue's sole ground of appeal was against the allowance of rebate under section 88E on the tax computed under section 115JB. The Assessing Officer had disallowed the rebate based on the tax payable after the rebate being less than 10% of the book profit. The CIT(A) directed the Assessing Officer to allow the rebate subject to the relevant provisions. The Tribunal agreed with the CIT(A)'s decision, noting that the rebate should be allowed subject to the amended sub-section (2) of section 87. The Tribunal found no reason to interfere with this direction, leading to the dismissal of both appeals.

In conclusion, the Tribunal upheld the disallowance under section 14A read with rule 8D, approved the addition of the disallowance amount to the book profit under section 115JB, and affirmed the allowance of rebate under section 88E on tax computed under section 115JB. Both appeals were dismissed accordingly.

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