Appeal success: Exclusion of non-exempt income investments in IT disallowance calculation

The appeal was filed against the disallowance of &8377; 12,86,148 under section 14A of the Income Tax Act for A.Y. 2008-09. The ITAT directed the AO to recompute the disallowance by excluding investments not yielding exempt income. Regarding the addition of disallowance under section 14A while computing book profit under section 115JB, it was held that only expenditure related to exempt income should be considered, not the disallowance calculated by the AO. The AO's action in adding the disallowance to book profit was deemed unjustified, resulting in the partial allowance of the assessee's appeal.

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Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Addition of disallowance under section 14A while computing book profit under section 115JB.

Issue 1: Disallowance under section 14A of the Income Tax Act:
The appeal was filed against the order of CIT(A)-7, Mumbai for the A.Y.2008-09 regarding the disallowance of &8377; 12,86,148 under section 14A of the Income Tax Act. The AO had made a disallowance under section 14A r.w.Rule 8D during the scrutiny assessment. The CIT(A) confirmed the AO's action, leading to the appeal. The argument put forth was that only investments yielding exempt income should be considered for computing the disallowance. The ITAT Special Bench decision in the case of Vireet Investments was cited, where it was held that only investments generating exempt income should be taken into account for calculating the average value of investments. Following this precedent, the AO was directed to recompute the disallowance by excluding investments that did not yield any exempt income.

Issue 2: Addition of disallowance under section 14A while computing book profit under section 115JB:
The next grievance related to the addition of &8377; 12,86,148 as computed by the AO under section 14A while determining the book profit under section 115JB. Referring to the decision in the Vireet Investment case, it was established that only the expenditure debited in the P & L account related to exempt income should be considered, not the disallowance calculated by the AO. The Special Bench ruling emphasized that the computation under clause F of explanation 1 to Section 115JB(2) should be done without resorting to the computation under section 14A r.w.Rule 8D of the Income Tax Act 1961. Consequently, the action of the AO in adding the disallowance computed under section 14A while computing book profit under section 115JB was deemed to lack merit. As a result, the appeal of the assessee was allowed in part.

In conclusion, the ITAT Mumbai, comprising Shri R.C. Sharma, AM and Shri Amarjit Singh, JM, addressed the issues of disallowance under section 14A of the Income Tax Act and the addition of disallowance while computing book profit under section 115JB. The judgment provided detailed analysis and cited relevant legal precedents to arrive at the decision to partially allow the appeal of the assessee. The order was pronounced on 21/06/2018 in the open court.

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