2017 (6) TMI 1124 - AT - Income Tax

MAT book-profit under s.115JB(2) computed without mechanical s.14A/Rule 8D formula; Rule 8D uses only investments yielding exempt income

Assistant Commissioner of Income-tax, Circle 17 (1), New Delhi Versus Vireet Investment (P.) Ltd.

ITAT held that for computing clause (f) of Explanation 1 to s.115JB(2) the disallowance under s.14A (and Rule 8D computation) is not to be mechanically ... Exempt income computed u/s 14A addition while computing book profit u/s 115JB - short-term capital gains - earning of the assessee related to non taxable income comes - notional interest income on interest-free loans and advances given by the assessee - Whether computation provisions prescribed for computation of total income under normal provisions with reference to section 14A can or cannot be taken into consideration while computing book profits under MAT provisions. Held that:- Ld. Principal CIT(DR) has pointed out that the phrase “expenditure relatable to” as used in clause (f) of Explanation 1 to section 115JB(2) will take its color from the phrase in “in relation to”, used in section 14A. The contention of ld. CIT(DR) is that If we apply principles of literal interpretation, then that would lead to an-anomalous situation, in which higher expenditure, to the extent of indirect expenses, will be charged towards the earning of exempt income u/s 14A, thereby reducing the exempt income as compared to expenditure charge while computing book profits u/s 115JB because no indirect expenditure will be allocated towards earning of exempt income. The submission is that obviously, this cannot be the intention of legislature. As per the provisions of section 115JB(1), a comparison of the total income computed under the normal provisions of the Income-tax Act is to be made with the book profits as computed u/s 115JB. This makes it clear that total income as contemplated under normal provisions is inextricably linked to book profits under MAT provisions and it is -wrong to suggest that both operate in entirely different fields. This interpretation overlooks the very object of insertion of MAT provisions. Therefore, the submission is that when we resort to comparison between computation under normal provisions of the Income-tax Act and MAT provisions, the comparison will not be on same footing. Submission of ld. CIT(DR) is that it cannot be denied that the legislative intent regarding disallowance of expenditure relating to earning of exempt income was same, whether under normal provisions or under the MAT provisions. Hence, the whole object of comparison between the total income under normal provisions and MAT provisions will get frustrated. We answer the question referred to us in favour of assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule SD of the Income-tax Rules, 1962. Applicability of section 14A - Held that:- We hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. As far as argument relating to meaning to be ascribed to the phrase 'shall not' used in Rule 8D(2)(iii) is concerned, the Revenue's contention is that it refers to those investments which did not yield any exempt income during the year but if income would have been yielded it would have remain exempt. There is no dispute that if an investment has yielded exempt income in a particular year then it will enter the computation of average value of investments for the purposes of Rule 8D(2)(iii). The assessee's contention that if there is no certainty that an income, which is exempt in current year, will continue to be so in future years and, therefore, that investment should also be excluded, is hypothetical and cannot be accepted. The matter is restored back to the file of AO for recomputing the disallowance u/s 14A in terms of above observations. Thus, revenue's appeal is dismissed and assessee's cross-objection, on the issue in question, stand allowed for statistical purposes, in terms indicated above. Addition u/s 94(7)- Held that:- No reason to interfere with the order of ld. CIT(A) because ld. CIT(A) has only referred the matter to AO for verifying the revised computation u/s 94(7) with reference to record date and not with respect to date of receipt of dividend. We do not find any infirmity in the order of CIT(A) on this issue. Addition made as assessee did not charge any interest from loanees - Held that:- No reason to interfere in the order of ld. CIT(A), because the issue that only real income and not notional income is taxable, is no more res-intgra particularly when no interest was paid by assessee on its borrowings. We, therefore, confirm the order of ld. CIT(A). This ground is dismissed. Issues Involved:1. Whether the expenditure incurred to earn exempt income computed u/s 14A could be added while computing book profit u/s 115JB of the Act.2. The correctness of the method used by the AO for disallowance u/s 14A.3. The addition made by AO under section 94(7) for disallowance of short-term capital gains.4. The addition of notional interest income on interest-free loans and advances given by the assessee.5. The delay in filing the cross-objection by the assessee.Detailed Analysis of the Judgment:Issue 1: Addition of Expenditure Incurred to Earn Exempt Income under Section 14A While Computing Book Profit under Section 115JBThe primary issue referred to the Special Bench was whether the expenditure incurred to earn exempt income computed under Section 14A could be added while computing book profit under Section 115JB of the Act. The Tribunal concluded that:- Section 115JB is a complete code in itself and overrides other provisions of the Act.- The term 'expenditure relatable to' in clause (f) of Explanation 1 to Section 115JB(2) does not equate to the disallowance computed under Section 14A read with Rule 8D.- The Tribunal relied on the decision of the Hon'ble Delhi High Court in the case of Pr. CIT v. Bhushan Steel Ltd., which held that disallowance under Section 14A read with Rule 8D cannot be added while computing book profits as per Section 115JB.- The Tribunal noted that the decision in Goetze (India) Ltd. was based on a concession by the assessee and did not constitute a binding precedent.Conclusion: 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.Issue 2: Method of Disallowance under Section 14AThe assessee contended that only the value of investments yielding tax-exempt income should be considered for disallowance under Rule 8D(2)(iii). The Tribunal observed:- The Hon'ble Delhi High Court in the case of CIT v. Holcin India Pvt. Ltd. held that if no exempt income is earned, Section 14A cannot be invoked.- The Tribunal concluded that only those investments which yielded exempt income during the year should be considered for computing the average value of investments under Rule 8D(2)(iii).Conclusion: The matter was restored to the AO for recomputing the disallowance under Section 14A in terms of the Tribunal's observations.Issue 3: Addition under Section 94(7)The AO made an addition under Section 94(7) for disallowance of short-term capital gains. The Tribunal upheld the CIT(A)'s decision to refer the matter back to the AO for verifying the revised computation under Section 94(7) with reference to the record date.Conclusion: The Tribunal found no reason to interfere with the CIT(A)'s order on this issue.Issue 4: Addition of Notional Interest IncomeThe AO added notional interest income on interest-free loans and advances given by the assessee. The Tribunal noted:- The assessee had not claimed any interest expenditure.- Only real income, not notional income, should be taxed, as established by several decisions, including Shoorji Vallabhdas & Co. and Godhra Electricity Co. Ltd..Conclusion: The Tribunal confirmed the CIT(A)'s order deleting the addition of notional interest income.Issue 5: Delay in Filing Cross-ObjectionThe assessee filed a cross-objection with a delay of approximately 686 days. The Tribunal condoned the delay, considering the assessee's bona fide belief based on legal advice and the lack of effective hearings during the period.Conclusion: The delay in filing the cross-objection was condoned to impart substantial justice.Final Decision: The revenue's appeal was partly allowed, and the assessee's cross-objection was allowed for statistical purposes.