ITAT Decision: Share of Loss Exclusion in Book Profit, Section 115JB

The ITAT partially allowed the assessee's appeal by deleting the addition of Rs. 18,91,12,786/- for the share of loss in the partnership firm while computing book profit under section 115JB. The ITAT remanded the issue of Rs. 75,75,430/- expenditure disallowed under section 14A back to the A.O. for fresh computation. The order was pronounced on 9th February 2018.

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Issues Involved:

1. Addition of Rs. 18,91,12,786/- on account of the assessee’s share of loss in the partnership firm while computing book profit under section 115JB of the Income Tax Act, 1961.
2. Addition of Rs. 75,75,430/- on account of expenditure disallowed under section 14A read with Rule 8D while computing book profit under section 115JB of the Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 18,91,12,786/- on Account of Assessee’s Share of Loss in Partnership Firm:

The primary issue in this appeal was the addition of Rs. 18,91,12,786/- made by the Assessing Officer (A.O.) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] on account of the assessee's share of loss in the partnership firm while computing the book profit under section 115JB of the Income Tax Act, 1961.

The assessee, a non-banking finance company, during the year was a partner in a partnership firm with a 97.50% share. The firm incurred a loss of Rs. 19,39,61,832/-, and the assessee's share of this loss, amounting to Rs. 18,91,12,786/-, was debited to its profit and loss account. While computing the book profit under section 115JB, the assessee did not add back this loss, relying on the ITAT Mumbai decision in the case of DCIT vs Metro Exporters Ltd. (10 SOT 647), which held that no addition could be made for the share of loss from a partnership firm.

The A.O., however, disagreed, citing the Kolkata High Court decision in Eastern Aviation & Industries Ltd. vs CIT (208 ITR 1023), which held that 'income includes loss'. Consequently, the A.O. added the loss back while computing the book profit under section 115JB, invoking clause (ii) of Explanation (1) to section 115JB(2).

On appeal, the CIT(A) upheld the A.O.'s addition, reasoning that the term 'income' in clause (ii) includes 'negative income' or 'loss'. The CIT(A) referenced the Supreme Court decision in CIT vs J.H. Gotla (156 ITR 323) and the Kolkata High Court decision in Eastern Aviation & Industries Ltd. (208 ITR 103), which both held that 'income' includes 'loss'.

The ITAT, however, found merit in the assessee's argument that the decisions cited by the A.O. and CIT(A) were rendered in a different context and not specifically in the context of clause (ii) of Explanation (1) to section 115JB. The ITAT agreed with the assessee's reliance on the ITAT Mumbai decision in Metro Exporters Ltd., which dealt with a similar issue under section 115JA, and held that no addition could be made for the share of loss from a partnership firm while computing book profit under section 115JA.

The ITAT concluded that the ratio of the Metro Exporters Ltd. decision could be applied to section 115JB, as the provisions of section 115JB are analogous to section 115JA. Consequently, the ITAT deleted the addition of Rs. 18,91,12,786/- made by the A.O. and confirmed by the CIT(A), allowing grounds 1 to 8 of the assessee's appeal.

2. Addition of Rs. 75,75,430/- on Account of Expenditure Disallowed under Section 14A:

The second issue was the addition of Rs. 75,75,430/- made by the A.O. and confirmed by the CIT(A) on account of expenditure disallowed under section 14A read with Rule 8D while computing the book profit under section 115JB of the Act.

During the year, the assessee earned a dividend income of Rs. 9,01,03,832/-, which was claimed to be exempt under section 10(34). The A.O. disallowed Rs. 75,75,430/- as expenditure incurred in relation to the exempt income under section 14A and added it back while computing book profit under section 115JB, relying on the ITAT Mumbai decision in Esquire Pvt. Ltd. vs DCIT (ITA No. 5688/Mum/2011). The CIT(A) upheld this addition, citing the Delhi High Court decision in CIT vs Goetze (India) Ltd. (361 ITR 505).

The ITAT noted that a similar issue had been decided by the Special Bench of the ITAT Delhi in ACIT vs Vireet Investment Pvt. Ltd. (ITA No. 502/Del/2012), which held that the expenditure disallowed under section 14A could not be added while computing book profit under section 115JB. The ITAT also referenced the Kolkata High Court decision in CIT vs Jayshree Tea Industries Ltd. (ITAT No. 47 of 2014), which held that section 115JB is a complete code in itself and does not require resort to section 14A.

Respectfully following the Kolkata High Court decision, the ITAT set aside the CIT(A)'s order on this issue and restored the matter to the A.O. to compute the expenditure relatable to exempt income independently under clause (f) of Explanation (1) to section 115JB, without resorting to section 14A or Rule 8D. Ground No. 9 of the assessee's appeal was thus partly allowed.

Conclusion:

The appeal of the assessee was partly allowed, with the ITAT deleting the addition of Rs. 18,91,12,786/- on account of the share of loss in the partnership firm and remanding the issue of Rs. 75,75,430/- expenditure disallowed under section 14A back to the A.O. for fresh computation. The order was pronounced in the open court on 9th February 2018.

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