2018 (6) TMI 1283 - HC - Income Tax

Appeals partly allowed in tax case on expenditure for earning exempt income

The Court partially allowed the appeals in a case involving disallowance of expenditure for earning exempt income under Section 14A of the Income Tax Act. ... Disallowance under Section 14A - Expenditure incurred to earn exempted income - Held that:- Disallowance under Section 14A cannot be a wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the Act but an enabling provision for assessing authority to compute the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty in not permissible in law. Since no such exercise has been undertaken by the assessing authority, the case calls for a remand - matter is remanded back to the Assessing Authority for re-computing the disallowance of expenditure, if any, under Section 14A of the Act, in accordance with law. Disallowance under Section 36(1)(viii) - profits and gains of business or profession for the purpose of claiming deduction of 20% thereof under Section 36(1)(viii) - Held that:- Section 36(1)(viii) of the Act talks of 'profits and gains of business or profession' before making any deduction under this Clause and therefore, the amortization and depreciation in SLR investments already deducted from the profit earned by the assessee for the said year cannot be added back for the limited purpose of computing profits and gains of business or profession for the purpose of Section 36(1)(viii) so as to claim a higher deduction of 20% under the said provisions. The artificial increase of the profits by adding back amortization and depreciation in SLR investments by the assessee as done by it before the assessing authority was not justified and therefore, the authorities below appear to be justified in reducing the said deduction, ignoring the said adding back of the amortization and depreciation in SLR investments. The said deduction has to be restricted to 20% of profits of banking business as computed by the assessing authority. Therefore, the contention raised by the assessee in this regard in the present appeals before us is not sustainable. Issues Involved:1. Disallowance of expenditure incurred for earning exempt income under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules for Assessment Years 2011-12 and 2012-13.2. Disallowance of excess claim of deduction under Section 36(1)(viii) of the Income Tax Act for Assessment Year 2012-13.Issue-Wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:Expenditure incurred to earn exempted income:- The assessee, M/s. Pragathi Krishna Gramin Bank, claimed dividend income of Rs. 1,80,30,965/- as exempt for Assessment Year 2011-12. The Assessing Authority disallowed an expenditure of Rs. 2,48,85,000/- under Section 14A read with Rule 8D, which was upheld by the appellate authorities.- The assessee argued that the disallowance exceeded the total expenditure claimed and was not justified as no separate accounts were maintained for earning the exempted income. The computation of Rs. 2,48,85,000/- was made as per Rule 8D, but the assessee claimed no actual expenditure was incurred.- The Revenue contended that the disallowance was justified as per the assessee's own computation under Rule 8D.- The Court found the disallowance of Rs. 2,48,85,000/- excessive and not in accordance with Rule 8D, which requires a reasonable proportion of expenditure to the income earned. The disallowance cannot exceed the expenses claimed by the assessee.- The Court remanded the matter back to the Assessing Authority for re-computation of the disallowance under Section 14A, emphasizing that the expenditure must have a rational nexus with the income earned.2. Disallowance under Section 36(1)(viii) of the Income Tax Act:Deduction for special reserve:- For Assessment Year 2012-13, the issue was whether the assessee could add back amortization and depreciation in SLR investments to compute a higher profit for claiming a 20% deduction under Section 36(1)(viii).- The authorities below disallowed this addition, stating that the profits and gains of business should be computed as per normal accounting practices without artificially increasing profits by adding back amortization and depreciation.- The Court agreed with the Revenue that the profits for the purpose of Section 36(1)(viii) should be computed without such additions. The artificial increase was not justified, and the deduction should be restricted to 20% of the actual profits computed by the assessing authority.- The Court rejected the assessee's contention and upheld the authorities' decision to reduce the deduction.Conclusion:- The appeals were partly allowed. The issue of disallowance under Section 14A was remanded back to the Assessing Authority for fresh computation as per the guidelines provided.- The disallowance under Section 36(1)(viii) was upheld, rejecting the assessee's method of artificially increasing profits for claiming higher deductions.- No orders as to costs.