2019 (6) TMI 33 - AT - Income Tax

Tribunal Limits Disallowance for Exempt Income, No 14A/8D for 115JB Book Profit

Dy. Commissioner of Income Tax Central Circle–7 (1), Mumbai Versus Pan India Network Infravest P. Ltd.

The Tribunal upheld the Commissioner's decision to restrict disallowance under section 14A r/w rule 8D to the exempt income earned by the assessee in the ... Disallowance u/s 14A r/w rule 8D - restrict the disallowance u/s 14A to the exempt income earned by the assessee in respective assessment years - HELD THAT:- Undisputedly, the exempt income earned by the assessee during the assessment year 2013–14, was ₹ 48,865 and in assessment year 2014–15, was ₹ 1,08,136. Whereas, the AO has made huge disallowance by invoking the provisions of rule 8D(2)(iii). Now, it is fairly well settled that the disallowance under section 14A r/w rule 8D cannot exceed the quantum of exempt income earned during the year. No reason to interfere with the decision of the learned Commissioner (Appeals) in directing the Assessing Officer to restrict the disallowance under section 14A of the Act to the exempt income earned by the assessee in respective assessment years. MAT computation - disallowance made while computing the book profit under section 115JB - HELD THAT:- It is evident that the AO has made such disallowance by resorting to the provisions of section 14A r/w rule 8D. As per the ratio laid down in Vireet Investment [2017 (6) TMI 1124 - ITAT DELHI] AO while computing the book profit u/s 115JB cannot make any disallowance by making reference to the provisions of section 14A r/w rule 8D. AO retains the power to make disallowance of expenditure incurred for earning exempt income as per Explanation–1(f) of section 115JB of the Act. Therefore, the disallowance made by the Assessing Officer while computing book profit under section 115JB(2) of the Act is unsustainable. AO directed to examine and quantify the expenditure incurred by the assessee for earning exempt income in terms of Explanation–1(f) of section 115JB of the Act without taking aid of rule 8D(2) r/w section 14A of the Act. Grounds no. (i) and (ii) in both the appeals are dismissed and ground no. (iii) is partly allowed for statistical purposes. Issues:1. Disallowance under section 14A r/w rule 8D for assessment years 2013-14 and 2014-15.2. Disallowance of expenditure while computing book profit under section 115JB of the Income-tax Act.Analysis:Issue 1: Disallowance under section 14A r/w rule 8DThe appeals filed by the Revenue challenged separate orders passed by the Commissioner (Appeals) for the assessment years 2013-14 and 2014-15, regarding disallowance under section 14A r/w rule 8D. The Assessing Officer made significant disallowances under rule 8D(2)(iii) for both years, despite the exempt income being relatively low. The Commissioner (Appeals) restricted the disallowance to the exempt income earned by the assessee in each year, citing various decisions supporting this view. The Tribunal concurred, emphasizing that the disallowance under section 14A r/w rule 8D cannot exceed the exempt income earned during the year. As a result, the Tribunal upheld the Commissioner's decision to restrict the disallowance to the exempt income earned by the assessee in the respective assessment years.Issue 2: Disallowance of expenditure while computing book profit under section 115JBRegarding the disallowance made by the Assessing Officer while computing the book profit under section 115JB of the Act, the Tribunal noted that the disallowance was based on section 14A r/w rule 8D. However, following the decision of the Special Bench in Vireet Investment, the Tribunal ruled that no disallowance under section 14A r/w rule 8D can be made while computing book profit under section 115JB. The Tribunal clarified that while the Assessing Officer can disallow expenditure incurred for earning exempt income as per Explanation-1(f) of section 115JB, this should be done without taking aid of rule 8D(2) r/w section 14A of the Act. Consequently, the Tribunal directed the Assessing Officer to reexamine and quantify the expenditure incurred by the assessee for earning exempt income in accordance with Explanation-1(f) of section 115JB. Grounds no. (i) and (ii) in both appeals were dismissed, and ground no. (iii) was partly allowed for statistical purposes.In conclusion, both appeals were partly allowed for statistical purposes, with the Tribunal providing detailed reasoning and legal analysis for its decisions, ensuring adherence to the provisions of the Income-tax Act and relevant case law.