2019 (6) TMI 88 - AT - Income Tax

Court Limits Disallowance for Exempt Income & Book Profit Calculation

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

The court held that disallowance under section 14A r/w rule 8D for exempt income cannot exceed the exempt income earned during the year. Disallowance ... Disallowance made u/s 14A r/w rule 8D, while computing the income under the normal provisions as well as u/s 115JB - HELD THAT:- The disallowance u/s 14A r/w rule 8D cannot exceed the quantum of exempt income earned during the year. No reason to interfere with the decision of CIT(A) in directing the AO to restrict the disallowance u/s 14A to the disallowance made by the assessee. Disallowance made while computing the book profit u/s 115JB - AO has made such disallowance by resorting to the provisions of section 14A r/w rule 8D - HELD THAT:- As per the ratio laid down by the Tribunal, Special Bench Delhi, 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 AO while computing book profit u/s 115JB(2) is unsustainable. Thus, AO is 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. Grounds no. (i) and (ii) are dismissed and ground no. (iii) is partly allowed for statistical purposes. Issues:1. Disallowance under section 14A r/w rule 8D for exempt income.2. Disallowance under section 115JB while computing book profit.Issue 1: Disallowance under section 14A r/w rule 8D for exempt income:The dispute in this case revolves around the disallowance made under section 14A r/w rule 8D while computing income under normal provisions and section 115JB of the Income-tax Act, 1961. The Assessing Officer noticed that the assessee, engaged in providing internet data services, earned exempt income through dividends but had not disallowed any expenditure under section 14A r/w rule 8D. The Assessing Officer proceeded to compute a substantial disallowance under rule 8D(2), which was also applied to book profit under section 115JB. The learned Commissioner (Appeals) restricted the disallowance to the amount voluntarily disallowed by the assessee, citing decisions supporting the view that disallowance under section 14A r/w rule 8D cannot exceed the exempt income earned during the year.Issue 2: Disallowance under section 115JB while computing book profit:Regarding the disallowance made by the Assessing Officer under section 115JB while computing book profit, it was found that the disallowance was based on section 14A r/w rule 8D. However, the Tribunal held, following the Vireet Investment case, that no disallowance under section 14A r/w rule 8D can be made while computing book profit under section 115JB. The Assessing Officer was directed to quantify the expenditure incurred for earning exempt income under Explanation-1(f) of section 115JB without relying on rule 8D(2) r/w section 14A of the Act. The appeal was partly allowed for statistical purposes, with specific grounds dismissed or partly allowed as per the judgment.This judgment clarifies the principles governing disallowances under section 14A r/w rule 8D for exempt income and disallowances under section 115JB while computing book profit. It emphasizes that disallowances should be proportionate to the exempt income earned and that different rules apply when computing book profit under section 115JB.