Tribunal directs AO to delete additions to book profits under Section 115JB, recompute disallowance under Section 14A.

The tribunal partly allowed the appeal, directing the AO to delete the additions made to book profits under Section 115JB for the disallowed depreciation and to recompute the disallowance under Section 14A, excluding investments in foreign subsidiaries and mutual funds. The tribunal also directed the deletion of additions to book profits under Section 115JB related to the Section 14A disallowance.

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Issues Involved:
1. Addition of disallowed depreciation to book profits under Section 115JB of the Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act, 1961, and its impact on book profits under Section 115JB.

Issue-wise Detailed Analysis:

1. Addition of Disallowed Depreciation to Book Profits under Section 115JB:

The assessee challenged the addition of Rs. 2,13,83,915/- on account of disallowed depreciation to the book profits under Section 115JB. The AO had made this addition based on the discovery of bogus purchase bills during a survey action, which led to the detection of unsupported purchases and a consequent disallowance of depreciation on these assets. The CIT(A) upheld the AO's decision, stating that the AO has the power to alter the net profit if it is found that the profit and loss account is not prepared in accordance with the Companies Act, 1956.

The assessee argued that once the books of accounts are audited and approved by the shareholders in the AGM, the AO does not have the power to alter the book profits unless specified under explanation (1) to Section 115JB. This argument was supported by the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT. The tribunal noted that the AO did not make any observations regarding the incorrectness of the books of accounts as per the Companies Act, 1956. Therefore, the tribunal concluded that the AO and CIT(A) erred in making additions to the book profit under Section 115JB for the disallowed depreciation. The tribunal directed the AO to delete these additions.

2. Disallowance under Section 14A and Its Impact on Book Profits under Section 115JB:

The assessee contested the disallowance of Rs. 77,41,478/- under Section 14A read with Rule 8D, arguing that no expenditure was incurred in relation to exempt income and that its own funds exceeded the investments made. The CIT(A) partially accepted the assessee's arguments, excluding investments in foreign subsidiaries from the disallowance calculation but upheld the disallowance for investments in domestic subsidiaries, citing the Delhi High Court's decision in Maxopp Investment vs. CIT.

The tribunal noted that the AO correctly applied Rule 8D for determining the disallowance under Section 14A. However, it agreed with the CIT(A) on excluding investments in foreign subsidiaries and mutual funds from the disallowance calculation. The tribunal directed the AO to recompute the disallowance under Section 14A after excluding these investments.

Regarding the addition of the Section 14A disallowance to book profits under Section 115JB, the tribunal referred to the ITAT Special Bench's decision in ACIT vs. Vireet Investments Pvt. Ltd., which held that computation under clause (f) of explanation (1) to Section 115JB(2) should be made without resorting to Section 14A read with Rule 8D. Consequently, the tribunal directed the AO to delete the additions to book profits under Section 115JB related to the Section 14A disallowance.

Conclusion:

The tribunal partly allowed the appeal, directing the AO to delete the additions made to book profits under Section 115JB for the disallowed depreciation and to recompute the disallowance under Section 14A, excluding investments in foreign subsidiaries and mutual funds. The tribunal also directed the deletion of additions to book profits under Section 115JB related to the Section 14A disallowance.

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