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Issues: (i) Whether the disallowance under section 14A read with Rule 8D was to be sustained in full, including the component based on investments from which exempt income was actually earned and the direct expenditure component; (ii) Whether delayed deposit of employees' contribution to provident fund, though made before the due date for filing the return, was allowable deduction for the assessment year in question; (iii) Whether disallowance under section 14A could be added while computing book profit under section 115JB.
Issue (i): Whether the disallowance under section 14A read with Rule 8D was to be sustained in full, including the component based on investments from which exempt income was actually earned and the direct expenditure component.
Analysis: The direct expenditure represented by STT was treated as expenditure incurred for earning exempt income and was therefore disallowable. For the balance disallowance computed under Rule 8D(2)(ii), the relevant principle applied was that only the value of investments which actually yielded exempt income during the year can be considered for the computation.
Conclusion: The disallowance was upheld only in respect of the direct expenditure component, while the balance was directed to be recomputed; the issue was partly in favour of the assessee.
Issue (ii): Whether delayed deposit of employees' contribution to provident fund, though made before the due date for filing the return, was allowable deduction for the assessment year in question.
Analysis: The amendment brought in by the Finance Act, 2021 was treated as prospective because the legislative intent, as reflected in the Notes on Clauses, showed that it was to apply from 1 April 2021. For the assessment year involved, the jurisdictional view allowing deduction where payment was made before the due date of filing the return continued to govern.
Conclusion: The addition was deleted and the deduction was allowed; the issue was decided in favour of the assessee.
Issue (iii): Whether disallowance under section 14A could be added while computing book profit under section 115JB.
Analysis: While section 14A read with Rule 8D could not be mechanically imported into section 115JB, clause (f) of Explanation 1 required independent computation of expenditure relatable to exempt income for book profit purposes.
Conclusion: The matter was restored for fresh computation under clause (f) of Explanation 1 to section 115JB; the issue was partly in favour of the assessee.
Final Conclusion: The appeal succeeded only to the extent indicated above, with partial relief on the disallowance issues and recomputation directed where required.
Ratio Decidendi: For the relevant assessment year, employees' contribution deposited before the due date of filing the return remained allowable, and for section 14A purposes only investments yielding exempt income could be considered in the Rule 8D computation, while book profit under section 115JB had to be computed independently under its own Explanation.
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