Assessee wins on section 14A disallowance and MAT computation under section 115JB for lease equalization reserves

The ITAT Delhi ruled in favor of the assessee on two grounds. First, regarding disallowance under section 14A for expenditure on earning exempt income, the tribunal held that since no exempt income was earned during the year, no disallowance could be made. Second, concerning MAT computation under section 115JB, the tribunal determined that rent/lease equalization reserve adjustments need not be added back while computing book profits, following precedents from Karnataka HC and Delhi HC that lease equalization charges are not covered under the relevant explanatory clauses.

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Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Adjustment of rent/lease equalization reserve under Section 115JB of the Income Tax Act, 1961.

Summary:

Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961
The assessee challenged the disallowance of Rs. 51,48,128/- made under Section 14A of the Income Tax Act, 1961. The main contention was that no exempt income was earned during the year, and hence, no disallowance under Section 14A should be made. The Tribunal noted that the assessee had suo-moto disallowed Rs. 51,48,128/- under Section 14A, but there was no exempt income earned during the year, as evidenced in the assessment order. The Tribunal also referred to its own decision in the assessee's case for the Assessment Year 2016-17, where the disallowance under Section 14A was deleted. Considering the settled legal position that in the absence of exempt income, no disallowance under Section 14A can be made, the Tribunal found merit in the assessee's ground and deleted the disallowance.

Issue 2: Adjustment of Rent/Lease Equalization Reserve under Section 115JB of the Income Tax Act, 1961
The assessee also contested the adjustment of rent/lease equalization reserve of Rs. 36,06,899/- under Section 115JB of the Income Tax Act, 1961. The assessee argued that the rent/lease equalization reserve was neither a reserve covered by Explanation 1(b) to Section 115JB nor a provision for unascertained liability within the meaning of Explanation 1(c) to Section 115JB. The Tribunal referred to various judgments, including those from the Hon'ble High Court and the Supreme Court, which held that lease equalization charges are not to be treated as adjustments needing to be added back while computing book profits under Section 115JA. The Tribunal concluded that the lease equalization charges should not be added back while computing book profits under Section 115JB, thereby allowing the assessee's ground and deleting the addition made by the AO, which was sustained by the CIT(A).

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal deleting both the disallowance under Section 14A and the adjustment of rent/lease equalization reserve under Section 115JB.

Order:
Order pronounced in open Court on 23rd February, 2024.

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