Section 14A disallowance cannot exceed exempted income amount, limited to Rs. 1,08,650 under Rule 8D

ITAT Ahmedabad held that disallowance under section 14A read with Rule 8D cannot exceed exempted income amount, limiting it to Rs. 1,08,650 based on SC and HC precedents. The tribunal ruled that section 14A disallowances cannot be applied while determining net profit under section 115JB, following established jurisprudence. For book profit computation under section 115JB, tribunal directed ad-hoc disallowance of 1% of exempted income under clause (f) to avoid multiplicity of proceedings. Both assessee's and Revenue's appeals were partly allowed with respective limitations imposed.

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Issues Involved:
The appeal against the order of the Learned Commissioner of Income Tax (Appeals), Vadodara under section 143(3) of the Income Tax Act, 1961 for Assessment Year 2014-15.

Issue 1: Disallowance under Section 14A r.w. Rule 8D:
The assessee challenged the addition of Rs. 99,34,511/- under section 14A r.w. Rule 8D of Income Tax Rules.

During assessment, the AO found exempted income of Rs. 1,08,650/- but made a disallowance of Rs. 99,34,511/- under section 14A r.w. Rule 8D. The Ld. CIT(A) upheld this decision.

The AR contended that the disallowance cannot exceed the exempted income. Citing relevant case law, the Tribunal held that the disallowance cannot exceed the exempted income of Rs. 1,08,650/-. As a result, the appeal of the assessee was partly allowed.

Issue 2: Addition to Book Profit under Section 115JB:
The assessee disputed the addition to book profit under section 115JB for the disallowed amount under section 14A r.w. Rule 8D.

The AO disallowed Rs. 99,34,511/- under section 14A r.w. Rule 8D, which was added to the book profit under section 115JB. The Ld. CIT(A) affirmed this decision.

The AR argued that the disallowed amount cannot impact the book profit calculation under section 115JB. Citing precedent, the Tribunal held that the disallowance under section 14A r.w. Rule 8D cannot be considered while determining the net profit under section 115JB. However, it was noted that a disallowance must be made with respect to the exempted income independently. To avoid further litigation, an ad-hoc disallowance of 1% of the exempted income was directed under clause (f) to Explanation-1 of Sec. 115JB. Consequently, the appeal of the Revenue was partly allowed.

In conclusion, the Tribunal partially allowed the appeal of the assessee regarding the disallowance under section 14A r.w. Rule 8D and the addition to book profit under section 115JB. The judgment was pronounced on 15/03/2024 at Ahmedabad.

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