2024 (12) TMI 1614 - AT - Income Tax

Disallowance under Section 14A and Rule 8D limited to exempt income-yielding investments; no addition to book profit under Section 115JB

The ITAT Kolkata held that for disallowance under section 14A read with Rule 8D, only investments yielding exempt income during the relevant year should ... Disallowance u/s 14A r.w.r. 8D(iii) - as argued assessee company has earned only exempt dividend income for which no expenses were incurred - whether on the facts and circumstances of the case, only the investments are to be considered for calculating the average value of investment which yielded exempt income during the year or not? - HELD THAT:- For calculation of disallowance under section 14A read with Rule 8D, only those investments are to be considered which yielded exempt income during the year under consideration. Therefore, by applying the decision of Cargo Motors Pvt. Ltd. [2022 (10) TMI 571 - DELHI HIGH COURT] the disallowance made by the ld. AO u/s 14A read with Rule 8D is set aside and restored to the file of AO to compute 0.5% on the investment which yielded exempt income during the year under consideration and also restrict the same to that effect. Accordingly, this issue raised by the assessee is allowed. Disallowance u/s 14A r.w.r. 8D while computing Book Profit of the assessee u/s 115JB - It is an admitted fact that in Apollo Tyres Limited [2002 (5) TMI 5 - SUPREME COURT] has categorically held that book profit is to be consdered u/s 115JB as per the Companies (Schedule 3) Act and hence any disallowance is not permitted to be added in the calculation of book profit under section 115JB of the Act. Therefore, we are inclined to set aside the order passed by Addl./JCIT(Appeals) and direct the AO to delete the addition made to the book profit. The ground raised by the assessee is allowed. ISSUES: Whether disallowance under section 14A read with Rule 8D(2)(iii) should be computed on the average value of all investments or only on investments yielding exempt income.Whether the disallowance under section 14A can be made in excess of the exempt income earned during the year.Whether the disallowance under section 14A should be added back while computing book profit under section 115JB of the Act. RULINGS / HOLDINGS: Disallowance under section 14A read with Rule 8D must be computed only on the investment which has given rise to exempt income during the year; the disallowance based on the entire investment was set aside and remanded for recalculation accordingly.The disallowance under section 14A cannot exceed the amount of exempt income earned; the disallowance of Rs.5,92,707/- was held excessive relative to exempt income of Rs.4,50,239/- and thus required adjustment.Disallowance under section 14A is 'bad in law' for the purpose of computing book profit under section 115JB and therefore should not be added back; the addition to book profit was deleted in accordance with the Apex Court ruling. RATIONALE: The Court applied the principle from the Hon'ble Delhi High Court decision that disallowance under section 14A read with Rule 8D must relate strictly to investments yielding exempt income, thereby limiting the scope of disallowance to avoid arbitrary or excessive additions.The legal framework includes section 14A of the Income Tax Act, which disallows expenditure incurred to earn exempt income, and Rule 8D which prescribes the method of computing such disallowance.The Court relied on the Hon'ble Apex Court decision in Appollo Tyres Limited -vs.- CIT, which held that book profit under section 115JB must be computed as per Companies (Schedule 3) Act and disallowances under section 14A cannot be added back in book profit computation, marking a doctrinal clarification on the treatment of such disallowances.The decision reflects a strict interpretation of nexus between exempt income and disallowance, and a rejection of disallowance additions in book profit calculations, ensuring conformity with statutory provisions and judicial precedents.