2025 (1) TMI 1636 - AT - Income Tax

Verify STT and allow exemption under s.10(38); s.14A disallowance and s.115JB addition rejected under s.44 and Rule 5

ITAT DELHI - AT directed the AO to verify STT payment and allow exemption under s.10(38). Disallowance under s.14A was rejected: the Bench followed ... Status of STT payment - exemption u/s 10(38) - HELD THAT:- Co-ordinate Bench of the Tribunal in the latest order [2023 (7) TMI 1579 - ITAT DELHI] for Assessment Year 2016-17 concluded issue is decided in favour of the assessee and AO is directed to verify about the status of STT payment and accordingly allow the exemption u/s. 10 (38). Disallowance u/s 14A both under the normal provision and as well as the provisions u/s 115JB - Disallowance of 14A under the normal provisions of the Act was decided against the Revenue by the case of the assessee company [2020 (3) TMI 507 - DELHI HIGH COURT] as held Section 44 begins with a non-obstante clause and overrides the other provisions of the Act as mentioned therein including Section 14A. We are not convinced with the submission of DR that Section 14A would be applicable in respect of the Respondent. Section 14A does not have independent legs to stand on. Addition of the disallowance on account of u/s 14A of the Act under the provisions of section 115JB of the Act has been decided against the Revenu in the case of the assessee for AY 2015-16 [2021 (9) TMI 1216 - ITAT DELHI] held that disallowance made u/s 14A could not be added to book profit of the assessee u/s 115JB. Adjustment to disclosed profits by making an addition on account of provision made for Standard Assets - As under Rule 5 the Statute makes profit disclosed in Profit and Loss account sacrosanct subject only to adjustments prescribed in Rules 5(a) to 5(c). The case law relied is, therefore, distinguishable. CIT (A), in AY 2011-12, has also not properly addressed the issue. Relevant statutory provisions have been inadvertently misread and hence not properly understood. We therefore delete the disallowance. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether profit on sale of investments qualifies for exemption under section 10(38) of the Act subject to verification of Securities Transaction Tax (STT) payment and hence should be excluded from taxable income. 2. Whether disallowance under section 14A of the Act is exigible when computing taxable income of an insurance company under the special provisions of section 44 and first schedule, and whether a section 14A disallowance can be added back in computing book profit under section 115JB (MAT). 3. Whether a provision made for Standard Assets can be disallowed by invoking the adjustments prescribed in Rule 5 (or otherwise) when computing taxable income/profit of an insurance company. 4. Whether reliance on higher court/coordinate-bench precedents that interpret applicability of section 10(38), section 14A and Rule 5 leads to conclusions controlling the present assessment year issues. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of profit on sale of investments; applicability of section 10(38) subject to STT verification Legal framework: Section 10(38) provides exemption for long-term capital gains on transfer of equity shares/index units where STT has been paid; section 44 and first schedule special provisions apply to computation of income of insurance companies only to the extent prescribed. Assessment must verify STT payment to determine exemption entitlement. Precedent treatment: The Tribunal followed its coordinate-bench decisions for earlier assessment years which directed verification of STT payment and allowance of exemption under section 10(38) where facts are pari materia. A coordinate-bench view favourable to the assessee for prior years was applied; no contrary distinguishing authority was produced by Revenue. Interpretation and reasoning: The Court observed identity of facts with earlier assessment years and applied the coordinate-bench conclusion that where STT status supports exemption, section 10(38) applies. The Tribunal declined to entertain Revenue's contention that a High Court view (as described by Revenue) supports taxation w.e.f. AY 2011-12 because Revenue did not produce distinguishing facts or precedents altering the coordinate-bench approach; the Tribunal followed settled coordinate-bench precedent directing the Assessing Officer to verify STT payment and grant exemption accordingly. Ratio vs. Obiter: Ratio - where facts are identical to earlier decisions of the Tribunal, the exemption under section 10(38) must be allowed subject to verification of STT payment. Obiter - Revenue's generalized submission about a High Court view supporting taxation w.e.f. AY 2011-12 was not treated as controlling because it was not shown to be distinguishable or applicable; that discussion is incidental. Conclusions: The profit on sale of investments is to be examined for STT payment and, if STT is duly paid, exemption under section 10(38) is to be allowed; coordinate-bench precedent governs and the Assessing Officer is directed to verify STT status and grant relief accordingly. Issue 2 - Applicability of section 14A disallowance under normal provisions and addition to book profit under section 115JB (MAT) Legal framework: Section 14A disallows expenditure incurred in relation to exempt income for purposes of computing total income; Rule 8D prescribes a method for computing such disallowance. Section 115JB provides special mode for computing book profit for MAT with an Explanation containing items (clauses (a)-(j)) to be added or reduced; sub-section (5) states other provisions apply save as provided. Precedent treatment: High Court and coordinate-bench authorities were cited and followed: a High Court held section 44 (for insurance companies) overrides computation provisions including section 14A when applicable; another High Court (Karnataka) held that the notional disallowance under section 14A cannot be added to book profit under section 115JB; other Tribunal decisions (Goetze, Integrated Mining) and High Court rulings were followed to the same effect. Interpretation and reasoning: For the insurance-company context, section 44 (a special provision) and the first schedule govern computation of business income, excluding application of general computation provisions (including section 14A) insofar as excluded by section 44. Separately, for MAT computation under section 115JB, the Tribunal and courts have reasoned that clause (f) of the Explanation to section 115JB contemplates amounts debited to profit and loss account; section 14A disallowance is a notional adjustment and not a debited expenditure, and Rule 8D's mechanical prescription is not apt for adding a notional disallowance into book profit. Therefore, section 14A disallowance should not be made part of book profit under section 115JB. Ratio vs. Obiter: Ratio - (a) For insurance companies governed by section 44 and the first schedule, section 14A is excluded from computation of business income; (b) Disallowance under section 14A (a notional disallowance) cannot be added to book profit under section 115JB. Obiter - references to inapplicability of certain Supreme Court precedents (e.g., on unrelated issues) are explanatory rather than foundational. Conclusions: The disallowance under section 14A is not exigible against the insurance-company taxpayer in computing business income under section 44/first schedule; further, the section 14A disallowance cannot be included in computing book profit under section 115JB. Accordingly, the CIT(A)'s deletion of the disallowance under both normal provisions and for MAT purposes is upheld. Issue 3 - Disallowance of provision for Standard Assets Legal framework: Rule 5 prescribes limited, specific adjustments to profits disclosed in the profit & loss account for computation of taxable income; statutory scheme treats disclosed profit as sacrosanct except for adjustments enumerated in Rules 5(a)-5(c). Provisions for standard assets are governed by specific provisions applicable ordinarily to banks and financial institutions; their treatment depends on statutory enablement. Precedent treatment: Coordinate-bench decisions were relied on which distinguished cases involving banks (where section 36(1)(viia) and Rule 5 operate differently) from insurance companies. The Tribunal in the cited coordinate-bench ruling found the bank decisions inapplicable because the statutory provisions and the operative Rules for insurance companies do not mandate an addition for provision for Standard Assets. Interpretation and reasoning: The Tribunal examined Rule 5 and concluded there is no enabling mechanism under Rule 5(a) to require adjustment for provision made for Standard Assets for an insurance company. Rule 5 preserves the profit disclosed in profit & loss account subject only to specified adjustments; absent a statutory provision compelling addition for such provision in the context of an insurance company, the Assessing Officer cannot make the disallowance. Distinguishing precedent involving banks, the Tribunal held those cases inapplicable because differing statutory regimes apply. Ratio vs. Obiter: Ratio - In the absence of a statutory provision or rule enabling an adjustment, a provision for Standard Assets cannot be disallowed by making an addition under Rule 5 when computing income of an insurance company. Obiter - comparison with bank cases is illustrative but not decisive for insurance-company treatment. Conclusions: The addition on account of provision made for Standard Assets is not sustainable for an insurance-company assessee; the CIT(A)'s deletion of the disallowance is upheld following coordinate-bench precedent distinguishing bank cases. Issue 4 - Role of coordinate-bench and higher-court precedents in controlling present assessment year Legal framework: Tribunal applies precedent where facts are identical; higher-court rulings bind Tribunal unless distinguishable; special provisions (section 44, section 115JB, Rules) must be interpreted consistently with earlier authoritative decisions. Precedent treatment: The Tribunal consistently applied its coordinate-bench decisions and followed intervening High Court decisions that addressed identical questions; Revenue failed to produce distinguishing facts or binding contrary authority applicable to the present assessment year. Interpretation and reasoning: Given parity of facts with earlier decided assessment years and applicable higher-court rulings, the Tribunal applied those precedents to the present assessment year. The Tribunal refused to deviate from coordinate-bench or higher-court conclusions where Revenue did not demonstrate distinguishing circumstances or controlling contrary authority. Ratio vs. Obiter: Ratio - Where facts are identical and controlling precedent exists, the Tribunal will follow coordinate-bench/high-court rulings and direct Assessing Officer action accordingly. Obiter - discussion of alternative Revenue arguments not advanced at earlier stages is treated as untimely and incidental. Conclusions: Coordinate-bench and applicable High Court decisions govern the outcome; the Tribunal upheld the CIT(A)'s deletions on the issues considered and dismissed Revenue's grounds to the extent indicated, directing the Assessing Officer to act in conformity with precedent (including verification of STT where relevant).