Section 14A disallowance applies to exempt partnership profits under 10(2A) regardless of investment purpose, but no MAT adjustment required

The ITAT Mumbai held that the AO correctly invoked section 14A r.w. rule 8D for disallowing expenditure attributable to exempt income from partnership firm profits under section 10(2A). Following the SC decision in Maxopp Investment Ltd., disallowance applies regardless of investment purpose. The CIT(A) erred in deleting the disallowance, favoring revenue on this ground. However, regarding MAT adjustment under section 115JB, the tribunal upheld CIT(A)'s decision that section 14A disallowance need not be adjusted in book profit for MAT liability, following special bench decisions in Vireet and Radha Madhav cases.

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Issues Involved:
1. Disallowance of Rs. 1,93,99,965/- as expenditure attributable to exempt income from partnership firms.
2. Addition of the disallowance amount to the book profit of the assessee under section 115JB for MAT liability.

Issue-Wise Detailed Analysis:

1. Disallowance of Rs. 1,93,99,965/- as expenditure attributable to exempt income from partnership firms:

The assessee company, engaged in trading commodities and financing, filed its return of income for A.Y. 2017-18, declaring a total income of Rs. 6,33,44,790/- and book profit of Rs. 9,41,64,555/- under section 115JB of the Income-tax Act, 1961. The return was revised to rectify an arithmetical error, declaring the same total income but a revised book profit of Rs. 9,17,03,453/-. During scrutiny, the Assessing Officer (AO) noticed that the assessee earned exempt dividend income and profits from partnership firms, claiming Rs. 8,16,949/- as disallowance under section 14A of the Act. The AO found that the assessee only considered investments yielding dividend income for disallowance and not those in partnership firms, despite claiming profits from these firms as exempt under section 10(2A).

The AO worked out the expenses attributable to exempt income using section 14A read with rule 8D, arriving at Rs. 2,02,39,996/-. After adjusting the assessee's suo-moto disallowance, the disallowance was restricted to Rs. 1,93,99,665/-. The CIT(A) deleted this addition, prompting the revenue to appeal.

The Tribunal noted that section 14A requires disallowance of expenditure incurred in relation to exempt income. The AO must record dissatisfaction with the assessee's claim before invoking rule 8D. The AO prudently recorded dissatisfaction, noting that the assessee did not consider expenses related to profits from partnership firms, which are exempt under section 10(2A). The Tribunal upheld the AO's disallowance, stating that the assessee's claim of no expenses incurred for exempt income was not satisfactory. The first point was determined in favor of the revenue, supporting the disallowance of Rs. 1,93,99,665/-.

2. Addition of the disallowance amount to the book profit of the assessee under section 115JB for MAT liability:

The second issue concerned whether the disallowance of Rs. 1,93,99,665/- should be added to the book profit under section 115JB for MAT liability. Section 115JB mandates that if the income-tax payable on total income is less than a specified percentage of book profit, the book profit shall be deemed total income, and tax shall be payable on it.

The Tribunal referred to the decision of the Special Bench of ITAT Delhi in Vireet Investment (P) Ltd., which held that the computation under clause (f) of Explanation 1 to section 115JB(2) should be made without resorting to the computation under section 14A read with rule 8D. Similarly, the ITAT Mumbai in Radha Madhav Investments Limited held that disallowance under section 14A should not be adjusted in book profits for section 115JB purposes.

Following these precedents, the Tribunal held that the CIT(A) was correct in not adding the disallowance under section 14A to the book profit for MAT liability. This point was determined against the revenue and in favor of the assessee.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the disallowance of Rs. 1,93,99,665/- under section 14A but ruled that this disallowance should not be added to the book profit under section 115JB for MAT liability. The order was pronounced on 04.07.2024.

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