Section 14A disallowance upheld for normal tax, but deleted from book profit computation under MAT.

Disallowance under section 14A read with Rule 8D(2)(ii) was sustained under the normal provisions because the assessee had not demonstrated that no expenditure was incurred in relation to exempt dividend income, and separate accounts for investment activity were not maintained. The same disallowance could not be mechanically added back while computing book profits under section 115JB, so the MAT adjustment was deleted. The principle applied is that Rule 8D can govern the computation of expenditure attributable to exempt income where the factual basis exists, but section 14A disallowance is not automatically reflected in book profit computation.

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Issues: (i) Whether the disallowance made under section 14A of the Income-tax Act, 1961 read with Rule 8D(2)(ii) of the Income-tax Rules, 1962 was sustainable under the normal provisions; (ii) Whether the same disallowance could be added back while computing book profits under section 115JB of the Income-tax Act, 1961.

Issue (i): Whether the disallowance made under section 14A of the Income-tax Act, 1961 read with Rule 8D(2)(ii) of the Income-tax Rules, 1962 was sustainable under the normal provisions.

Analysis: The investment portfolio had movement during the year, and the assessee had incurred administrative and employee-related expenses without maintaining separate accounts for the investment activity. In the absence of demonstrative evidence showing that no expenditure was incurred in relation to exempt dividend income, the computation mechanism under Rule 8D was held to be applicable.

Conclusion: The disallowance under section 14A, as computed under Rule 8D(2)(ii), was upheld under the normal provisions and the issue was decided against the assessee.

Issue (ii): Whether the same disallowance could be added back while computing book profits under section 115JB of the Income-tax Act, 1961.

Analysis: The adjustment to book profits was held to be impermissible for the purpose of section 115JB, and the disallowance under section 14A was directed not to be added back in the MAT computation.

Conclusion: The addition to book profits under section 115JB was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded only in part, with the disallowance under section 14A sustained for normal tax computation but deleted for MAT purposes.

Ratio Decidendi: A disallowance under section 14A may be computed under Rule 8D where the assessee fails to show that no expenditure was incurred for earning exempt income, but the same disallowance is not to be mechanically added back while determining book profits under section 115JB.

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