Disallowance under Rule 8D and book profit computation: restrict to exempt-income investments, other tax adjustments and remittal.

Disallowance under Rule 8D must be computed with reference only to investments that actually yield exempt income and limited to 1% of the monthly average of such investments, and any Rule 14A/Rule 8D disallowance should not be added to book profit under the mechanism of Explanation (1) to the book-profit tax. Proportionate interest on borrowings need not be disallowed where interest-free advances are covered by own non-interest funds. Large recurrent payments claimed as business expenditure may be non-business in character. Subsidy for investing in backward area can be taxable as revenue by reason of amendment. Royalty to government is deductible on actual payment basis. Leave encashment provision requires fresh examination under Explanation (1) for book profit. Interest on belated TDS is allowable in computing book profit. Specified Bank Note cash deposits remitted to AO for production of employee corroboration and evidence.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether disallowance under Section 14A read with amended Rule 8D for the relevant year must be computed by considering only investments which actually yielded exempt income during the year; and whether such disallowance can be added while computing book profit under Section 115JB.

(ii) Whether proportionate interest on borrowings can be disallowed where interest-free advances to subsidiaries are covered by sufficient own funds.

(iii) Whether depreciation attributable to capitalised payments made to a "vastu" consultant is allowable when such expenditure is held not to be for business purposes.

(iv) Whether subsidy/incentive received from a State Government for setting up a unit (quantified with reference to investment and received by retention/adjustment mechanism) is taxable as "income" in view of Section 2(24)(xviii) (effective from the relevant period), irrespective of capital/revenue character.

(v) Whether unpaid royalty/amounts payable under mining law (including sums payable to a specified fund) are disallowable under Section 43B to the extent not actually paid within the prescribed time, after giving effect to amounts paid/reversed during the year.

(vi) Whether provision for leave encashment can be added back while computing book profit under Section 115JB by importing Section 43B(f), and if not, whether the allowability must be tested only with reference to Explanation (1) to Section 115JB.

(vii) Whether interest paid for belated deposit of TDS is to be added back while computing book profit under Section 115JB.

(viii) For Section 80-IA deduction in respect of captive power generation, whether the transfer price for power supplied to own manufacturing units should be benchmarked with the rate charged by distribution companies to consumers (landed cost), rather than tariff rates notified for purchase of power by electricity boards; and whether consequent denial of deduction was justified.

(ix) Whether cash deposits of specified bank notes during demonetisation period, claimed to be sourced from returned employee advances/non-permitted receipts, can be sustained as unexplained cash credit under Section 68 without supporting evidence; and whether the matter requires remand for verification.

2. ISSUE-WISE DETAILED ANALYSIS

(i) Section 14A r.w. amended Rule 8D-scope of "investments" to be considered; and impact on Section 115JB

Legal framework: The Tribunal addressed Section 14A and Rule 8D (as amended with effect from 02.06.2016) for the relevant year, including the change to computation at 1% of the monthly average of investments. It also addressed whether the resulting disallowance can be carried into Section 115JB computation.

Interpretation and reasoning: The Tribunal applied the principle that, for Rule 8D purposes, only those investments which yielded exempt income during the year are to be considered. While accepting applicability of the amended Rule 8D methodology for the relevant year, it held that the investment base must still be confined to exempt-income-yielding investments. For book profit, the Tribunal followed its earlier binding view in the assessee's own case that the computation under Section 115JB cannot be made by directly adopting a Rule 8D disallowance as an add-back.

Conclusions: Disallowance under Rule 8D was directed to be recomputed as 1% of the monthly average of investments which yielded exempt income, based on month-wise details to be furnished by the assessee. Addition of Section 14A/Rule 8D disallowance to book profit under Section 115JB was directed to be deleted.

(ii) Disallowance of interest on borrowings vis-à-vis interest-free advances to subsidiaries

Legal framework: The Tribunal examined allowability of interest under Section 36(1)(iii), and the presumption principle where own funds exceed interest-free advances.

Interpretation and reasoning: The Tribunal found that own funds (capital, reserves and surplus) were far in excess of the average balance of interest-free advances. On that factual finding, it applied the presumption that such advances are made out of own interest-free funds, so that disallowance of interest on borrowings does not arise.

Conclusions: The proportionate interest disallowance was held unwarranted and directed to be deleted.

(iii) Depreciation on capitalised payments to "vastu" consultant

Legal framework: The Tribunal considered whether the underlying expenditure, capitalised to building cost, was for business purposes so as to permit depreciation.

Interpretation and reasoning: The Tribunal followed the later coordinate bench decision in the assessee's own case which had upheld disallowance on the basis that such recurring, substantial "vastu/ritual" payments lacked demonstrated business purpose/bonafides to justify allowance. The Tribunal treated that later view as governing.

Conclusions: Depreciation attributable to the capitalised "vastu" fees was disallowed and the appellate confirmation was upheld.

(iv) Taxability of State subsidy/incentive after insertion of Section 2(24)(xviii)

Legal framework: The Tribunal examined Section 2(24)(xviii) (effective from the relevant period) which includes within "income" assistance in the form of subsidy/grant/incentive/concession etc., except where taken into account for determining actual cost under the specified depreciation framework.

Interpretation and reasoning: The Tribunal held that, after this amendment, the earlier "purpose test" distinction between capital and revenue subsidies is no longer determinative for taxability, and all such subsidies become taxable unless falling within the stated exclusion. The Tribunal applied this changed legal position to the incentive received under the State industrial scheme, and rejected reliance on an earlier year's decision based on pre-amendment law.

Conclusions: The subsidy/incentive was held to be taxable as income for the relevant year and the addition was confirmed.

(v) Section 43B disallowance of unpaid royalty/amount payable under mining law

Legal framework: The Tribunal examined Section 43B covering any sum payable by way of tax, duty, cess or fee (by whatever name called), and its allowability only on actual payment basis within prescribed timelines.

Interpretation and reasoning: The Tribunal noted that the amount provided in the books pursuant to demand under the mining law fell within Section 43B, and that the assessee failed to controvert why such royalty/levy would not be covered. It accepted the appellate working which allowed deduction for amounts paid/reversed during the year (linked to reduction notification) and sustained only the net unpaid portion.

Conclusions: Net disallowance under Section 43B, after allowing the relief for payments/reversals recognised by the first appellate authority, was confirmed.

(vi) Provision for leave encashment-addition to book profit under Section 115JB

Legal framework: The Tribunal addressed the principle that Section 115JB is a self-contained code and book profit adjustments must be confined to Explanation (1) thereto, rather than importing Section 43B(f).

Interpretation and reasoning: The Tribunal agreed that Section 43B(f) governs computation under normal provisions but cannot be mechanically applied to book profit. It held that the correct enquiry is whether the provision falls within any clause of Explanation (1) (including whether it is an unascertained liability), and found that lower authorities had not examined this as required.

Conclusions: The issue was set aside to the Assessing Officer for de novo determination under Explanation (1) to Section 115JB alone, after giving the assessee opportunity to establish whether the provision was ascertained or not; allowed for statistical purposes.

(vii) Interest on belated deposit of TDS-treatment in Section 115JB computation

Legal framework: The Tribunal examined whether such interest is covered by the book profit add-back relating to "income tax" and allied items under the relevant Explanation.

Interpretation and reasoning: The Tribunal held that TDS is not "income tax" payable by the assessee on its own income; it is tax deducted in respect of a third party's income. Consequently, interest for belated remittance of TDS does not fall within the contemplated add-back to book profit.

Conclusions: Interest on belated deposit of TDS was directed to be allowed in computing book profit under Section 115JB, and the add-back was deleted.

(viii) Section 80-IA deduction for captive power-benchmarking/transfer price for inter-unit transfer

Legal framework: The Tribunal considered computation of eligible profits for captive power undertakings under Section 80-IA, including valuation of inter-unit transfer of power, and addressed the benchmarking approach adopted by the tax authorities versus the assessee.

Interpretation and reasoning: The Tribunal applied its binding decision in the assessee's own case for a later year on identical facts, holding that for captive consumption, the appropriate rate is the rate charged by distribution companies to consumers (open market/landed cost), not the tariff at which boards procure power from generators. It found the lower authority erred in sustaining the reduced rate approach which resulted in notional losses and denial of deduction.

Conclusions: The downward adjustment using procurement tariffs was deleted; the assessee's benchmarking was upheld; and the Section 80-IA deduction was allowed.

(ix) Addition under Section 68 for cash deposits of specified bank notes-sufficiency of explanation and evidence

Legal framework: The Tribunal evaluated the requirement under Section 68 that the assessee establish the source of credited sums with supporting evidence.

Interpretation and reasoning: While noting the assessee's claim that deposits represented employee advances returned (including specified notes) during demonetisation, the Tribunal held that the assessee had not produced basic supporting particulars (such as identities, dates of advances, travel evidence, confirmations). Without such substantiation, the explanation could not be accepted at face value; however, the Tribunal considered it appropriate to allow an opportunity to produce evidence and permit the Assessing Officer to verify, including by independent enquiries if required.

Conclusions: The Section 68 issue was remitted to the Assessing Officer for fresh examination upon evidence to be furnished by the assessee; allowed for statistical purposes.

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