DETERMINATION OF BOOK PROFIT

[S.C. WADHWA]

An Assesse engaged in making investments in shares & other securities.  The assesse deals in shares whereas amount invested in other securities are held as investments. The assesse received dividend income on it.

While computing income from business & profession, it added back

1. Expenditure incurred in relation to exempt income

2. Amount determined under Section 14A read Rule 8D ( at the rate of .5 percent of average of investments)

Expenditure incurred in relation to exempt income (as aforesaid in point no. 1) was also added back in determining book profit but amount determined u/s 14A  (point no. 2) was not added back.

In course of assessment proceedings, the assessing officer required the assesse to add back also the amount determined under Section 14A (point no. 2) as aforesaid.

Please advise whether the amount determined u/s 14A (point no. 2) should be added back because the provisions governing determination of book profit requires the amount to be added back which has been debited to profit & loss account.

Please give your expert opinion.

AI Summary

Determination of book profit: whether a rule-based notional disallowance for exempt income must be added back in computation.
Assessee, a share dealer with some securities held as investments, received exempt dividend income; it added back expenditures attributable to exempt income when computing book profit but did not add back a formulaic notional disallowance calculated on average investments. The assessing officer required inclusion of that notional disallowance in book profit. The question is whether a rule-based notional disallowance debited or otherwise affecting profit and loss must be added back in computing book profit alongside other add-backs for exempt income.