TaxTMI 
TaxTMI 
2026 (4) TMI 1108
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....y the Assessing Officer to the book profit under Section 115JB of the income-tax Act, 1961, being expenditure relatable to exempt income, without appreciating that such adjustment is specifically mandated by clause (1) of Explanation 1 to Section 115JB(2) of the Act? 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the expression "expenditure relatable to any income which does not form part of the total income" under clause (1) to Explanation I is analogous in intent and scope to the expression "expenditure incurred in relation to exempt income under Section 144, both embodying the same accounting principle that such expenditure cannot be allowed to reduce taxable or book profits? 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in relying on the decision of the ITAT Special Bench in Vireet Investment (P) Ltd. (82 taxmann.com 415), ignoring the binding ratio of the Hon'ble Delhi High Court in CIT v. Goetze (India) Ltd. [361 ITR 505), which upheld the addition of such expenditure while computing book profit under Section 115JB? 5. Whether on the facts and ci....
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....ok profit of 115 JB of the Act. 3. As far as ground related to disallowances of expenses under rule 8D is concerned the Ld. CIT(A) has deleted the addition observing as under: "7. The issue involved in these grounds relates to disallowance U/s 14A of the Act. During the relevant previous year, the appellant had claimed exempt income u/s 10(34) of the Act of Rs. 2,14,325/- and the appellant had suo motu offered disallowance u/s 14A of Rs. 2,14,325/-. The AO has worked out disallowance U/s 14A of the Act r.w.r. 8D at Rs. 12,24,59,142/-. Considering the disallowance already offered by the appellant, the net disallowance of Rs. 12,22,44,817/- was made to the returned income u/s 14A r.w.r. 8D of the Act. The appellant has contended that disallowance u/s 14A of the Act cannot exceed the claim of exempt income claimed in the return of income for which it has relied on various judicial decisions. 7.1 It is observed that on the issue of extent of disallowance u/s 14A which can be made if the dividend income earned during the relevant year is either nil or less than the amount of disallowance computed under section 14A, has been subjected to substantial debate. However, ....
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....bmitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. 10.3 According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. 10.4 Rule BD, in our view, cannot go beyond what is provided in Section 14A of the Act. 11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd. v. Addl. T.C.A.No.520 of 2016. of 11.1 A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf. 11.2 As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowe....
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....e, therefore, is restricted to Rs. 1,13,72,545/- which is exempt income earned by the Assessee, the Assessee would accept the same. 5. Having heard the learned Counsel for the parties and having perused the documents on record, consistently different High Courts in the country have taken a view that the disallowance under Section 14A of the Act read with Rule 8D of the Rules cannot exceed the Assessee's exempt income. The Delhi High Court, in the case of Cheminvest Ltd. Vs. Commissioner of Income Tax 1, has held that when the Assessee has not earned any income which was exempt from tax, 'disallowance of the expenditure under Section Rules would not be permissible. 7.3 The Hon'ble Karnataka High Court, in the case of Pragati Krishna Gramin Bank Vs. Joint Commissioner of Income-tax 2, has held that expenditure in relation to income not includable in the total income cannot exceed such income. It was observed as under. "14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to....
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....he assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under: "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application. 5. We do not find any question of law arising. Appeal is therefore dismissed." 7.5 The Hon'ble Bombay High Court, in a decision dated 4th February....
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....n 14A of the Act being part of the salary of three employees and other overhead expenses, deletion of addition of Rs. 35,88,82,480/- made by Id. CIT(A) does not require any interference by the Tribunal. Moreover, it is settled consideration. So we find no scope to interfere in the impugned order passed by cannot exceed the dividend earned by the assessee during the year under Id. CIT(A)." 7.7 Based on legal precedent and the Hon'ble jurisdictional Tribunal's earlier decision for AY 2015-16, in the assessee's own case, disallowance is restricted to the exempt income claimed i.e. Rs. 2,14,325/-. Accordingly, disallowance u/s 14A r.w.r. 8D is restricted to Rs. 2,14,325/-. The grounds of appeal are Allowed." 4. Before us learned counsel for the assessee filed a paper book containing page no. 1-98. 5. We have considered the rival submission of parties and perused the relevant material on record. Since, Ld. CIT(A), following the legal precedents on the issue on dispute, has restricted the disallowance to the extent of exempted income earned, we do not find any infirmity in the order of the Ld. CIT(A) on the issue and dispute and accordingly, we uphold the same.....