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Income Tax Appellate Tribunal, MUMBAI ‘G’ BENCH, MUMBAI.
Before: Shri B.R. Baskaran (AM) & Shri Pavan Kumar Gadale (JM)
The assessee has filed appeals for AY 2006-07, 2008-09, 2010-11 and 2011-12. The revenue has filed appeal for AY 2013-14. All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
All the appeals filed by the assessee are barred by limitation by 655 days. The assessee has moved petitions requesting the bench to condone the delay. It is stated in the affidavit that the business operations were closed in the financial year 2015-16 and accordingly the office premises at Wadala was vacated. Since the financial conditions of the assessee deteriorated and the assessee defaulted in payments to be made to the creditors, many creditors filed winding up petition in various Courts across the Country. It is stated
2 M/s. Semit Pharmaceuticals Pvt. Ltd. that the filing of petitions started way back from 2014-15 onwards. The assessee’s limited operations were carried out from the office premises of a sister concern named M/s Elder Pharmaceuticals Ltd. However, by virtue of an order of Hon’ble High Court of Kolkatta receiver dated 25.06.2016 in the case of above stated M/s Elder Pharmaceuticals Ltd, its office was also sealed and closed. Under these difficult situation, the limited employees could not maintain proper records of the documents and the same resulted in misplacement of orders passed by Ld CIT(A). Subsequently, when it was found that the appeals have not been filed, the management took immediate steps to file the present appeals. Accordingly, it has been stated that the delay in filing the present appeals is due to reasonable cause and accordingly it is prayed that the delay may be condoned and the appeals may be admitted.
The Ld A.R reiterated the submissions made in the affidavit and prayed for condoning the delay. He also relied upon a decision dated 11.3.2019 rendered by the co-ordinate bench in the case of M/s Shree Vijaylaxmi Trading Corporation vs. ITO in & 675/Mum/2018, wherein the delay of 247 days before Ld CIT(A) was condoned. Accordingly, he prayed that a reasonable view may be taken on this preliminary issue. The Ld D.R, on the contrary, submitted that the delay is substantial and accordingly opposed the prayer of the assessee.
We heard the parties on this preliminary issue. We noticed that the assessee was facing financial difficulties and hence it had closed down its business. Subsequently, the assessee was operating from the premises belonging to its sister concern and the said sister concern also went into problems. In the decision of the co-ordinate bench relied upon by the assessee (supra), the Tribunal has taken support of the decision rendered by Hon’ble Supreme Court in the case of Collector, Land Acquisition vs. Mst. Katiji & Ors (1987)(167 ITR 471)(SC), wherein it was held that when
3 M/s. Semit Pharmaceuticals Pvt. Ltd. substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred and the other side cannot claim to have vested right in injustice being done because of non- deliberate delay. Accordingly, following the above said decision, we are of the view that the reasons cited by the assessee for the delay in filing the appeals are reasonable and hence there was sufficient cause for the assessee in filing these appeals belatedly. Accordingly, we condone the delay and admit the appeals for hearing.
The facts relating to the case are stated in brief. The revenue carried out search and seizure operations in the hands sister concern of the assessee named M/s Elder Pharmaceuticals Ltd on 06-03-2012. On the very same day, the proceedings u/s 153C of the Act was initiated in the hands of the assessee for the above said years. The assessing officer completed the assessments u/s 143(3) r.w.s 153C in all the years under consideration by making addition u/s 14A of the Act. The addition so computed u/s 14A of the Act was also added by him for the purpose of computing book profit u/s 115JB of the Act. The assessee got partial relief before Ld CIT(A) and hence the assessee has filed appeals for AY 2006-07, 2008-09, 2010-11 and 2011- 12 challenging the addition u/s 14A sustained by Ld CIT(A) both under normal provisions of the Act and also u/s 115JB of the Act. The revenue has filed appeal in AY 2013-14 challenging the relief granted by Ld CIT(A) in respect of addition made u/s 14A of the Act. Hence the issue contested in all these appeals relate to the addition made u/s 14A of the Act.
The submission of the assessee is that the addition made u/s 14A of the Act is not based on any incriminating material. Further, the assessments of AY 2006-07, 2008-09 and 2010-11 would fall under the category of “unabated assessments” and hence the AO could not have made the above said addition u/s 14A of the Act in the absence of any incriminating material forwarded to him by the AO of the searched person.
4 M/s. Semit Pharmaceuticals Pvt. Ltd.
7. It is also submitted that it is well settled proposition that the addition u/s 14A of the Act should not exceed the exempt income and hence the addition should be directed to be restricted to the amount of exempt income in respect of other two years.
8. With regard to the adoption of the amount of disallowance computed u/s 14A of the Act for the purpose of computing book profit u/s 115JB of the Act, the Ld A.R submitted that the same is not permissible in view of the decision rendered by the Special bench of Tribunal, Delhi in the case of Vireet Investments P Ltd (165 ITD 27)(Delhi –SB).
We heard the parties and perused the record. There is no dispute with regard to the fact that the Assessments relating to AY 2006-07, 2008-09 and 2010-11 fall under the category of “unabated assessments”. There is also no dispute that the department did not unearth any incriminating material relating to the addition to be made u/s 14A of the Act. Hence the AO, in the absence of any incriminating material relating to the above said addition, could not have made any addition in unabated assessment years. In support of the above said proposition, we rely upon the decision rendered by Hon’ble Bombay High Court in the case of Continental Corporation (Nhava Sheva) Ltd (2015)(58 taxmann.com 78)(Bom) and Gurinder Singh Bawa (2017)(79 taxmann.com 398)(Bom), wherein the Hon’ble Bombay High Court held that the unabated assessments (finalized assessments) cannot be touched by resorting to the provisions of sec.153A of the Act unless some incriminating materials relating to the said assessments, which are contrary to and/or not disclosed during regular assessment proceedings, are found.
The provisions of sec.153A of the Act provide for issuing of notice u/s 153A of the Act for six assessment years immediately preceeding the year of search and thereafter, the AO shall assess or reassess the total income for the above said six years. This section further provides that all pending
5 M/s. Semit Pharmaceuticals Pvt. Ltd. assessment or re-assessment pending as on the date of search shall abate. Hence the assessments of the assessment years falling within the period of above said six years which are not pending, i.e., which have attained finality shall not abate. Assessments of such assessment years are called “unabated/completed/finalized” assessments. The question as to whether the AO is entitled to interfere with such kinds of unabated/completed/ finalized assessments or not without there being any incriminating material found during the course of search, was examined by the Special bench of Tribunal in the case of All Cargo Logistics Ltd vs. DCIT (2012)(137 ITD 287)(Mum), wherein it was held that the AO could interfere with the unabated/completed/finalized assessments only if the incriminating materials found during the course of search warrant such interference, meaning thereby, if the search action did not bring out any incriminating material, then the AO cannot disturb the completed assessments and he has to simply reiterate the earlier total income in the present assessment order.
The above said view expressed by the Special bench has since been upheld by Hon’ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd (supra). The relevant observations made by Hon’ble Bombay High Court in the above said case are extracted below:-
“31. We, therefore, hold that the Special Bench's understanding of the legal provision is not perverse nor does it suffer from any error of law apparent on the face of the record. The Special Bench in that regard held as under :
"48. The provision under section 153A is applicable where a search or requisition is initiated after 31.5.2003. In such a case the AO is obliged to issue notice u/s 153A in respect of 6 preceding years, preceding the year in which search etc. has been initiated. Thereafter he has to assess or reassess the total income of these six years. It is obligatory on the part of the AO to assess or reassess total income of the six years as provided in section 153A(1)(b) and reiterated in the 1st proviso to this section. The second proviso states that the assessment or reassessment pending on the date of initiation of the search or requisition shall abate. We find that there is no divergence of views in so far as the provision contained
6 M/s. Semit Pharmaceuticals Pvt. Ltd. in section 153A till the 1st proviso. The divergence starts from the second proviso which states that pending assessment or reassessment on the date of initiation of search shall abate. This means that an assessment or reassessment pending on the date of initiation of search shall cease to exist and no further action shall be taken thereon. The assessment shall now be made u/s 153A.
The case of Ld. Counsel for the assessee is that necessary corollary to this provision is that completed assessment shall not abate. These assessments become final except in so far and to the extent as undisclosed income is found in the course of search. On the other hand, it has been argued by the Ld. Standing Counsel that abatement of pending assessment is only for the purpose of avoiding two assessments for the same year, one being regular assessment and the other being assessment u/s 153A. In other words these two assessments coalesce into one assessment. The second proviso does not contain any word or words to the effect that no reassessment shall be made in respect of a completed assessment. The language is clear in this behalf and therefore literal interpretation should be followed. Such interpretation does not produce manifestly absurd or unjust results as section 153A (i)(b) and the first proviso clearly provide for assessment or reassessment of all six years. It may cause hardship to some assesses where one or more of such assessments has or have been completed before the date of initiation of search. This is hardly of any relevance in view of clear and unambiguous words used by the legislature.
This interpretation does not cause any absurd etc. results. There is no casus omissus and supplying any would be against the legislative intent and against the very rule in this behalf that it should be supplied for the purpose of achieving legislative intent. The submissions of the Ld. Counsels are manifold, the foremost being that the provision u/s 153A should be read in conjunction with the provision contained in section 132(1), the reason being that the latter deals with search and seizure and the former deals with assessment in case of search etc, thus, the two are inextricably linked with each other.
Before proceeding further, we may now examine the provision contained in sub-section (2) of section 153, which has been dealt with by Ld. Counsel. It provides that if any assessment made under sub-section (1) is annulled in appeal etc., then the abated assessment revives. However, if such annulment is further nullified, the assessment again abates. The case of the Ld. Counsel is that this provision further shows that completed assessments stand on a different footing from the pending assessments because appeals etc. proceedings continue to remain in force in case of completed assessments and their fate depends upon subsequent orders in appeal. On consideration of the provision and the submissions, we find that this provision also makes it clear that the abatement of pending proceedings is not of such permanent nature that they cease to exist for all times to come. The interpretation of the Ld. Counsel, though not specifically stated, would be that on annulment of the assessment
7 M/s. Semit Pharmaceuticals Pvt. Ltd. made u/s 153(1), the AO gets the jurisdiction to assess the total income which was vested in him earlier independent of the search and which came to an end due to initiation of the search.
The provision contained in section 132 (1) empowers the officer to issue a warrant of search of the premises of a person where any one or more of conditions mentioned therein is or are satisfied, i.e. - a) summons or notice has been issued to produce books of account or other documents but such books of account or documents have not been produced, b) summons or notice has been or might be issued, he will not produce the books of account or other documents mentioned therein, or c) he is in possession of any money or bullion etc. which represents wholly or partly the income or property which has not been and which would not be disclosed for the purpose of assessment, called as undisclosed income or property. We find that the provision in section 132 (1) does not use the word "incriminating document". Clauses (a) and (b) of section 132(1) employ the words "books of account or other documents". For harmonious interpretation of this provision with provision contained in section 153A, all the three conditions on satisfaction of which a warrant of search can be issued will have to be taken into account.
Having held so, an assessment or reassessment u/s 153A arises only when a search has been initiated and conducted. Therefore, such an assessment has a vital link with the initiation and conduct of the search. We have mentioned that a search can be authorised on satisfaction of one of the three conditions enumerated earlier. Therefore, while interpreting the provision contained in section 153A, all these conditions will have to be taken into account. With this, we proceed to literally interpret to provision in 153A as it exists and read it alongside the provision contained in section 132(1).
The provision comes into operation if a search or requisition is initiated after 31.5.2003. On satisfaction of this condition, the AO is under obligation to issue notice to the person requiring him to furnish the return of income of six years immediately preceding the year of search. The word used is "shall" and, thus, there is no option but to issue such a notice. Thereafter he has to assess or reassess total income of these six years. In this respect also, the word used is "shall" and, therefore, the AO has no option but to assess or reassess the total income of these six years. The pending proceedings shall abate. This means that out of six years, if any assessment or reassessment is pending on the date of initiation of the search, it shall abate. In other words pending proceedings will not be proceeded with thereafter. The assessment has now to be made u/s 153A (1)(b) and the first proviso. It also means that only one assessment will be made under the aforesaid provisions as the two proceedings i.e. assessment or reassessment proceedings and proceedings under this provision merge into one. If assessment made under sub-section (1) is annulled in appeal or other legal proceedings, then the abated assessment or reassessment shall revive. This means that the assessment or 8 M/s. Semit Pharmaceuticals Pvt. Ltd.
reassessment, which had abated, shall be made, for which extension of time has been provided under section 153B.
The question now is - what is the scope of assessment or reassessment of total income u/s 153A (1)(b) and the first proviso ? We are of the view that for answering this question, guidance will have to be sought from section 132(1). If any books of account or other documents relevant to the assessment had not been produced in the course of original assessment and found in the course of search in our humble opinion such books of account or other documents have to be taken into account while making assessment or reassessment of total income under the aforesaid provision. Similar position will obtain in a case where undisclosed income or undisclosed property has been found as a consequence of search. In other words, harmonious interpretation will produce the following results :- a) In so far as pending assessments are concerned, the jurisdiction to make original assessment and assessment u/s 153A merge into one and only one assessment for each assessment year shall be made separately on the basis of the findings of the search and any other material existing or brought on the record of the AO, (b) in respect of non-abated assessments, the assessment will be made on the basis of books of account or other documents not produced in the course of original assessment but found in the course of search, and undisclosed income or undisclosed property discovered in the course of search.
It may be mentioned here that Ld. Counsel for All Cargo Global Logistics Ltd. was questioned about the scope of pending assessments as it was his contention that all six assessments are to be made, if necessary, on the basis of undisclosed income discovered in the course of search. He was specifically questioned about the jurisdiction of the AO to make original assessment along with assessment u/s 153A, merging into one. However he took an evasive view submitting that this question need not be decided in his case although the question of jurisdiction u/s 153A was vehemently pressed on account of which ground No.1 in the appeal for assessment year 2004-05 was admitted as additional ground. He also wanted the additional ground to be retained in case of any future contingency."
The view expressed by Hon’ble jurisdictional Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd (supra) was reiterated by the Hon’ble Bombay High Court in yet another case of Gurinder Singh Bawa (2017)(70 taxmann.com 398) as under:-
9 M/s. Semit Pharmaceuticals Pvt. Ltd.
“5. On further appeal before the Tribunal, the assessee interalia challenged the validity of the assessment made under Section 153A of the Act. This on account of the fact that no assessment in respect of the six assessment years were pending so as to have abated. The impugned order accepted the aforesaid submission of the respondent-assessee by interalia placing reliance upon the decision of the Special Bench of the Tribunal in Al-Cargo Global Logistics Ltd. rendered on 6 July 2012. The Tribunal in the impugned order further held that no incriminating material was found during the course of the search. Thus the entire proceedings under Section 153A of the Act were without jurisdiction and therefore the addition made had to be deleted on the aforesaid ground. The impugned order also thereafter considered the issues on merits and on it also held in favour of the respondent-assessee.
6. Mr. Kotangale, the learned Counsel for the revenue very fairly states that the decision of the Special Bench of the Tribunal in Al-Cargo Global Logistics Ltd. was a subject matter of challenge before this Court as a part of the group of appeals disposed of as CIT v. Continental Warehousing Corporation (Nhava Sheva) Ltd. [2015] 374 ITR 645/58 taxmann.com 78/232 Taxman 270 (Bom.) upholding the view of the Special Bench of the Tribunal in Al- Cargo Global Logistics Ltd. Consequently, once an assessment has attained finality for a particular year i.e. it is not pending then the same cannot be subject to tax in proceedings under Section 153A of the Act. This of course would not apply if incriminating materials are gathered in the course of search or during proceedings under Section 153A of the Act which are contrary to and/or not disclosed during regular assessment proceedings.
In view of the above, on issue of jurisdiction itself the issue stands concluded against the revenue by the decision of this Court in Continental Warehousing Corpn. (Nhava Sheva) Ltd. (supra). In the appeal before us, the revenue has made no grievance with regard to the impugned order of the Tribunal holding that in law the proceedings under Section 153A of the Act are without jurisdiction. This in view of the fact that no assessments were pending, so as to abate nor any incriminating evidence was found. The grievance of the revenue is only with regard to finding in the impugned order on the merits of the individual claim regarding gifts and deemed dividend. However once it is not disputed by the revenue that the decision of this Court in Continental Warehousing Corporation (Nhava Sheva) Ltd. (supra) would apply to the present facts and also that there are no assessments pending on the time of the initiation of proceedings under Section 153A of the Act. The occasion to consider the issues raised on merits in the proposed questions becomes academic.
In the above view, the questions as framed in the present facts being academic in nature, do not give rise to any substantial question of law. Thus not be entertained.”
The co-ordinate bench has followed the above said binding decisions of jurisdictional High Court in the cases of Smt Anjali Pandit vs. ACIT (ITA
10 M/s. Semit Pharmaceuticals Pvt. Ltd.
No.3028 to 3032/Mum/2011 & others - order dated 17.11.2016) and held as under:- “8. From the propositions in the above mentioned decisions, we find that the case of the assessee is squarely covered by the ratio laid down in the decisions cited supra. We therefore respectfully following the same hold that the AO has not jurisdictional to assess the long term capital gain as income from other sources as the same is not based upon the seized or incriminating materials found during the search proceedings qua the long term capital gain. Similarly the CIT(A) enhancing the assessment is also not based upon any seized or incriminating materials found during the search and therefore the enhancement is also without jurisdiction u/s 153A. Accordingly, the additional grounds no. 1A and 1B raised by the assessee stand allowed in favour of the assessee and AO is directed accordingly.”
We may also gainfully refer to the decision rendered by Hon’ble Delhi High Court in the case of Kabul Chawla, wherein identical view was expressed. The Hon’ble Delhi High Court has summarized the legal position with regard to the provisions of sec.153A as under:-
“Summary of the legal position
On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed income would be brought to tax". iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other
11 M/s. Semit Pharmaceuticals Pvt. Ltd. post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material." v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.”
In view of the foregoing discussions, we set aside the orders passed by Ld CIT(A) in the hands of these assessees in AY 2006-07, 2008-09 and 2010-11 and direct the AO to delete the addition relating to sec. 14A and also addition made u/s 115JB of the Act. Since we have deleted the addition in these years on the basis of above said legal contention, we do not find it necessary to adjudicate the additions on merits.
We shall now take the appeal filed by the assessee for AY 2011-12 and 2013-14. In these two years, the assessee earned exempt income of Rs.63,33,372/- and Rs.69,75,048/- respectively. The assessee suo motu disallowed a sum of Rs.63,33,372/- and Rs.4,61,74,060/- respectively. The AO computed disallowance at Rs.1,24,76,868/- and Rs.6,59,67,391/- respectively and accordingly added the difference amount. While computing book profit u/s 115JB of the Act, the AO added the above said amount of 12 M/s. Semit Pharmaceuticals Pvt. Ltd.
Rs.1,24,76,868/- and Rs.6,59,67,391/- respectively in AY 2011-12 and 2013-14 under clause (f) of Explanation 1 to sec. 115JB of the Act.
The Ld CIT(A) granted any relief to the assessee in AY 2011-12. However, the Ld CIT(A) deleted the disallowance enhanced by the AO in AY 2013-14.
The common contention of the assessee in both the years is that the law on the disallowance u/s 14A of the Act is now well settled, i.e., the disallowance cannot exceed the amount of exempt income. In this regard, he placed reliance on the decision rendered by the co-ordinate bench in the case of M/s Elder Projects Ltd vs. DCIT (ITA No.815/Mum/2017 dated 14.11.2018), wherein the co-ordinate bench has held that the amount of disallowance cannot exceed exempt income. In this regard, the co-ordinate bench has followed the decision rendered by Hon’ble Punjab & Haryana High Court in the case of PCIT vs. M/s Empire Package P Ltd (ITA No.415 of 2015 dated 12.01.2016) and the decision rendered by Hon’ble Delhi High Court in the case of Joint Investment P Ltd (ITA No.117/15 dated 25.2.2015).
However, in AY 2013-14, the assessee himself has computed disallowance at Rs.4,61,74,060/- voluntarily, while the exempt income earned by the assessee was only Rs.69,75,048/- in that year.
In this context, it is important to refer to the judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT in Tax Case Appeal Nos.41 to 43 & 220 of 2017 (judgment dated 30.09.2020). The Hon’ble Madras High Court followed the judgment of the Hon’ble Karnataka High Court in the case of Pargathi Krishna Gramin Bank v. JCIT[(2018) 95 taxman.com 41 (Kar.)]. In the case considered by the Hon’ble Madras High Court, the assessee therein had made voluntarily disallowance u/s 14A of the I.T.Act more than the dividend income earned and the Tribunal
13 M/s. Semit Pharmaceuticals Pvt. Ltd. confirmed the disallowance made u/s 14A of the I.T. Act. However, the Hon’ble Madras High Court held that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year. The relevant finding of the Hon’ble Madras High Court reads as follow:-
“20. Before parting, we may also note with reference to the Table of disallowance voluntarily made by the Assessee, which is part of the Paper Book before us for the four assessment years in question. In the Table quoted in the beginning of the order, shows that the Assessee himself computed and offered the disallowance beyond the exempted income in the particular year, namely AY 2009-10, as against the dividend income of Rs.41,042/- and the Assessee himself computed disallowance under Rule 8D of the Rules to the extent of Rs.2,38,575/-, which was increased to Rs.98,16,104/- by the Assessing Authority. Similarly, for AY 2012-13, against Nil dividend income, the Assessee himself computed disallowance at Rs.8,50,000/-, which was increased to Rs.2,61,96,790/-.
21. We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank (2018) 95 taxmann.com 41 (Kar.) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard.
We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the 14 M/s. Semit Pharmaceuticals Pvt. Ltd.
Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income Tax Rules, 1962.”
20 Respectfully following the above judgment of the Hon’ble Madras High Court rendered in the case of M/s. Marg Limited v. CIT (supra), we hold that the disallowance u/s 14A of the I.T. Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income.
Therefore, the AO is directed to restrict the disallowance u/s 14A of the Act to the amount of exempt income in both AY 2011-12 and 2013-14.
22. We notice that the AO also adopted the very same amount of disallowed u/s 14A of the Act for making addition under clause (f) of Explanation 1 to sec. 115JB of the Act for computing ‘Book Profit’ u/s 115JB of the Act and it was also confirmed by Ld CIT(A). It is well settled proposition that the disallowance computed u/s 14A is for the purpose of computing total income under normal provisions of the Act. The ‘Book Profit” is computed u/s 115JB of the Act on the basis of the Profit and Loss account computed under the provisions of the Companies Act, after making adjustments provided for in Explanation 1 to sec.115JB of the Act. Clause (f) of the said Explanation 1 states that the expenses incurred for earning exempt income should be added to the Net Profit. Hence the addition to be made under clause (f) is required to be computed on the basis of Profit and Loss account prepared under the Companies Act and accordingly, the Special bench in the case of Vireet Investments P Ltd (supra) held that the disallowance computed under Rule 8D r.w.s 14A of the Act cannot be imported in sec.115JB of the Act. Accordingly, we direct the AO to compute the addition to be made under clause (f) to Explanation 1 to sec.115JB of the Act on the basis of Profit and Loss account considered for the purposes of sec.115JB of the Act in both the years.
15 M/s. Semit Pharmaceuticals Pvt. Ltd.
In the result, all the appeals filed by the assessee are allowed. The appeal of the revenue is dismissed.
Pronounced in the open court on 24.3.2023.