GUJARAT INDUSTRIAL INVESTMENT CORPORATION LTD.,,GANDHINAGAR vs. THE DY.CIT.,GANDHINAGAR CIRCLE,, GANDHINAGAR

Briefly stated facts are that the assessee is a company and engaged in the business of extending financial assistance by way of term loans, financial services and implementation of joint and associated sectors projects in the State of Gujarat.

1 The assessee in the year under consideration has written back the provision created for investment in the earlier years amounting to Rs. 11,71,93,401/-. The assessee in the statement of income claimed the deduction of said amount from the total income on the ground that these provisions were not allowed in the respective assessments pertaining to A.Ys. 2001-02 to 2009 to 2010. Thus, the provision written back has already benn suffered the income tax. Therefore the same is eligible for deduction from the total income.

However, the AO found that in the identical facts and circumstances in the earlier assessment order the addition was sustained on account of such provision written back. Therefore, the AO disallowed the same and added to the total income of the assessee.

Aggrieved assessee preferred an appeal before the Ld.CIT (A). The assessee before the Ld.CIT (A) submitted that it had created provision against the investment in the earlier year which was not allowed as deduction. Now in the year under consideration same provision has been written back. Therefore the deduction for the same in the statement of income was claimed.

The Ld.CIT (A) after considering the submissions of the assessee and keeping in mind the decision of his predecessor about the earlier assessment years deleted the addition made by the AO.

Being aggrieved by the order of Ld.CIT (A) Revenue is in appeal before us.

The Ld.DR, and Ld.AR, before us, relied on the order of the authorities below as favorable to them.

We have heard the rival contentions and perused the material available on record.

1 At the outset we find that in the identical facts and circumstances the Tribunal in the case of the assessee has confirmed the deletion for the addition made by the AO in ITA NO/419/Ahd/2012 about A.Y. 2008-2009 vide order dated 18/09/2018 The relevant extract of the order is reproduced below:

We have heard the rival contentions and perused the materials available on record. On perusal of the revised computation of income we note that the provision has already been added by the assessee to the total income as evident from the same which is reproduced as under:

1 Thus there is no ambiguity that the impugned provision has suffered the tax in the AY 2006-07. Therefore we do not want to disturb the finding of the Id. CIT-A.

2 The issue in the instant appeal is identical to the appeal in ITA No. 419/Ahd/2012 (supra). Therefore respectfully following the same we do not find any reasons to disturb the findings of Ld. CIT (A). Hence the ground of appeal of the Revenue is dismissed.

The second issue raised by the Revenue is that Ld.CIT (A) erred in reducing the sum of Rs. 87,13,687/- (correct amount Rs. 2,12,423/-) from the book profit computation u/s 115JB of the Act.

At the outset the Ld.AR, before us, submitted that the amount mentioned in the ground of appeal by the Revenue is incorrect. As per the Ld. AR, the amount involved in the issue under consideration is of Rs.2,12,423/- only.

On the other hand the Ld. DR fairly agreed to the submission of Ld. AR. Therefore, we are adjudicating the issue on hand taking the amount involved in the dispute for Rs. 2,12,423/- only.

The assessee in his financial statement has shown a net profit before the provision of tax and prior period adjustment amounting to Rs. 1141.77 lacs only. The relevant extract of the profit and loss account is reproduced as under:

59 Prior Period of expenses (See Note No.12 of Sch. L) (5.82) (5.42) Net Profit 1096.93 1827.05 Add: Balance as per last Balance Sheet (18407.45) (20234.50) Profit (Loss) Carried to Balance Sheet (17310.52) (18407.45)

1 The assessee in the computation of book profit u/s 115JB of the Act, has taken net profit of Rs. 11,41,77,188/- only. The relevant extract of the book profit stands as under: Computation of Book Profit u/s. 115JB 114,177,188 Net profit as per Profit and Loss Account 212,423 Less: Prior Period Expenses (net)

2 However, the AO in working out the book profit under the provision of MAT has taken the net profit of Rs. 11,41,77,188/- without making any adjustment prior period item as evident from his order which is extracted below:- Net Profit as per P&L Account Rs. 11,41,77,188/- Add: i) Disallowance u/s.14A Rs. ii) Provision of NPA 1,16,21,865/- Rs. Nil Rs. 12,57,99,053/- Less: i) Dividend income exempt u/s 10(34) Rs. 2,80,89,306/- ii) The amount of loss brought forward or unabsorbed depreciation whichever is less as per books of account (After set off of depreciation of Rs.2,43,55,105/- in the assessment order for A.Y. 2007-08) iii) NPA Provision for loans & advance Rs. Nil Rs. Nil BOOK PROFIT Rs. 9,77,09,747/-

Aggrieved assessee preferred an appeal to Ld.CIT (A). The assessee before the Ld.CIT (A) submitted that the AO had taken the wrong amount of net profit shown under the profit and loss account without making any adjustment of the prior period item.

1 The assessee further submitted that the AO should have taken the net profit after reducing the prior period adjustment.

2 The assessee also submitted that there could not be any adjustment in explanation 1 to section 115JB of the Act on account of prior period adjustment.

The Ld.CIT (A) after considering the submission of the assessee held that the AO has not given the benefit of prior period adjustment as claimed by the assessee without specifying any reason. Accordingly, the ld. CIT-A deleted the addition made by the AO.

Being aggrieved by the order of Ld.CIT (A), the Revenue is in appeal before us.

Both the authorities below relied on the order of the authorities below as favorable to them.

We have heard the rival contentions & perused the materials available on record. It is a settled law that the adjustment in the work of book profit can be made only in respect of the items specified u/s 115JB of the Act. In the instant case, the assessee has started computation of book profit before the provision of tax and prior period adjustment. Accordingly, the assessee rightly

1 We further find that AO has taken the same amount of net profit which was taken by the assessee but the omitted to adjust the prior period item. Therefore, in our considered view the AO has taken the wrong amount of net profit for the computation of book profit u/s 115JB of the Act.

1 We also find that in the similar facts and circumstances the ITAT Mumbai in the case of Shivshahi Punarvasan Prakalp Limited Vs ITO reported in 15 taxmann.com 352 has set aside the issue in favor of the assessee by observing as follows: “4.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding addition made on account of disallowance of prior period expenses amounting to Rs. 1,93,061/- while computing book profit under section 115JB. Under the provisions of section 115JB, book profit has to be the profit disclosed as per P&L account prepared in accordance with the provisions of Part II and III of Schedule-6 of the Companies Act, 1956 and laid before the company in its AGMs and to the said profit, only adjustments as specified in Explanation-1 to section 115JB could be made. There is no dispute that claim on account of prior period expenses had been debited in the P&L Account prepared under the Companies Act and laid before AGM. There is no provision for any adjustment on account of prior period expenses in Explanation-1 to Section 115JB(2). Therefore, any addition on account of disallowance of prior period expenses while computing book profit is not permitted in view of the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra). We, therefore, set aside the order of CIT(A) and delete the addition made.”

In the result, the appeal of the Revenue is dismissed.

Coming to the assessee appeal in ITA No. 2390/Ahd/2014 for A.Y 2011-12. The assessee has raised following grounds of appeal.

The first issue raised by the assessee is that Ld.CIT (A) erred in confirming the disallowance of Rs. 40,91,687/- u/s 14A r.w.r 8D of Income Tax Rule.

The assessee in the year under consideration has earned dividend income amounting to Rs. 2,80,89,306/- which was claimed as exempt u/s 10(34) of the Act. The assessee against such dividend income made the disallowance of Rs. 11,83,509/- suo moto in the computation of income u/s 14A r.w.r. 8D of the Income Tax Rule.

However, the AO found that the assessee has not made the disallowance of expenses u/s 14A of the Act, in pursuance to the Rule 8D of the Income Tax Rule. Accordingly, the AO worked out the disallowance as per the Rule 8D of Income Tax Rule on account of administrative expenses amounting to Rs. 40,91,687/- only and added to the total income of the assessee.

Aggrieved assessee preferred an appeal before the Ld.CIT (A). The assessee before Ld.CIT (A) submitted that it has already made the disallowances of Rs.11,83,509/- against such exempt income. The AO without finding out any defect in the suo moto disallowance made by it has invoked the provisions of Rule 8D for the disallowance. As per the assessee, the AO has not recorded the satisfaction before resorting to the disallowance under Rule 8D of Income Tax Rule.

1 The assessee also submitted that the AO has wrongly considered the gross value of investment without adjusting the provision made in respect of such investments.

However, the Ld.CIT (A) was not convinced with the submission of the assessee and accordingly confirmed the order of the AO after having a reliance on the order of his predecessor pertaining to the assessment year 2008-09 and 2009-10. 27. Being aggrieved by the order of Ld.CIT (A) assessee is in appeal before us.

The ld AR, before us, filed a paper book running from pages 1 to 120 and submitted that the disallowance could not have been made u/s 14A r.w. Rule 8D without recording the satisfaction.

1 The assessee already made suo moto disallowance of Rs. 11,83,509/- against the exempted income which was rejected by the AO before invoking the provisions of section 14A r.w Rule 8D of Income Tax Act but without adducing any reason thereon.

On the other hand Ld. DR, vehemently supported the order of authorities below.

We have heard the rival contentions and perused the materials available on records.

1 At the outset, we note that in the identical facts and circumstances the Tribunal in the case of the assessee in ITA No.208/Ahd/2012 vide order dated 18/09/2018 pertaining to Assessment Year 2008-09 has decided the issue partly in favor of the assessee. The relevant extract is reproduced as under:

1 Thus in view of the above we hold that the AO has correctly invoked the provision of section 14A Rule 8D of the Income Tax Rule for the disallowance of the administrative expenses.

2 However we further note that the AO should have taken the net amount of investment after reducing the following amount from the gross value of the investment.

3 In view of above we direct the AO to compute the disallowance under Rule 8D of Income Tax Rule after considering to the above stated direction.

2 However, we note that the facts of the case on hand are different from the fact of the case in ITA NO.208/Ahd/2012 (supra). As such assessee made suo moto disallowance in the above case for Rs 1 lakh only without furnishing any basis. Therefore, the ITAT confirmed the order of the lower authorities for making the disallowance as per the provisions of section 14A r.w. Rule 8 D of the Income Tax Rule after small modification as discussed above.

3 But in the case in hand the assessee has given the basis of disallowance of Rs.11,83,509/- as evident from notes forming part of the return of income which is extracted below:

4 Thus in our considered view the AO was under the obligation before the resorting to the disallowance as per the section 14A of the Act r.w Rule 8D to reject the disallowance made by the assessee with cogent reasons. But the AO has not rejected the suo moto disallowance made by the assessee with any cogent reasons amounting to Rs.11,83,509/- against the exempted income.

5 In this regard we find support and guidance from the judgment of Hon’ble High Court of Mumbai in the case of PCIT vs Reliance Capital Asset Management Limited reported in 400 ITR 217 wherein it was held as under:

1 The above question raised before the Hon’ble Gujarat High Court was answered as below:

2 We also note that in the recent judgment of Special Bench of Hon’ble Delhi Taxmann.com 415 held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below:

3 The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case. Thus it can be concluded that the provisions of section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.

4 However, in our considered view the disallowance needs to be made as per Clause (f) to Section 115JB of the Act independently on account of dividend/ exempted income as specified. The judgment of Hon’ble Gujarat High Court relied on in the case of Alembic Ltd. (supra), does not deny for making the disallowance as per clause (f) u/s 115JB of the Act for the expenses incurred in relation to dividend income.

5 Thus it is clear that the disallowance needs to be made in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw our support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.”

6 Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).

7 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently on account of dividend income. However, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the disallowance. Therefore in the given facts & circumstances, we feel that ad-hoc disallowance will serve the justice to the Revenue and assessee. Therefore to put the dispute to rest in given facts & circumstances, we direct for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation.

8 We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we are of the view that as there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently, therefore there would be unnecessarily further litigation if the matter is sent back to the file of AO.

9 Thus, considering the peculiar circumstances of the case, we propose to limit the disallowance on an ad-hoc basis @ 1% of the dividend/exempt income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed.”

2 As the issue is already covered partly in favor of the assessee in its case as discussed above; therefore we are not inclined to place reliance on the order of this Tribunal referred above by the assessee i.e. Gujarat

Now coming to the ITA No, 1906/Ahd/2015 for A.Y. 2012-13. The Revenue has raised the following grounds of appeal.

At the outset we note that we have decided the identical issue in favor of the assessee and against the Revenue in ITA No. 2319/Ahd/2014 for A.Y. 2011-12 vide para no. 10 of this order. Therefore respectfully following the same we do not want to disturb the findings of the order of the Ld. CIT (A).

In the result the appeal of the Revenue is dismissed.

In the combined result, the appeal of the assessee bearing No.2390/Ahd/2014 for A.Y.2011-12 is partly allowed and both the appeals of the Revenue bearing no. 2319/Ahd/2014 for A.Y. 2011-12 and 1906/Ahd/2015 for A.Y. 2012-13 are dismissed.

""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त(अपील) / The CIT(A)

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