Loading judgment…
Facts
The Assessing Officer made an addition of Rs. 19,22,407/- under Section 14A read with Rule 8D for AY 2018-19, despite the assessee's claim of earning no exempt income. The AO and CIT(A) relied on CBDT Circular No. 5/2014 and case law. The assessee appealed, also challenging the inclusion of this disallowance for computing book profit under Section 115JB.
Held
The Tribunal held that disallowance under Section 14A read with Rule 8D can only be made when exempt income is actually earned, and since there was none, the addition was invalid. It further ruled that no upward adjustment for Section 14A disallowance should be made while computing book profit under Section 115JB, citing various High Court and ITAT Special Bench decisions.
Key Issues
1. Whether disallowance under Section 14A read with Rule 8D can be made when no exempt income has been earned. 2. Whether disallowance under Section 14A can be used to enhance book profit for computing MAT under Section 115JB.
Sections Cited
14A, 8D, 250, 115JB
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, “SMC” BENCH, KOLKATA
Compact Agencies Pvt. Ltd., Room No. 1A, 20B, West Bengal, East India House, BBD Bag, West Bengal - 700069 [PAN: AADCC6607K] ……..…...…………….... Appellant vs. DCIT/ACIT, Circle – 3(1), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata - 700069 ................................ Respondent Appearances by: Assessee represented by : Manish Tiwari, FCA Department represented by : Sima Das Biswas, JCIT, Sr. DR Date of concluding the hearing : 12.08.2025 Date of pronouncing the order : 13.08.2025 O R D E R
PER SANJAY AWASTHI, ACCOUNTANT MEMBER
The present appeal arises from order u/s 250 of the Income Tax Act, 1961 (hereafter “the Act”), passed by Ld. Commissioner of Income Tax (Appeals), [hereinafter “the Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order dated 01.05.2025.
1.1 In this case, the Ld. AO has made an addition of Rs. 19,22,407/- under Section 14A of the Act read with Rule 8D of the IT Rules. It is a matter of record that the assessee has consistently being arguing that no exempt income has been earned during the year under consideration and Compact Agencies Pvt. Ltd. hence there should be no addition under Section 14A of the Act. However, the Ld. AO has relied on CBDT Circular No. 5/2014, dated 11.02.2014, which states that the legislative intent is to disallow appropriate amounts from even those investments which have a potential for yielding exempt income. This circular also mandates that such disallowance has to be worked out even though no exempt income has been earned during a particular year.
1.2 Aggrieved with this action of Ld. AO, the assessee approached the CIT(A) where also he could not succeed mainly on account of CBDT’s Circular (supra). Reliance has also been placed on the case of Maxopp Investment Ltd. reported in 402 ITR 640 (SC) and reliance has also been placed on the case of Williamson Financial Services Ltd. reported in 140 taxmann.com 164 (Guwahati-Tribunal) by the Ld. CIT(A).
1.2 In light of the adverse findings in the impugned order, the assessee has approached the ITAT with the following grounds:
“1.) That on the facts and in the circumstances of the case, the order u/s 250 dated 01.05.2025 passed by Ld. CIT(A)-NFAC, Delhi is erroneous and bad in law. 2.) That on the facts and in the circumstances of the case, Ld. CIT(A) erred in confirming the disallowance to the tune of Rs. 19,22,407/- u/s 14A of the Income Tax Act, 1961 made by the AO. 3.) That on the facts and in the circumstances of the case, Ld. CIT (A) erred in confirming the disallowance of Rs. 19,22,407/- u/s 14A of the Act made by AO while calculating the book profit u/s 115JB of the IT Act, 1961. 4.) That on the facts and in the circumstances of the case, Ld. CIT(A) erred in confirming the disallowance of Rs. 19,22,407/- u/s 14A of the Act without considering the judicial decisions relied upon by the appellant. 5.) That the appellant craves leave to add, amend, alter and / or delete any of the forgoing grounds of appeal before or during the course of appeal proceedings.”
2. Before us, the Ld. AR argued that it was duly informed at all stages that there was no exempt income earned during the year and hence there could not be any addition on account of section 14A read with Rule 8D.
Compact Agencies Pvt. Ltd. The Ld.AR mentioned that the Williamson Financial Services Ltd. case of the Guwahati Tribunal was subsequently reversed by the Hon'ble Gauhati High Court in the same case reported in 166 taxmann.com 607 (Gauhati). It was further argued by the Ld. AR that it is also a settled position that any disallowance under Section 14A of the Act cannot be used to enhance income for the purposes of section 115JB of the Act.
2.1 The Ld. DR relied on the orders of authorities below and laid subject emphasis on CBDT Circular number 5/2014 (supra).
We have carefully considered the rival submissions and have gone through the records. There is considerable merit in the argument of the Ld. AR that only exempt income yielding investments need to be considered for the purposes of making any disallowances u/s 14A of the Act. The judicial pronouncements on this issue are in favour of the appellant in as much as it is fairly well settled as of now that any disallowance u/s 14A of the Act, r.w. Rule 8D, will need to be made only on investments yielding exempt income. The following cases cover this issue in favour of the appellant: -
(i) Williamson Financial Services Ltd. [166 taxmann.com 607 (Gauhati) (ii) Era Infrastructure (India) Ltd. [448 ITR 674 (Delhi) (iii) Avantha Realty Ltd. [164 taxmann.com 376 (Cal)] In light of these case laws, there cannot be any addition under Section 14A of the Act. Since there is, admittedly, no exempt income earned this year.
3.1 Regarding the issue of disallowance made u/s 14A of the Act being considered for the purposes of section 115JB of the Act, it deserves to be mentioned that in the case of Birla Corporation Ltd., (ITA No. 1024/Kol/2024 and CO 04/Kol/2024), dated 24.12.2024, the following finding will decide the issue in favour of the assessee:
“5. Regarding the upward adjustment of disallowance computed under Section 14A Compact Agencies Pvt. Ltd. of the Act for computing "book profit under Section 115JB of the Act. It is seen that for A.Y. 2015-16 the matter has been decided against the assessee by the Hon'ble ITAT vide its order in (supra) as under: “32. The Id, counsel for the assessee, in this respect, has submitted that the provisions of section 115JB are complete code in itself and therefore, the Assessing Officer cannot tinker with the book profits. However, we do not find force in the aforesaid contention of the Id. counsel for the assessee in this respect. It is to be pointed out that as per Explanation 1(f), the book profit means the profit shown in the statement of profit and less account as increased by the amount of expenditure relatable to the exempt income. The said amount of expenditure has already been ordered to be determined as per our observations made above while adjudicating the issue relating to the disallowance u/s 14A vide Ground No. 10 of the revenue's appeal. It has to be further noted that section 115JB in itself does not prescribe any procedure to calculate the expenditure relatable to exempt income earned by the assessee. The said provision has been separately and specifically placed in the Act u/s 14A of the Act. Therefore, the book profits of the assessee are liable to be increased by the expenditure as Clause (f) of section 115JB of the Act. In view of this, it is directed that the book profits will be increased u/s 115JB of the Act by the disallowance calculated as per our directions given while adjudicating Ground No.10 of the revenue's appeal. This ground of the revenue's appeal is hereby allowed." 5.1 It is seen that while coming to the conclusion as extracted above, the Hon'ble Bench was presumably not made aware of the ITAT Special Bench decision in the case of ACIT Vs. Vireet Investments Pvt. Ltd. reported in 82 taxmann.com 415 (Delhi- Trib-SB). In this case it has been held that the computation u/s 115JB of the Act is to be made without resorting to computation as contemplated under Section 14A read with Rule 8D of the Rules. Furthermore, a review of literature on this issue reveals that the Hon'ble Karnataka High Court in the case of PCIT Vs. J.J. Glastronics Pvt. Ltd. reported in 446 ITR 712 (Kar) has specifically directed that the amount disallowed under Section 14A could not be added to net profit while computing book profit under Section 115.JB of the Act. Similarly, the Hon'ble Delhi High Court in the case of PCIT (Central)-1, Vs. Moon Star Securities Trade and Finance Co. (P) Ltd. reported in 161 taxmann.com 158 as also directed that disallowance made under Section 14A of the Act could not be considered while computing MAT under Section 115.JB of the Act. These authorities are merely cited as illustrations since there are other judicial pronouncements also on the subject, including an unreported judgement of the Hon'ble Calcutta High Court: CIT vs Jayshree Tea Limited (ITAT 47 of 2014 and GA 1501 of 2014, order dated 19.11.2014). Respectfully following these judgements, and differing from the order of ITAT for AY 2015-16 (supra), the issue of computing for book profits after including additions made under Section 14A read with Rule SD, cannot be supported and thus, the action of Ld. CIT(A) as per his findings on page 45 of the impugned order is upheld and the specific ground of the revenue is dismissed." 3.2 Considering the discussion above, it deserves to be held that the Compact Agencies Pvt. Ltd. assessee cannot be subjected to the rigours of section 14A of the Act in the absence of any exempt income during the year. Consequently, there cannot be any upward adjustment for the purposes of computing MAT for the purposes of section 115JB of the Act.
In result, appeal of the assessee is allowed.
Order pronounced on 13.08.2025