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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B. R. BASKARAN
Date of hearing : 15.11.2021 Date of Pronouncement : 16.11.2021 O R D E R
Per N.V. Vasudevan, Vice President
This is an appeal by the assessee against the order dated 22.03.2018 of CIT(A)-4, Bengaluru, relating to Assessment Year 2014-15.
The assessee is a company engaged in the business of rendering consulting engineering and software services. For Assessment Year 2014- 15, the assessee filed a return of income declaring total loss of Rs.19,57,23,783/-. While computing income from business, the assessee disallowed a sum of Rs.3,00,000/- under section 14A of the Income Tax Act, 1961 (hereinafter called ‘the Act’) being expenditure incurred in earning income which does not form part of the total income. The assessee had earned dividend income of Rs.1,21,81,043/- and hence the assessee had disallowed the computation of total income of a sum of Rs.3,00,000/- under section 14A of the Act. An order of assessment under section 143(3) of the Page 2 of 7 Act was passed on 31.05.2016 accepting the returned loss of Rs.19,57,23,783/-.
The AO issued a notice under section 154 of the Act dated 04.12.2017. According to the AO, the assessee had not disallowed any sum under section 14A of the Act as expenses incurred in earning exempt income. According to the AO, a sum of Rs.47,71,625/- was required to be disallowed under section 14A of the Act r.w.r. 8D(2)(iii) of the Income Tax Rules, 1963. The assessee filed a reply dated 12.12.2017 to the notice under section 154 of the Act praying for some time. According to the AO, no reply was received and he therefore proceeded to pass an order dated 17.01.2018, making a disallowance of Rs.47,71,625/- under section 14A of the Act. The AO also made the aforesaid addition while computing book profit under section 115JB of the Act in the order passed under section 154 of the Act.
Aggrieved by the order of the AO, assessee filed appeal before the CIT(A). The assessee contended before CIT(A) that the case of the assessee was picked up for limited scrutiny and the items set out for scrutiny was mismatched in sales turnover reported in audit report and ITR, mismatched the amount paid to related parties under section 40A(2)(b) reported in audit report and ITR and mismatched between income / receipt credited to P & L A/c considered under other heads of income. It was submitted by the assessee that disallowance under section 14A of the Act was never subject matter of limited scrutiny and therefore what could not have been done in the assessment completed under section 143(3) of the Act cannot be done in proceedings under section 154 of the Act. Besides the above, the assessee contended that under section 154 of the Act, the AO cannot seek to rectify a point which was never subject matter of discussion in the order of Page 3 of 7 assessment and in this regard relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Hero Cycles Pvt. Ltd., 228 ITR 463 (SC). With regard to disallowance under section 14A of the Act in the context of section 115JB of the Act, the assessee relied on the decision of the Special Bench of ITAT in the case of ACIT Vs. Vireet Investments Pvt. Ltd., 165 ITD 25 (Delhi – Special Bench) wherein it was held that disallowance computed under section 14A of the Act cannot be added while computing book profits under section 115JB of the Act. Assessee also pointed out that without looking into the computation of the disallowance of Rs.3,00,000/- under section 14A of the Act, the AO cannot seek to rectify the disallowance under section 14A of the Act without pointing out the apparent mistake on record with regard to the disallowance under section under section 14A of the Act made by the assessee.
The CIT(A) however confirmed the order of the AO without dealing with any of the objections raised by the assessee.
Aggrieved by the order of the CIT(A), assessee is in appeal before the Tribunal. We have heard the rival submissions. Learned Counsel for the assessee reiterated stand as was taken before the CIT(A) and relied on the following decisions:
1. 1. Order of Hon'ble Tribunal in the appellant's own case for AY: 2013-14 in ITA.NO. 2054/Bang/2019 - ACIT v MN Dastur & Co Pvt ltd 2. Order of Hon'ble Tribunal in the case of Mphasis Software and Service (India) Pvt Ltd - ACIT - 59 CCH 176 Bangalore Tribunal Learned DR relied on the order of the AO.
7. After considering the rival submissions, we are of the view that under identical facts and circumstances, this Tribunal in the case of Mphasis
Page 4 of 7 Software and Services India Pvt. Ltd., (supra) took the view that the quantum of disallowance to be made under section 14A of the Act was debatable and therefore cannot be subject matter of proceedings under section 154 of the Act. The following were the relevant observations of the Tribunal in this regard:
“14. In the present case, the Assessee has taken a stand that expenditure was incurred to earn exempt income was only Rs.3,55,660. The AO has to follow the mandate laid down in Sec.14A(2) of the Act, i.e., he has to examine the claim of the Assessee in the light of the books of accounts of the Assessee. If the AO does not agree with the claim of the Assessee having regard to the books of accounts of the Assessee, then is it mandatory for him to resort to Rule 8D of the Income Tax Rules, 1962 to quantify the disallowance u/s.14A of the Act? We are of the view that even in a case where the AO rejects the claim of the Assessee regarding expenses incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. The second part of Sec.14A(2) of the Act provides as follows, "if the Assessing Officer, having regard to the accounts of the Assessee, is not satisfied with the correctness of the claim of the Assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act". In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. Therefore the expression "shall" occurring in Sec.14A(2) of the Act, viz., "the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed", should be read as "may". The AO, u/s 14A of the Act has the discretion to substitute the computation of disallowance u/s 14A as made by the Assessee on estimation. The satisfaction contemplated u/.s 14A (2) of the Act is not merely restricted to rejecting the claim made by the Assessee and the disallowance to be made u/s 14A of the Act but also includes substituting the claim made by the Assessee on any other reasonable basis as the AO deems it fit. In such circumstances the correctness of the AO's judgment can be reviewed but it cannot be said that the AO Page 5 of 7 had no jurisdiction to do so and AO ought to resort only to the provision of Rule 8D of the Rules. In other words Rule 8D is not automatic and can be resorted to by the AO only as a measure of last resort.
In view of the aforesaid legal position with regard to disallowance u/s 14A of the Act, we are of the view that the issue before the AO was debatable and therefore, resort to proceedings u/s 154 of the Act was not appropriate. We therefore, hold that the proceedings u/ 154 of the Act were not appropriate and accordingly the same is quashed.”
We also find that in assessee’s own case in Assessment Year 2013-14 in order dated 24.06.2020, this Tribunal held that the amount disallowed under section 14A of the Act under the normal provisions cannot be added while computing book profits under section 115JB of the Act. The following were the relevant observations of the Tribunal:
“10. As far as the amount to be added to the profit as per P&L account u/s. 115JB of the Act towards expenditure incurred in earning income exempt u/s. Chapter III of the Act, the plea of the assessee was that the disallowance u/s. 14A of the Act made while computing total income under the normal provisions of the Act should not be automatically added while determining the book profits u/s. 115JB of the Act. In support of the stand taken by the assessee, the assessee has placed reliance on the decision of the Delhi Special Bench of ITAT in the case of ACIT v. Vireet Investments Pvt. Ltd., 165 ITD 25 (Del)(SB). In the aforesaid decision, two questions were considered by the Special Bench which are as follows:- "(i) Whether the expenditure incurred to earn exempt income computed u/s 14A could not be added while computing book profit u/s 115JB of the Act? And (ii) Whether investments which did not yield any exempt income should enter into the computation under Rule 8D while arriving at the average value of investment, income from which does not form part of the total income? 11. The Special Bench answered the aforesaid questions as follows:-
Page 6 of 7 "(i) We answer the question referred to us in favour of assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2). is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income-tax Rules, 1962. (ii) Only those investments are to be considered for computing the average value of investment which yielded exempt income during the year.
Thus, it is clear that the amount to be added while computing book profits u/s. 115JB of the Act, the AO cannot in terms of Explanation 1(f) to Sec.115JB(2) to the Act, add the sum determined as disallowance u/s. 14A of the Act while computing total income under the normal provisions of the Act and he has to adopt a basis as laid down by the Special Bench in the aforesaid decision viz., direct expenditure associated with earning of income. The grievance of the revenue in this appeal as projected in ground No.2 is that the CIT(A) ought to have followed the decision in the case of DCIT Vs. Sobha Developers (supra) rendered by ITAT Bangalore Bench wherein it was held that the disallowance u/s.14A of the Act made while computing total income under the normal provisions of the Act can also be adopted while determining book profits u/s.115JB in terms of Explanation- 1(f) to Sec.115JB(2) of the Act. The ratio laid down in the said decision of the Bangalore Bench has not been approved by a full bench (Special Bench) of ITAT Delhi in the case of Vireet Investments (supra), which decision was rendered after the decision rendered by the Bangalore Bench of ITAT. As far as the grievance of the revenue projected in Gr.No.3 is concerned, the subject matter of the impugned order is only as to, whether there was a mistake apparent from the record in the order of CIT(A) dated 2.4.2019 and not the issue whether not making addition of disallowance u/s.115JB(2) explanation-1(f) of expenses incurred to earn income which is exempt u/s.10 is a mistake apparent from the record or not. In other words, the issue sought to be raised by the revenue in ground No.3 can arise only in an appeal against the order dated 2.4.2019 and not in an appeal against the impugned order.”
Following the aforesaid decisions, we hold that the impugned additions made in the proceedings under section 154 of the Act are unsustainable and the same are hereby directed to be deleted.
In the result, appeal by the assessee is allowed.