DCIT, CC-7(1), MUMBAI vs. PAN INDIA NETWORK INFRAVEST PVT. LTD., MUMBAI

The dispute arising for consideration relates to disallowance made under section 14A r/w rule 8D, while computing the income

Brief facts are, the assessee company is engaged in the business of providing internet data service. In the course of assessment proceedings, the Assessing Officer noticed that during the year assessee had earned exempt income by way of dividend amounting to `.2,53,140. However, he noticed that the assessee had not disallowed any expenditure under section 14A r/w rule 8D for earning the exempt income. Accordingly, he called upon the assessee to explain why disallowance under section 14A r/w rule 8D should not be made. Though, the assessee objected to the proposed disallowance by stating that the disallowance of expenditure made voluntarily also takes care of the expenditure attributable to exempt income, however, the Assessing Officer rejecting the explanation of the assessee proceeded to compute the disallowance under rule 8D(2) for an amount of ` 3,20,28,845. He also made identical disallowance while computing book profit under section 115JB of the Act. Of course, ultimately the Assessing Officer computed the tax liability of the assessee under the normal provisions of the Act.

The assessee challenged the aforesaid disallowance before learned Commissioner (Appeals). While disposing of assessee’s

The learned Departmental Representative relying upon the observations of the Assessing Officer submitted that there is no condition under the provisions of section 14A of the Act to restrict the disallowance to the exempt income earned. He submitted, disallowance of expenditure under section 14A of the Act has to be made as per rule 8D(2). Further, he submitted, as per the decision of the Tribunal, Mumbai Bench, in DCIT v/s Viraj Profiles Ltd., [2016] 156 ITD 72 (Mum.), disallowance of expenditure for earning exempt income has to be made as per Explanation–1(f) of section 115JB(2).

The learned Authorised Representative strongly relying upon the observations of the first appellate authority submitted, disallowance under section 14A r/w rule 8D cannot exceed the exempt income

Further, learned Authorised Representative submitted that while computing book profit under section 115JB(2) of the Act, the Assessing Officer has made disallowance under section 14A r/w rule 8D which is contrary to the ratio laid down in Vireet Investment (supra).

We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. Undisputedly, the exempt income earned by the assessee during the assessment year was `.2,53,140. Whereas, the Assessing Officer has made huge disallowance by invoking the provisions of rule 8D(2). Now, it is fairly well settled that the disallowance under section 14A r/w rule 8D cannot exceed the quantum of exempt income earned during the year. The decisions relied upon by the learned Authorised Representative squarely support this view. That being the case, we do

As regards disallowance made by the Assessing Officer while computing the book profit under section 115JB of the Act, it is evident that the Assessing Officer has made such disallowance by resorting to the provisions of section 14A r/w rule 8D. In our view, as per the ratio laid down by the Tribunal, Special Bench Delhi, in Vireet Investment (supra), the Assessing Officer while computing the book profit under section 115JB of the Act cannot make any disallowance by making reference to the provisions of section 14A r/w rule 8D. However, the Assessing Officer retains the power to make disallowance of expenditure incurred for earning exempt income as per Explanation– 1(f) of section 115JB of the Act. Therefore, the disallowance made by the Assessing Officer while computing book profit under section 115JB(2) of the Act is unsustainable. Thus, the Assessing Officer is directed to examine and quantify the expenditure incurred by the assessee for earning exempt income in terms of Explanation–1(f) of section 115JB of the Act without taking aid of rule 8D(2) r/w section 14A of the Act. Grounds no. (i) and (ii) are dismissed and ground no. (iii) is partly allowed for statistical purposes.

In the result, the appeal is partly allowed for statistical purposes. Order pronounced in the open Court on 29.05.2019