DEPUTY COMMISSIONER OF INCOME TAX-3(3)(1), MUMBAI vs. RELIANCE CAPITAL LTD, MUMBAI

These appeals are filed by Revenue directed against the order of CIT(A)-8, Mumbai dated 26th July 2017 for A.Y.2013-14 in the matter of order passed u/s.143(3) of the Income-Tax Act, 1961. Since identical issues are involved in these appeals, they were heard together and are being disposed off by this common order for the sake of convenience. 2. The only effective issue to be decided in this appeal is as to whether Ld. CIT(A) was justified in directing the Ld. AO to consider only

Facts of A.Y.2013-14 are taken up for adjudication and the decision rendered thereon would apply with equal force for A.Y.2014-15 also except with variance in figures.

The brief facts of this issue are that assessee is a public limited company engaged in the business of leasing, lending, investment in shares and securities. The assessee in the return of income declared a sum of Rs.132,43,53,846/- as dividend and claimed the same as exempt. The assessee suomoto made disallowance u/s.14A of the Act to the tune of Rs.5,87,66,710/- being attributable administrative expenses. The Ld. AO considered the workings of the assessee in this regard and observed that the same is incorrect and accordingly proceeded to make disallowance u/s.14A of the Act r.w.r 8D(2)(iii) of the Rules in the sum of Rs.45,48,59,679/- after reducing the suomoto disallowance made by the 6397/Mum/2017 M/s. Reliance Capital Ltd., assessee in the sum of Rs.5,87,66,710/-, while computing the income under normal provisions of the Act.

The Ld. AO proceeded to make disallowance u/s.14A of the Act for the purpose of computation of book profits u/s.115JB of the Act. The Ld. AO observed that assessee had earned exempt income in the form of dividend as well as long term capital gains. Out of this, the long term capital gains are not exempt in the computation of book profits u/s.115JB of the Act. Accordingly, the assessee company submitted that the expenses disallowable u/s.14A as worked out by it cannot be the basis for disallowance u/s.14A while computing book profits u/s.115JB of the Act.

The assessee made suo moto disallowance of Rs 35,00,000/- on an estimated basis for the purpose of computation of book profits u/s 115JB of the Act. The Ld. AO proceeded to work out the disallowance u/s.14A of the Act while computing the book profits u/s 115JB of the Act in the following manner:- Expenses as worked out u/s.14A 0.5% of investment Rs. 51,36,26,389 i. Income exempt in computation of book profit Rs. 32,43,53,846 ii. Income exempt in normal computation of income Rs. 199,64,44,659 iii. Addition under clause (f) of Explanation to Section 115JB Rs. 51,36,26,389 x Rs. 132,43,53,846 Rs.199,64,44,659 Rs.34,07,17,225

Accordingly, the Ld. AO made disallowance of Rs.33,72,17,245/- u/s.14A while computing the book profits u/s.115JB of the Act.

The assessee added back a sum of Rs.35 lakhs on an adhoc basis towards disallowance u/s 14A of the Act, while computing the book profits u/s.115JB of the Act in the return of income and prayed for exclusion of the same before the Ld. CIT(A). The Ld. CIT(A) held that disallowance under Rule 8D(2)(iii) of the Act should be made in the facts of the instant case, but however, held that the same has to be worked out by taking only those investments which had yielded exempt income to the assessee by placing reliance on the decision of his predecessor for A.Yrs. 2011-12 and 2012-13 while computing income under normal provisions of the Act. 9. With regard to disallowance made u/s.14A of the Act while computing book profits u/s.115JB of the Act, the Ld. CIT(A) went by the decision taken by him in earlier years i.e. A.Yrs. 2008-09, 2009-10 and 2010-11 wherein a sum of Rs.35 lakhs, Rs.37.50 lacs and Rs.35 lacs was considered respectfully while computing book profits u/s.115JB of the Act. The Ld. CIT(A) also observed that for A.Y.2012-13, a sum of Rs.40 lakhs which was worked out by the assessee on estimate basis was to be upheld towards disallowance u/s.14A while computing the book profits. Accordingly, following the principle of consistency he held that only a sum of Rs.35 lakhs is to be disallowed u/s.14A while computing book profits u/s.115JB of the Act. Aggrieved, Revenue is in appeal before us.

We have heard rival submissions. We find that with regard to disallowance u/s.14A of the Act r.w.r. 8D(2)(iii) of the rules under normal provisions of the Act, we find that the Special Bench of the Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd., reported in 165 ITD 27 had held that only those investments that had yielded exempt income are to be considered while working out the disallowance under Rule 8D of Rules. Respectfully following the said Special Bench decision, we do not find any infirmity in the order of the Ld. CIT(A) with regard to disallowance u/s.14A under normal provisions of the Act. Accordingly Ground No.(i) raised by the revenue is dismissed.

With regard to computation of book profits u/s.115JB of the Act, the Special Bench of Delhi Tribunal in the case referred to supra had held that disallowance u/s.14A of the Act had to be made with reference to the expenses debited by the assessee in its profit and loss account on actual basis and not with regard to applying the computation mechanism provided under Rule 8D(2) of the Rules. We hold that disallowance in terms of Clause(f) of Explanation-1 to Section 115JB of the Act has to be worked out independently after considering the expenses debited in the profit and loss account as mandated under the provisions of law. We find that Ld. AR placed reliance on the decision of Co-ordinate Bench of the Tribunal in its own case for A.Y.2011-12 in dated

In the result, appeals of the Revenue are partly allowed for statistical purposes. Order pronounced in the open court on this 30/01/2019