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Income Tax Appellate Tribunal, MUMBAI BENCHES “H”, MUMBAI
Before: SHRI JOGINDER SINGH & SHRI ASHWANI TANEJA
O R D E R
Per ASHWANI TANEJA, AM:
This appeal has been filed by the assessee against the order of the Commissioner of Income-tax (Appeals) [hereinafter called CIT(A)] dt 15-04- 2013 passed against the assessment order of the AO u/s 143(3) dt 230-12- 2011 for A.Y. 2009-10 on the following grounds: “
1. The Learned C.I.T. (Appeal) erred in sustaining the addition of Rs.35,13,921/- being disallowance made u/s 14A, while computing book profit u/s 115JB of I.T. Act, 1961.
2. The Learned C.I.T. (Appeal) failed to appreciate that only actual expenses incurred for earning exempt income can be added to the book profit u/s 115JB and not the deeming expenses calculated under clause (ii) & (iii) of Rule 8D of Income Tax Rule, 1952.
The Learned C.I.T. (Appeal) failed to follow the judgment of Mumbai Tribunal in the case of Essar Teleholding in which the detailed discussion has been made on the subject and erred in relying upon the judgment in the case of Esquire Pvt Ltd where only passing remarks were given without much detailed discussion on the subject.” 2. The solitary issue raised in this appeal by the assessee is with regard to action of the lower authorities in making an addition of Rs.35,13,921/- being the amount disallowed u/s 14A, while computing the book profit u/s 115JB of the Act. It was contended by the Ld. Counsel during the course of hearing that though disallowance was made u/s 14A, but, in view of the legal developments that have taken place in the country, if applied on the facts of the case, it would show that no disallowance was liable to be made u/s 14A under clauses 8D(2)(ii) & (iii) and since no disallowance was liable to be made under these two clauses, no addition can be made while computing book profit u/s 115JB. It was submitted that the provisions of section 115JB are deeming provisions which seek to compute the taxable income on deemed basis, de hors, other provisions of the Act, and therefore, these provisions must be construed strictly. If no disallowance was liable to be made under these clauses, then amount wrongly disallowed under clause (ii) and (iii), shall not be added back to the book profits. Our attention was drawn upon the balance-sheet showing that own funds of the assessee were more than the amount of investment made in tax-free securities and submitted that no disallowance on account of indirect interest could have been made. It was further submitted that there were various investments on which no dividend income was earned and, therefore, these investments cannot be considered for making disallowance u/s 14A as no exempt income has been earned with respect to these investments and thus, it cannot be said that any expenditure has been incurred for earning exempt income. It was also submitted that since there is no estoppel against law, therefore merely because disallowance made u/s 14A was not contested by the assessee due to absence of any tax effect, then it would not clothe the AO with powers to make an automatic enhancement to the book profit with the amount of illegal disallowance made u/s 14A. 3. Per contra, Ld. DR submitted that in case disallowance is made u/s 14A, then automatically an adjustment has to be made in view of clause (f) to Explanation 1 to section 115JB (2). In his support, he placed reliance upon the following judgments:
1. 1. Dy. CIT vs Sobha Devlopers |(Bang) 2. Dabur India Ltd vs ACIT 37 Taxmann.com 289(Mum) 3. ITO vs RBK Share Broking Pvt Ltd 37 Taxman.com 128 (Bom) He, therefore, requested that orders of the lower authorities should be upheld.
4. We have gone through the orders of the lower authorities as well as submissions made by both the sides. It is well settled that there is no estoppel against law. Thus, merely because disallowance made by the AO u/s 14A was not contested by the assessee due to nil tax effect; it would not preclude the assessee from challenging its illegality while examining its effect on the computation of income under other provisions of the Act. One cannot ignore this aspect that provisions of section 14A as well as section 115JB are deeming provisions and therefore their scope and effect cannot be extended beyond what the statute has provided therein. Thus, assessee has all the rights under the law to challenge the validity of disallowance made u/s 14A if AO seeks to make an addition to the book profits based upon disallowance u/s 14A. 4.1. We have further analysed the provisions contained in section 115JB and find that it has nowhere been mentioned therein that disallowance made u/s 14A is straight away liable to be added while computing the book profits. Perusal of clause (f) of Explanation 1 to section 115JB (2) reveals that for the purpose of computing book profit, inter-alia, following amounts shall be added:
“(f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply.” Thus, perusal of the aforesaid provisions reveals that for the purpose of making addition there should be added expenditure actually incurred which are relatable to any income to which provisions of section 10, excluding the provisions contained in clause (38) thereof, applies. It has been contended that in this case, only disallowance, that would have been possible as per law and facts of this case was under rule 8D(2)(i) and no disallowance was liable to be made in clauses (ii) & (iii) in view of the latest judgement of Hon’ble Bombay High Court in the case of HDFC Bank Ltd vs DCIT 383 ITR 529. On the other hand, perusal of section 14A reveals that disallowance therein can be made with respect to expenditure incurred by the assessee in relation to income which does not form part of total income under this Act. Thus, comparison of clause (f) of Explanation 1 to section 115JB with section 14A, reveals that though both may appear to be identical, but actually there is a clear distinction in the scope of these two sets of provisions. The former i.e. clause (f) is narrower in scope than the latter, i.e. section 14A. Under clause (f) only those expenses can be disallowed which relate to any income to which section 10 applies and that too excluding those incomes which are exempt u/s 10(38); whereas provisions of section 14A shall apply to expenses incurred in relation to the income which does not form part of total income under any provisions of the Act. Thus, nature of the expenses as may get covered u/s 14A may be comparatively wider. Further, disallowance u/s 14A shall be made only in accordance with methods prescribed u/r 8D. 4.2. It is further noticed by us that provisions of section 115JB are deeming provisions; intending to compute the taxable income of the assessee on deemed basis as prescribed u/s 115JB. It is a well accepted rule of interpretation of statute that the scope of deeming fiction cannot be extended by adding or subtracting anything from the plain language of the statute. The plain language of clause (f) of explanation 1 of section 115JB clearly suggests that amount of expenditure relatable to any income to which section 10 [other than the provisions contained in clause (38)] only shall be added to compute the taxable amount of book profits. No method has been prescribed u/s 115JB to compute such expenditure, nor has the legislature linked aforesaid clause (f) to the provisions of section 14A or rule 8D. Thus, the plain reading of the provisions of section 115JB suggests that such expenditure has to be computed on actual basis as per the common understanding applying normal provisions of the Act. Under these circumstances, the AO is not permitted to add to the book profits u/s 115JB, the amount of disallowance made u/s 14A, in a routine, blindfolded or automatic manner presuming it to be expenses relatable to income exempt u/s 10 as stipulated in clause (f), especially when the assessee is agitating that even the disallowance u/s 14A is beyond the provisions of law in view of judgement of the Hon’ble jurisdictional High Court. 4.3. It is noted by us that perusal of the assessment order reveals that the AO has blindly added disallowance made u/s 14A r.w.r. 8D of Rs.35,13,921/- while computing book profits u/s 115JB without testing it independently under the provisions of clause (f) to explanation 1 of section 115JB (2). The approach of the AO and resultant addition made by him are not valid as per law. Thus, in view of the aforesaid discussion and circumstances, accepting the request of the assessee, we send this issue back to the AO with the following directions:- (1) The AO shall first recompute disallowance u/s 14A so as to bring it in line with the judgement of Hon’ble jurisdictional High Court in the case of HDFC Bank Ltd (supra). The assessee is free to place reliance upon other judgements also, as may be available at that time and is also free to raise any other legal and factual issues in this regard and also to submit requisite details and documentary evidence in support of its claim. Thus, after giving opportunity of hearing to the assessee, the AO shall recompute the correct amount that can be disallowed u/s 14A, under the law; (2) The assessee shall furnish requisite details and working of the amount of expenditure relatable to any income exempt u/s 10 [excluding income exempt u/s 10(38)], as envisaged in clause (f) of Explanation 1 to section 115JB (2). The AO shall examine the same and determine the amount to be added under clause (f) keeping in view the provisions of law and facts of the case; (3) In case, the assessee does not furnish requisite information to enable the AO to compute amount disallowable under clause (f) as directed above in point no (2), then the AO shall be free to treat the amount determined as disallowable u/s 14A in terms of our first direction above, as the amount to be added under clause (f) of explanation 1 to section 115JB. (4) In any case, amount to be added under clause (f) of explanation 1 to section 115JB (2) cannot exceed amount of disallowance that can be made u/s 14A, the latter being wider in its scope.
It is clarified to remove any doubts that this exercise is being done only for the limited purpose of computing taxable amount of book profits u/s 115JB and thus original disallowance made by the AO u/s 14A , having not been contested by the assessee, shall remain unaffected by our order 6. Thus, with these directions, the grounds raised by the assessee are sent back to the AO and may be treated as partly allowed for statistical purposes.
Order pronounced in the court on this _09th ___ day of September, 2016.