MICRO LABS LTD.,,BANGALORE vs. ACIT, BANGALORE

per P&L account. In this regard, our attention was drawn to the expression “expenditure relatable” used in sub-clause (f) of Explanation (1) to section

115JB of the Act. The ld. counsel for the assessee contrasted the above expression with the expression used in 14A of the Act which says

“expenditure incurred by the assessee in relation to”. He also pointed out

that in the present case, there was no direct expenses in earning the exempt income and this fact is accepted by the AO in the order of

assessment. He therefore prayed that the order of CIT(Appeals) should be sustained.

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 16 of 29 26. We have considered the rival submissions. The relevant provisions of Sec.115JB(2) and Explanation thereto need to be seen. The said provisions read thus:

“Sec.115JB:Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent. (2) Every assessee,— (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including profit and loss account,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account;

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 17 of 29 (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956)97b, which is different from the previous year under this Act,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation [1].—For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 18 of 29 (e) the amount or amounts of dividends paid or proposed ; or (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; or (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account, and as reduced by,— (i) ….. or (ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof)] or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or (iia) ….. ” (other portions of the section are not relevant for the present case)

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 19 of 29

prescribed percentage (this percentage keeps changing for various AYs) of

its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income

shall be the amount of income-tax at the rate of eighteen and one-half per

cent. Book profit for the purpose of Sec.115JB of the Act has been defined by Expln.-1 below Sec.115JB(2) as net profit as shown in the profit and

loss account for the relevant previous year prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956).

Expln.1 below Sec.115JB(2) also provides for certain additions and

deductions from the said profit where such sums have either been added or reduced while arriving at the profit as per profit and loss account for the

relevant previous year prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956).

be added to the total income laid down in the first part of Expln.1 clause (f) viz., 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. Identical issue came up for

consideration before this Tribunal in DCIT v. Sobha Developers, ITA

No.1410/B/2013 for A.Y. 2008-09 wherein on identical order of CIT(A) and on identical facts and identical arguments by the Assessee and Revenue,

this Tribunal held as follows:-

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 20 of 29 “33. As far as ground No.3 is concerned, viz., the addition to the net profit as per profit and loss account expenditure incurred in earning income which does not form part of the total income under the Act, u/s.10 of the Act, it is seen that the quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. The provisions of section 115JB Explanation 1(f) lay down that the amount of expenditure relatable to income to which section 10 applies, should be added to the profit as per the P&L account. Section 14A of the Act r.w. Rule 8D of the Rules is a reasonable method of calculating the amount of expenditure, in a case where the Assessee has not been able to satisfy the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. If the Assessee satisfies the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act than that can be adopted for the purpose of addition under clause (f) of Expln.1 below Sec.115JB(2) of the Act. Rule 8D of the rules come into play only when there is no other basis for arriving at the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. 34. In our opinion, the question formulated by the CIT(A) whether Sec. 14A of the Act read with Rule 8D of the rules can be imported into the provisions of clause (f) to Explanation (1) to section 115JB of the Act, is itself erroneous. The question to be asked is as to how to give effect to the provisions of clause (f) to Explanation (1) to section 115JB of the Act. We do not think that there is any prohibition to adopt the disallowance made by the AO u/s.14A of the Act read with Rule 8D of the rules, while computing total income under the normal provisions of the Act. The argument of the learned counsel for the Assessee that section 14A of the Act is very specific and is applicable only for the purpose of computing total income under Chapter IV of the Act and that section 115JB appears in Chapter XII-B of the Act dealing with specific provisions relating to certain companies and therefore the provisions of Sec.14A read with Rule 8D of the Rules cannot be applied while making addition to net profit as per profit and loss account u/s.115JB Expln.1 clause (f) of the Act,

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 21 of 29 because the expression “expenditure relatable” is used in sub- clause (f) of Explanation (1) to section 115JB of the Act whereas expression with the expression used in 14A of the Act is “expenditure incurred by the assessee in relation to” and therefore only direct expenditure attributable to earning of income which does not form part of the total income under the Act can be added under clause(f) of Expln.1 below Sec.115JB(2) of the Act, cannot be accepted. In our view, there is no difference between the expression “expenditure relatable” and the expression “expenditure incurred by the Assessee in relation to”. Both the expressions mean that whatever expenditure are incurred to earn income which does not form part of the total income under the Act, both direct and indirect expenditure, have to be disallowed. There is no basis for the argument u/s. 115JB of the Act, it is only direct expenses that are contemplated as capable of being added to the profits as per P&L account under clause (f) to Expln.1 below Sec.115JB(2) of the Act. 35. As we have already seen, the quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. In such circumstances, we do not see any reason why the same disallowance cannot be adopted while arriving at the book profits u/s.115JB (2) of the Act read with Explanation 1(f) thereto. In our view the CIT(A) has fallen into an error in coming to a conclusion contrary. We therefore reverse the order the CIT(A) and restore the order of the AO in this regard.”

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 22 of 29 30. In the result, the appeal by the revenue is partly allowed and the assessee’s appeal is allowed.

ITA 1429/13 (Assessee’s appeal) 31. Ground No.1 is general in nature and calls for no specific adjudication.

“2. The learned Commissioner of Income Tax (Appeals) has erred in sustaining the additions made by the assessing officer u/s. 14A read with rule 8D on the ground that the appellant has not produced the evidentiary support in relation to dispersal of loan and utilization of loan. Whereas the appellant has produced the evidence that the amount invested was out of positive bank balance and no borrowings were utilized for the purpose of investment.”

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 23 of 29

to the borrowed funds which were used for the purpose of investment

which yielded tax free income.

shares mutual funds of various companies. He was of the view that such investments cannot be made routinely. No prudent businessman would

make any investment without applying the resources wisely. Obviously this

entails expenditure, direct as well as indirect. He thereafter proceeded to make disallowance u/s. 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXURE-II to this order.

before the CIT(Appeals).

in support of the above contention, the Assessee filed copies of balance

sheets as on 31.03.2003 upto 31.03.2009 to show that the various loans availed from banks were all taken for specific purposes and could not have

been utilized for making any investments out of which exempt income was earned. These loans include short term loans from IDBI Bank, Exim Bank,

Barclays Bank and Standard Chartered Bank in respect of which it was explained that the loans could not have been used for making any long

term investment. Copies of some communications from banks regarding

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 24 of 29

sanction of the loans were also filed before me to substantiate the nature of

the loan. In respect of IDBI loan, it was submitted that the same had been returned back before the year end, thus bringing the balance to Nil.

relevant documents, the CIT(A) was of the view that the claim of the Assessee was not evidenced from the documents submitted in view of the

loans and other sources of funds being mixed up in the common pool of

funds. The CIT(A) further held that the burden of proof in this matter clearly continues to rest with the Assessee and that it was not enough to merely

show that surplus funds were available or that bank loans had been availed for specific purposes including short term reasons. A one-to-one correlation

must also be established to prove that the loans were absolutely utilised for the purpose for which they were claimed. The CIT(A) also held that there

was no utilisation certificate from the bank filed before the AO nor was such

evidence furnished before the CIT(A). The CIT(A) also held that the documents submitted from the bank during the course of appeal only refer

to the disbursal of the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and utilisation is not

proved from the ledger copies as submitted. The CIT(A) also referred to the

decision of Mumbai ITAT in the case of Hercules Hoists Ltd. (ITA No.7944, 7946, 2255 & 7943/mum/2011), wherein it was held that with the

introduction of Rule 8D the burden of proof on the assessee has become “more stringent, so that rather than showing existence of sufficient capital,

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 25 of 29

the matter would be required to be examined from the stand point of utilisation of the borrowed interest bearing funds.” In the absence of categorical utilisation certificate from the bank, the CIT(A) was of the view that there was no evidentiary support of the assessee’s claim. Hence, the disallowance u/s.14A of the Act as made by the AO was upheld by the CIT(A).

profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.

Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far

exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon’ble Bombay High Court in CIT v. HDFC Bank Ltd.,

ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 26 of 29

when investments are made out of common pool of funds and non-interest

bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.

disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order

accordingly.

assessee had made a claim before the AO that ‘other expenses’ to be considered for disallowance under Rule 8D(2)(iii) is only Rs.3,22,426. The

assessee had also given a break-up of ‘other expenses’ also. Without

rejecting the claim of assessee, the AO proceeded to make a disallowance invoking Rule 8D of the Rules. In the decision of Hon’ble Bombay High

Court in the case of Godrej & Boyce Mfg. Co., 328 ITR 81 (Bom), it was

held that Rule 8D can be resorted to by the AO only when he rejects the

claim made by the assessee regarding expenditure incurred in earning income which does not form part of total income. In the present case, the

AO has not done so. We therefore deem it fit and proper to restore this

issue of disallowance under Rule 8D(2)(iii) to the AO for fresh consideration in the light of observations made above, after affording assessee

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 27 of 29 opportunity of being heard. Thus, ground No.2 raised by the assessee is allowed to the extent indicated above.

“3. The learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition regarding wealth tax liability under the provisions of section 115JB treating the provision for wealth tax as unascertained liability.”

“5. The appellant has grieved against the AO adding the provision of Wealth Tax to the Book Profit u/s. 115JB whereas explanation 1(a) to Sec. 115JB only refers to “the amount of income tax paid or payable, and the provision therefor.” While agreeing with the appellant’s view that wealth tax has not been specifically mentioned in this explanation, I nevertheless find that any provision for meeting liabilities other than ascertained liabilities is liable to be added back to book profit and the appellant’s debiting of wealth tax provisions would be covered under this provision.”

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 28 of 29

Explanation (1)(a) to section 115JB, the amount of income-tax paid or payable, and the provision therefor; has to be added, and wealth-tax is not

included therein. According to him, if at all, addition could be made u/s.

Explanation (1)(c) on the ground that provision made is not for an ascertained liability. It was submitted by him that provision for wealth-tax

liability is made on the basis of actual net wealth declared by the assessee in wealth-tax returns and it is not an unascertained liability as is sought to

be made out by the revenue.

1(a) to Sec.115JB(2) of the Act. Regarding applicability of Expln-1(c ) to Sec.115JB(2) of the Act is concerned, we are of the view that it would be

just and proper to remand this issue for fresh consideration to verify the

claim of assessee to the extent that the provision for wealth-tax is based on the actual wealth-tax returns filed by the assessee (and if so), then the

same cannot be considered as unascertained liability. Ground No.3 is treated as allowed for statistical purposes.

ITA Nos.1412 & 1429/B/13 & 764/B/14 Page 29 of 29 50. In the result, the appeals viz., ITA No.1412/12 and 1429/12 are partly allowed and ITA No.764/14 is allowed.

Pronounced in the open court on this 5th day of March, 2015.

Sd/- Sd/-

( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member

Bangalore, Dated, the 5th March, 2015.

/D S/

Copy to:

By order

Assistant Registrar/ Senior Private Secretary ITAT, Bangalore.