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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
per P&L account. A sum of Rs.24,64,632 was, admittedly, a disallowance made by the AO u/s. 14A of the Act r.w. rule 8D of the I.T. Rules. The
aforesaid computation of expenditure was made by the AO while computing income of the assessee under the normal provisions of the Act.
It is not in dispute that no direct expenses were attributable to earning of exempt income and what was disallowed was only indirect interest
expenses and other expenses which were disallowed invoking provisions of
Rule 8D(2) (ii) and (iii) of the Rules.
While working out the book profits, the assessee submitted before
the AO that it had earned a sum of Rs.6,63,79,683 being share of profits
from a partnership firm in which the Assessee was a partner. This amount had been credited to the P&L account. The assessee submitted that in
view of Explanation (1)(ii) to section 115JB(2) of the Act, the aforesaid sum should be reduced from the book profits. Assessee made this claim before
the AO in the form of letter dated 20.12.2010.
The AO refused to entertain the claim of assessee for the following reasons:-
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“In this regard the assessee’s reply (was) as follows: “Apart from the issue relating to the claim of interest, we also would like to draw your Honour’s kind attention to the fact that there has been an error in the computation of income u/s. 115JB of the Act in the revised return of income. It is submitted that while computing the income u/s. 115JB of the Act, we have not deducted a sum of Rs.6,63,79,683/- being the share of a profits from a partnership firm M/s. Sobha City. It is submitted that the share income of firm is exempt u/s. 10[2A] of the Act and also deductible while computing book profit in terms of explanation [1] sub-clause [ii] to Section 115JB of the Act. We request that the book profit may be correctly determined while concluding the assessment. We request your honour that the income u/s. 1 15JB of the Act, may kindly be considered after excluding that Share of profit as discussed above.” The assessee’s contention is not acceptable. As seen from the assessee’s reply it has not claimed the deduction of Rs.6,63,79,683/- being the share of profit from a partner ship firm M/s Shoba City neither in the revised return of income filed on 18.03.2009. As per case law Goetze (India) Ltd Vs. CIT (2006) 157 Taxman 1 (SC). The assessing Authority has no power to entertain a claim made by the assessee, after filing original return, otherwise than filing revised return. Hence the assessee’s claim is not considered.”
Aggrieved by the aforesaid action of the AO, assessee preferred appeal before the CIT(A). Assessee contended before CIT(A) that Explanation 1(f) to section 115JB(2) of the Act does not make any reference to provisions of section 14A of the Act or Rule 8D of the Rules and therefore disallowance made under the aforesaid provisions cannot
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automatically be imported into those provisions and addition made to the profit as per P&L account of the assessee. With regard to action of the AO in not reducing from the book profits the share income which the assessee received as partner of the partnership firm, which was exempt u/s. 10(2A) of the Act, relying on the decision of the Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra), it was submitted that the same was
not correct and that the appellate authorities under the Act have the powers to look into any legitimate claim made by the assessee, even without there being no revised return of income filed by the assessee. In other words, it was submitted that the restriction laid down by the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (supra) is applicable only to the AO
and not to the appellate authorities under the Act.
The CIT(A) agreed with the contentions put forth by the assessee and held as follows:-
“14. I have gone through the AO’s order and the appellant’s submission and am in agreement with the latter since the computation of book profit for purposes of Sec. 115JB for determining the minimum alternative tax is done as per the book profit evident from the financial statements drawn under the Companies Act. Sec.14A and the disallowance envisaged under it by applying Rule 8D are adjustments specific to the Income Tax Act. Even where the book profit as per the Companies Act has been allowed to be adjusted by the IT Act, it has been done through very specific provisions in terms of the explanations to Sec. 115JB. When the language of the explanation is specific and unequivocal and mentions specific exempted incomes in explanation 1(f), there is no situation for reading in any other interpretation even if they are analogous to the specified sections.
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While Sec.14A deals with disallowance of expenditure related to exempt income, it cannot be equated in letter and spirit with exempted income u/s.10 and expenditure related to it which is provided in explanation 1(f) of Sec.115JB. Hence, the AO’s extension of these provisions to the amount disallowed u/s. 14A is not within the scheme of the legal provisions and the same is therefore, directed to be deleted.” “12. Before me the AR stated that the above decision only lays down a broad proposition that the AO cannot entertain claims which are not contained in a valid return of income before him. He also relied upon the CBDT’s Circular No, 14 of 1955 dt. 11.4.1955 wherein it was expressed that the AOs are expected to educate the assessee and allow claims that are legitimately due to the assessee, even when such a claim is not made. I am convinced by the arguments of the AR. In fact, in the decision in the case of Goetze India (supra) the Apex Court has also clarified that the view taken does not impinge upon the power of the CIT(Appeals) to admit the additional ground. Since the appellant’s share in the firm’s profit is exempt u/s. 10(2A) and deductible while computing book profit, the AO is directed to exclude the same while computing the book profit. This ground, therefore, sub- clause (iii) i.e succeeds.”
Aggrieved by the order of CIT(Appeals), revenue has raised grounds No.3 & 4 before the Tribunal.
We have heard the rival submissions. The ld. DR drew our attention to the provisions of section 115JB Explanation 1(f) and submitted that the amount of expenditure relatable to any income to which section 10 applies, should be added to the profit as per the P&L account. His submission was that section 14A of the Act r.w. Rule 8D of the Rules is a reasonable method of calculating the amount of expenditure and therefore without going into the question of whether Rule 14A can be imported into the
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provisions of clause (f) to Explanation (1) to section 115JB of the Act, the CIT(A) ought to have sustained the addition made by the AO. With regard
to the share of income of the assessee, which was sought to be reduced by the assessee and rejected by the AO, the ld. DR relied on the order of AO.
The ld. counsel for the assessee, on the other hand, submitted 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. His submission was
that section 115JB appears in Chapter XII-B of the Act dealing with specific provisions relating to certain companies and therefore those provisions
cannot be applied. It was his further submission that even assuming that
those provisions are applicable 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. 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.
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With regard to reduction of a sum of Rs.6,63,79,683 which was share of profits received by the assessee as partner from a partnership firm which was exempt u/s. 10(2A) of the Act, the ld. counsel for the assessee submitted that the facts with regard to claim u/s. 115JB are already available on record and notwithstanding the assessee’s failure to make a claim in the return of income, it was incumbent on the part of the AO to compute the book profits in accordance with the mandate laid down in section 115JB of the Act.
The ld. DR in his rejoinder submitted that u/s. 115JB(4) of the Act, computation of book profits has to be supported by a report of auditor in the prescribed form and that such a report of the auditor did not contain exclusion of the sum in question from the book profits. The ld. DR also submitted that revised computation of book profits u/s. 115JB by the assessee was not supported by a certificate of the auditor.
In reply to the aforesaid contentions, the ld. counsel for the assessee submitted that requirement of section 115JB(4) is only procedural and therefore not mandatory. It was also his submission that the report is not conclusive in the matter. According to him, it is not fair to deny the Assessee a relief purely on technicalities, when otherwise, the Assessee was entitled to the same. In this regard, ld. counsel placed reliance on the
decision of ITAT, Bangalore Bench decision in the case of Sri Lakhan
Singh v. ACIT, ITA No.1025/Bang/2011 for the AY 2007-08, wherein
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the Tribunal had after making a reference to the CBDT Circular No.14/1955 dated 11.4.1955 and considering the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (supra) held as follows:-
“10.6 The Hon’ble Supreme Court in the case of Goetze (India) Limited v. Commissioner of Income-tax (supra) relied on by the CIT is distinguishable on the facts. The question before the Court was whether the appellant-assessee could make a claim for deduction, other than by filing a revised return. After the return was filed, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The claim, therefore, was not before the appellate authorities. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Act to make an amendment in the return of income by modifying an application at the assessment stage without revising the return. The Commissioner of Income-tax (Appeals) allowed the assessee’s appeal. The Tribunal, however, allowed the department’s appeal. In the Supreme Court, the assessee relied upon the judgment in National Thermal Power Company Limited contending that it was open to the assessee to raise the points of law even before the Tribunal. The Supreme Court held :- “4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs.” [emphasis supplied] 10.7 The Hon’ble Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can
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be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the appellate authorities. 10.8 A Division Bench of the Hon’ble Delhi High Court in the case of Commissioner of Income-tax v. Jai Parabolic Springs Limited (2008) reported in 306 ITR 42 had distinguished the Hon’ble Apex Court judgement in the case of Goetze (India) Ltd. (Supra). The Hon’ble Delhi High Court, in paragraph 17 of the judgment held that the Supreme Court dismissed the appeal making it clear that the decision was limited to the power of the assessing authority to entertain a claim for deduction otherwise than by a revised return and did not impinge on the powers of the Tribunal. In paragraph 19, the Hon’ble High Court held that there was no prohibition on the powers of the Tribunal to entertain an additional ground which, according to the Tribunal, arises in the matter and for the just decision of the case.”
We have given a very careful consideration to 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.
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(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; (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,
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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 (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,—
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(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].
A reading of the provisions of Sec.115JB(1) shows that when an Assessee is a company and the income-tax, payable on the total income as computed under this Act (under the normal provisions of the Act) in respect of any previous year relevant to the assessment year is less than 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
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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).
In the present case we are concerned with one item which needs to 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. Another item which needs to be excluded to the total income laid down in the second part of Expln.1 clause
(ii) viz., 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.
On the issue of reducing/excluding the share of profits from the profit as per the P&L account, in view of clause (ii) to Expanation (1) to
section 115JB(2) of the Act, viz., the amount of income to which any of the provisions of section 10, we are of the opinion that the contentions put forth
by the assessee are acceptable. In this regard, we are also of the view that decision rendered by the Bangalore Bench of the Tribunal referred to by
the ld. counsel for the assessee clearly supports the stand taken by the
assessee. We, therefore, concur with the view of the CIT(Appeals) on this issue and find no merit in ground No.4 raised by the revenue.
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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.
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
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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, 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
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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.
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.
In the result, appeal of the revenue is partly allowed. 36.
Pronounced in the open court on this 9th day of January, 2015.
Sd/- Sd/-
( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 9th January, 2015.
/D S/
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.