Loading judgment…
Facts
The assessee earned dividend income of Rs 3,90,326/- and claimed it as exempt. The assessee suo motu disallowed expenses of Rs 25,61,188/- for earning exempt income. The Assessing Officer (AO) disallowed the same amount for book profit computation under Section 115JB of the Act. The CIT(A) upheld the AO's action.
Held
The Tribunal held that the computation mechanism under Rule 8D(2) cannot be applied for calculating book profits under Section 115JB. The disallowance of expenses under Section 14A cannot exceed the exempt income. Therefore, the disallowance was restricted to the dividend income earned.
Key Issues
Whether the disallowance of expenses under Section 14A can exceed the exempt income earned, and whether Rule 8D(2) can be applied for book profit computation under Section 115JB.
Sections Cited
14A, 10, 143(3), 115JB, 8D(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI C. N. PRASAD & SHRI M. BALAGANESH
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 2014-15, arises out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. NFAC’, in short] in Appeal No. ITBA/NFAC/S/250/2024- 25/1072430406(1) dated 22.01.2025 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 22.12.2016 by the Assessing Officer, ITO, Circle-14(2), Delhi (hereinafter referred to as ‘ld. AO’).
The only issue to be decided in this appeal is challenging the disallowance of expenses made under section 14A of the Act.
We have heard the rival submissions and perused the materials available on record. It is not in dispute that Assessee earned dividend income of Rs 3,90,326/- and claimed the same as exempt under section 10 of the Act in the Page | 1 return of income. Further, it is not in dispute that Assessee had made suo moto disallowance of expenses of Rs 25,61,188/- as expenditure incurred for the purpose of earning exempt income by applying the computation mechanism provided in Rule 8D(2) of the Income Tax Rules. This was accepted by the Learned AO while computing income under normal provisions of the Act. However, no disallowance was made by the Assessee in the computation of book profits under section 115JB of the Act vide clause (f) of Explanation 1 thereon. Accordingly, the learned AO proceeded to adopt the same disallowance figure of Rs 25,61,188/- being suo moto disallowed by the Assessee under normal provisions of the Act to be the amount that is to be added back in terms of clause (f) of Explanation 1 to section 115JB(2) of the Act while computing the book profits. This action of the learned AO was upheld by the learned CIT(A).
We find that the Special Bench of Delhi tribunal in the case of Vireet Investments reported in 165 ITD 27 (Del) (SB) had already held that the computation mechanism provided in Rule 8D(2) of the Income Tax Rules cannot be imputed in clause (f) of Explanation 1 to section 115JB(2) of the Act while computing book profits. Hence, no disallowance of expense incurred for earning exempt income could be made by adopting the computation mechanism under Rule 8D(2) of the Rules. However, it is not in dispute that the Assessee in the present case had computed the suo moto disallowance of Rs 25,61,188/- by applying the computation mechanism provided in Rule 8D(2) of the Rules. But, in any case, the disallowance made under section 14A of the Act cannot exceed exempt income. In this regard, reliance has been rightly placed by the learned AR on the decision of Hon’ble Jurisdictional High Court in the case of Joint Investments reported in 372 ITR 694 (Del) wherein it was categorically held that disallowance of expense cannot exceed the exempt income. Accordingly, we direct the learned AO to restrict the disallowance of expenses under section 14A of the Act only to the extent of dividend income of Rs 3,90,326/- and delete the remaining amounts while computing income under normal provisions of the Act.
With regard to computation of book profits under section 115JB of the Act, the disallowance of expense should be restricted only to the extent of exempt income and accordingly we direct the learned AO to adopt the disallowance figure of Rs 3,90,326/- in terms of clause f of Explanation 1 to section 115JB(2) of the Act while computing book profits. Accordingly, the grounds raised by the Assessee are partly allowed.
In the result, the appeal of the Assessee is partly allowed.
Order pronounced in the open court on 29/08/2025.