Case Law Details
Essar Teleholdings Ltd. Vs DCIT (ITAT Mumbai)
The ITAT Mumbai partly allowed the assessee’s appeal against the order of the CIT(A) for AY 2005-06. The assessee, engaged in the business of investment, had filed a return declaring a loss of Rs. 87,98,40,509. The Assessing Officer completed the assessment under Section 143(3) by determining the total loss at Rs. 65,60,40,509 after disallowing finance charges of Rs. 22.38 crore under Section 14A. The Assessing Officer also added Rs. 4.06 crore to the book profit under Section 115JB as expenditure relating to exempt income under Section 10(34), although the assessee had not received any dividend or other exempt income during the year.
The CIT(A) upheld the disallowance by applying Rule 8D on the basis of the Special Bench decision in Daga Capital Management Pvt. Ltd. The Tribunal observed that the Bombay High Court in Godrej & Boyce Vs. DCIT had subsequently held that Rule 8D applies only from AY 2008-09 onwards and not to earlier assessment years. Accordingly, the Tribunal set aside the orders of the lower authorities on this issue and restored the matter to the Assessing Officer to determine the quantum of disallowance on a reasonable basis, after providing the assessee with a reasonable opportunity of being heard.
Regarding the addition to book profit under Section 115JB, the Tribunal held that Rule 8D could not be applied for the relevant assessment year and observed that no actual expenditure relating to exempt income had been debited to the profit and loss account. Relying on Goetze (India) Ltd. Vs. CIT, the Tribunal held that the provisions of Section 14A(2) and (3) could not be imported into clause (f) of the Explanation to Section 115JB. It therefore deleted the addition made while computing book profit under Section 115JB. The appeal was partly allowed.
Cases Discussed
- Godrej Boyce Vs DCIT (Bombay High Court), (2010) 43 DTR 177 (Bom.)
- Goetze (India) Ltd. Vs CIT (ITAT Delhi), (2009) 32 SOT 101 (Del)
- Daga Capital Management Pvt. Ltd. (ITAT Special Bench, Mumbai), (2008) 119 TTJ 289 (Mum)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal preferred by the assessee are directed against the order dt.29.6.2011 passed by the ld. CIT(A)-9 for the Assessment Year 2005-06.
2. The brief facts of the case are that the appellant company is engaged in the business of investment. Return of income showing total loss of Rs. 87,98,40,509/- was filed on 31.10.2005 alongwith the copies of audited balance sheet and profit and loss account and the Tax Audit Report u/s. 44AB of the I.T. Act. After scrutiny of return, details and information submitted, the Assessing Officer computed total loss of Rs. 65,60,40,509/- u/s. 143(3) of the Act on 27.12.2007. While arriving the aforesaid loss, the AO disallowed finance charges to the tune of Rs. 22.38 crores u/s. 14A of the I.T. Act. During the year, the assessee company has not received any dividend or any income in respect of investment of shares which is exempt or otherwise does not form part of total income. The AO therefore applying provisions of Sec. 14A and thereby disallowing proportionate interest on loans taken for the purpose of investment.
3. While arriving the Book Profit u/s. 115JB, the AO added proportionate finance charges of Rs. 4.06 crores related to exempt income u/s. 10(34) of the Act. During the year, the assessee company has not received any dividend or any income in respect of investment of shares which is exempt or otherwise does not form part of total income. The AO therefore erred in adding the proportionate finance charges of Rs. 4.06 crores related to exempt income u/s. 10(34) of the Act, while computing the Book Profit u/s. 115JB of the I.T. Act.
4. Aggrieved by the order of the AO, assessee preferred an appeal before the Ld. CIT(A).
5. The first ground raised by the assessee reads as follows:
“1. The CIT(A) erred in directing the AO to disallow the expenditure as per Rule 8D r.w. 14A of the I.T. Act.
1.1 The CIT(A) erred in enhancing the amount of disallowance u/s. 14A, by directing to disallow the expenditure as per Rule 8D as against the disallowance made by the AO based on the average cost of funds.
1.2 The CIT(A) erred in applying Rule 8D of I.T. Rules to the appellant for the A.Y. under appeal without appreciating the fact that Rule 8D was applicable from A.Y. 2007-08. ”
6. On perusal of the Ld. CIT(A)’s order, we find that the CIT(A) has confirmed the AO’s action by applying the decision of ITAT, Special Bench Mumbai in the case of Daga Capital Management Pvt. Ltd. (2008) 119 TTJ 289 (Mum) and, has thus, applied the method provided under Rule 8D of the I.T. Rules. At this stage, it is pertinent to note that the decision of Special Bench of Tribunal in the case of Daga Capital Management Pvt. Ltd. (supra) holding that Rule 8D is retrospective in nature, has been over-rules by the Hon’ble Bombay High Court in the case of Godrej Boyce Vs DCIT (2010) 43 DTR 177 (Bom.), wherein it has been held that Rule 8D would be applicable only on and from A.Y. 2008-09 onwards and not prior to A.Y. 2008-09. In the light of the decision of Hon’ble Bombay High Court in the case of Godrej Boyce Vs DCIT (supra), we set aside the orders of the authorities below and hold that no disallowance u/s. 14A shall be made by applying the method provided u/R 8D of the I.T Rules, in the present assessment year which is prior to A.Y. 2008-09.
However in circumstances as are prevailing presently and the disallowance has to be worked out by the AO on some ‘reasonable basis’ and not Rule 8D. Under such circumstances, we set aside the impugned order and restore the matter to the file of the AO for deciding the quantum of disallowance, as per the afore-noted judgment of Godrej & Boyce (supra) after allowing a reasonable opportunity of being heard to the assessee.
7. The second ground raised by the assessee reads as follows:
“The CIT(A) erred in directing the AO to adjust the book profits computed u/s. 115JB with the expenditure as per Rule 8D r.w.s.14A of the Act. ”
8. As already held in ground No. 1 the provisions of Rule 8D are not applicable to the present A.Y. under consideration. Therefore, disallowance of expenditure by applying Rule 8D is not justified. Further, no actual expenditure was debited in the profit & loss account relating to the earning of exempt income. Therefore the provisions of Sec. 14A cannot be imported into while computing the book profit u/s. 115JB of the Act inasmuch as clause (f) of Explanation to Sec. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s. 115JB of the Act. In this connection, reliance can be placed upon the decision of ITAT Delhi Bench in the case of Goetze (India) Ltd. Vs CIT (2009) 32 SOT 101 (Del), wherein it has been held that provisions of Sub-Sec. (2) & (3) of Sec. 14A cannot be imported into clause (f) of the Explanation to Sec. 115JA of the Act. In this view of the matter, we therefore, delete the disallowance of expenses confirmed by the CIT(A) while computing book profit u/s. 115JB of the Act. In other words, no addition to the book profit shall be made on account of alleged expenditure incurred to earn exempt income while computing income u/s. 115JB of the Act. Thus ground No. 2 is decided in favour of the assessee.
9. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 29th day of July, 2011
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