Sri Vishnu Shankar Mill Vs ITO (ITAT Chennai)
Section 14A read with Rule 8D(2) of the 1962 Rules cannot be invoked for making disallowance u/s 115JB of the 1961 Act but disallowance of expenses incurred relatable to earning of an exempt income is to be computed in accordance with Explanation 1(f) to Section 115JB of the 1961 Act, in accordance with ratio of decision of Special Bench in the case of Vireet Investment(supra).
We also remit this matter back to the file of the AO for making additions to the Book Profit u/s.115JB in accordance with decision of the Hon’ble Special Bench of the tribunal in the case of Vireet Investment (P) Limited (supra) read with explanation 1(f) to Section 115JB of the 1961 Act.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This appeal filed by assessee is directed against appellate Order dated 28.01.2019 passed by learned Commissioner of Income Tax (Appeals)-1, Madurai (hereinafter called “the CIT(A)”), in ITA No. 0200A/2016-17 for assessment year (ay) 2014-15, the appellate proceedings before learned CIT(A) had arisen from assessment order dated 29.12.2016 passed by learned Assessing Officer (hereinafter called“the AO”) u/s.143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”).
2. The grounds of appeal raised by assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Chennai (hereinafter called “the Tribunal”) read as under:-
“The under mentioned grounds of appeal are independent of and without prejudice to one another.
1. The order of the Hon’ble Commissioner of Income Tax (Appeals! is contrary to law and facts.
2. The Hon’ble Commissioner of Income Tax (Appeals) erred in sustaining the addition of Rs. 36,38,000/- under section 14A (in relation to the dividend amount of Rs. 40,62,190/-) since all the investments held by the appellant were funded entirely by company’s own funds and no borrowed funds were used for making the investments, as is evident from the facts already submitted to the Assessing Officer and the Commissioner of Income Tax (Appeals) with respect to source and deployment of funds.
3. The Learned Commissioner of Income Tax (Appeals) erred in not appreciating that once no borrowals were used to make the investments, the question of disallowance under Section 14A will not arise and hence any such disallowance will be contrary to facts and will be based purely on erroneous presumption.
4. The Hon’ble Commissioner of Income Tax (Appeals) is not justified in sustaining the disallowance despite the fact that the financial statements and the details of the source of funding the investments furnished by the Appellant prove that no borrowing was used therefor.
5. The Hon’ble Commissioner of Income Tax (Appeals) omitted to notice that factually no expenditure was incurred for earning the exempt dividend income and the receipt of the dividend income was made by crediting it directly by the investee companies to the bank account of the appellant and as such the disallowance is not warranted and averments to the contrary is speculative and not mandated by section 14A.
6. The Hon’ble Commissioner of Income Tax (Appeals) erred in sustaining the said addition of Rs. 36,38,000/- made to the Book Profits computed under the provisions of Section 115JB since the same is contrary to the specific provisions contained in Section 115JB in this regard and linking it to Section 14A is an unauthorized adjustment for computing the book profits under Section 115JB which is a self- contained complete code for computing book profits. The Appellant submits that the same is contrary to the decision of the Special Bench of the Tribunal in Vireeth Investment (P) Limited (2017) 82 taxmann.com 415 (Del-Tri.)(SB)
7. The Hon’ble Commissioner of Income Tax (Appeals) is not justified in relying upon the decision of the Hon’ble ITAT in Lally Motors India (P) Ltd. (2018) 93 taxmann.com 39(Amritsar-Trib.), which is not in pari materia with facts on record in as much as in that case the assessee had a negative net worth of Rs. 7.70 crores, whereas the Appellant had own funds due to a huge positive net worth Rs. 19.75 crores (much in excess of its investments of Rs. 8.35 crores) and thus no part of the sources of investments made by the Appellant is relatable to any borrowed funds.
8. The Hon’ble Commissioner of Income Tax (Appeals) erred in sustaining the disallowance based on a presumption that expenses have been incurred and on an erroneous interpretation that the disallowance under Section 14A is to be made automatically regardless of whether or not any expenses were incurred. The decision of the learned Commissioner of Income Tax Appeals) is contrary to the judicial precedents that apply in this regard, including the decisions of the Apex court and various high courts.
9. Without prejudice to the above, it is submitted that the investments which generated exempt income alone should have been considered for the purposes of section 14A.
10.For these and other grounds that may be urged at the time of hearing, it is Respectfully prayed that the addition of Rs.36,38,000/- made by the Assessing Officer under section 14A in the regular computation as .well as for Book Profits purposes be deleted.
11.The appellant craves leave to add, alter, delete or withdraw any of the grounds of appeal.”
3. Briefly stated facts of the case are that the assessee is engaged in business of manufacture and sale of cotton yarn. The only issue agitated in this appeal is with respect to disallowance of expenses incurred in relation to earning of an exempt income, u/s.14A of the Act read with Rule 8D(2) of the Income-tax Rules, 1962 under the normal provisions and also corresponding additions made to ‘Book Profit’ by invoking provisions of Sec.115JB of the Act for computing book profit for levying minimum alternate tax. The AO had invoked provisions of Sec.14A r.w.r. 8D(2)(ii) & (iii) of the Income-tax Rules, 1962 to make disallowance of expenses to the tune of 36.38 lakhs both under normal provisions as well while computing book profits for computing MAT payable u/s 115JB of the 1961 Act, vide assessment order dated 29.12.2016 passed by AO u/s 143(3) of the 1961 Act, which is reproduced hereunder:
“3.6 Accordingly, the rule 8D is applied to work out expenditure in relation to income not includible in total income, as under:
