Book profit u/s. 115JB cannot be computed by including disallowance u/s 14A

DCIT Vs Adani Wilmar Ltd (ITAT Ahmedabad)

ITAT Ahmedabad held that book profit under section 115JB of the Income Tax Act cannot be computed by including disallowances made under section 14A of the Income Tax Act.

Facts- The assessee had earned exempt income of Rs. 15 crores from investment made in KOG KTV Food Products for Rs. 16.12 crores. AO made proportionate disallowance under Rule 8D(2)(iii) of Rs. 8.25 crores. AO also made disallowance under Rule 8D(2)(iii) for Rs. 75.62 lakhs and the aggregate disallowance worked out at Rs. 9.01 crores.

The assessee filed appeal before CIT(A). CIT(A) held that interest expenditure of Rs. 253.50 crores cannot be considered for making disallowance u/s. 14A. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that CIT(A) in our view correctly observed that out of total expenditure of Rs. 314 crores, a sum of Rs. 253.50 crores was incurred for specified purpose and the same had to be excluded for the purpose of disallowance of interest expenditure u/s. 14A of the Act. Further, the ld. CIT(A) also correctly observed that since the assessee had offered an amount of Rs. 59.58 crores as interest income, such interest income was also required to be reduced from the remaining interest expenditure of Rs. 60.99 crores. Accordingly, only the net expenditure of Rs. 1.41 crores was considered for the purpose of making disallowance u/s. 14A of the Act.

Held that it is well settled law that book profit u/s. 115JB cannot be computed by including disallowance made u/s. 14A of the Act.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-1, Ahmedabad, in proceeding u/s. 250 vide order dated 08/01/2020 passed for the assessment year 2016-17.

2. The Department has raised the following grounds of appeal:-

“(1) The CIT(A) has erred in restricting the disallowance u/s 14A r.w. Rule 8D from Rs. 9,01,28,550/- to Rs. 8,50,235/-.

(2) The CIT(A) has erred in deleting the adjustment of Rs. 9,01,28,550/- made u/s 115JB of the Act.

(3) It is, therefore, prayed that the order of Id. CIT(A) may be set aside and that of the Assessing Officer be restored.”

3. The brief facts of the case are that the assessee had earned exempt income of Rs. 15 crores from investment made in KOG KTV Food Products for Rs. 16.12 crores. As the total investments as on 31^st March, 2015 were Rs. 250.5 crores and Rs. 47.45 crores as on 31^st March, 2016, the Assessing Officer made proportionate disallowance under Rule 8D(2)(iii) of Rs. 8.25 crores. The Assessing Officer also made disallowance under Rule 8D(2)(iii) for Rs. 75.62 lakhs and the aggregate disallowance worked out at Rs. 9.01 crores.

4. The assessee filed appeal before the ld. CIT(A) and claimed that it had sufficient interest free funds in the form of share capital and reserves and surplus and therefore, no disallowance of interest expenditure can be made. The assessee also submitted that interest expenditure of Rs. 314.49 crores includes specific interest expenditure incurred on loan taken for specific purpose which cannot be attributed to investments made to earn exempt income. Accordingly, the assessee contended that interest expenditure of Rs. 253.50 crores cannot be considered for making disallowance u/s. 14A of the Act. The Ld. CIT(A) substantially allowed the appeal of the assessee on the ground that identical issue has been decided by the predecessor CIT(A) vide order dated 26^th June, 2017 in assessment year 2013-14. The ld. CIT(A) observed that the assessee had given below table giving details of interest expenditure incurred:-

The CIT(A) observed that the assessee had declared gross interest expenditure of Rs. 314.49 crores but such interest expenditure includes specific interest of Rs. 253.50 crores pertaining to interest on long term exchange difference on foreign currency loan interest on buyer credit etc. and such interest expenditure has been incurred for specific business purpose and no funds can be attributed for making investments to earn exempt income. Accordingly, the CIT(A) held that interest expenditure to the extent of Rs. 253.50 crores cannot be considered for making disallowance u/s. 14A of the Act. Secondly, the ld. CIT(A) held that assessee had earned interest income of Rs. 59.58 crores which has been offered to tax as business income and hence interest income is required to be reduced from the remaining interest expenditure of Rs. 60.99 crores (Rs. 314.49 crores – Rs. 253.50 crores), in view of the Gujarat High Court decision in the case of Nirma Credit and Capital Pvt. Ltd. 85 taxman.com 72 and Vikram Capital Resources Ltd. Accordingly, the ld. CIT(A) held that only net interest expenditure of Rs. 1.41 crores ( 60.99 crores – 59.58 crores) is required to be considered for the purpose of making disallowance u/s. 14A of the Act. Further, the CIT(A) observed that the assessee had earned exempt income of Rs. 15 crores from investments in shares of KOG Health Food Pvt. Ltd. and in respect of other investments made by assessee in equity shares, such other investments made by the assessee have not resulted into any tax free income during the current year. The ld. CIT(A) observed that the ITAT in the case of Adani Enterprises Ltd. ITA Nos. 184/Ahd/2012, 3321/Ahd/2014 and 2305/Ahd/2014 dated 12-02-2019 for assessment years 2008-09, 2009-10 and 2010-11 has held that disallowance u/s. 14A of the Act is required to be made on investments resulting in tax free income during the “current year”. Accordingly, the CIT(A) held that disallowance u/s. 14A in the case of the assessee is required to be computed after considering investment of Rs. 16.21 crores in shares of KOG Health Food Pvt. Ltd. on which the assessee has earned exempt income during the current year and other investments on which assessee had not earned any exempt income during the current year were liable to be ignored for the purpose of computation of disallowance u/s. 14A of the Act. Accordingly, the ld. CIT(A) restricted the disallowance to Rs. 8,50,235/-. On the issue of applicability of MAT provisions u/s. 115JB of the Act an amount disallowed u/s. 14A of the Act, the ld. CIT(A) held that as per Ahmedabad Tribunal decision in the case of Torrent Cable and the decision of Vireet Investments (Special Bench ITAT Delhi) and also the decision in the case of assessee’s group cases in the case of Adani Logistics Ltd. for assessment year 2014-15 in ITA 57/Ahd/2018 vide order dated 22^nd October, 2019, it was held that computation under clause “F of Explanation 1 & 2 Section 115JB(2) is to be made without resorting to the disallowance as contemplated u/s. 14A r.w Rule 8D of the Income Tax Rules, 1962. Accordingly, the ld. CIT(A) deleted the adjustment made by the Assessing Officer while computing book profit u/s. 115JB of Rs. 9,01,28,550/-. While allowing relief to the assessee, the ld. CIT(A) observed as under:-

“4.6 As facts of the case for the year under consideration are similar to the facts of earlier Assessment Year, disallowance under Section 14A made by AO is re-computed as under:

(i) So far as proportionate interest disallowance under Rule 8D(2)(ii) is concerned, it is observed that Appellant has debited gross interest expenditure of Rs.314.49 crores but such interest expenditure includes specific interest of Rs.253.50 crore pertaining to interest on term loan, exchange difference on foreign currency loan, interest on buyer’s credit, export packing credit, foreign bill purchases, etc., as tabularised at para 4.3 herein above and such interest expenditure is for specific business purpose and no funds can be attributable for making investment hence interest to the extent of Rs253.50 crore cannot be considered for the purpose of making disallowance under Section 14A. Similar view was already taken by my predecessor CIT (Appeals), as stated herein above, after relying upon judicial pronouncements. Further, Appellant has earned interest income of Rs.59.58 crores and same has been offered to tax as business income hence such interest income is also required to be reduced from remaining interest expenditure of Rs. 60.99 crore (interest paid on working capital loan). This view is also now supported by decision of Hon’ble Gujarat High court in the case of Nirma Credit and Capital Pvt. Limited 85 taxmann.com 72 (supra) and Vikram Capital Resources Pvt. Limited referred supra. On this basis, only net interest expenditure of Rs1.41 croe (60.99- 59.58) is required to be considered for the purpose of making disallowance under Section 14A of the Act.

(ii) It is also found that during the year under consideration Appellant has earned exempt income of Rs.15 crores from investment in shares of KOG Health Food Pvt. Limited for Rs.16.21 crores. Though Appellant has made other investments in equity shares, such investments have not resulted into any tax free income in current year. The Hon’ble Ahmedabad ITAT in one of the group cases being Adani Enterprises Limited vide order Nos ITA Nos.: 1840/Ahd/12, 3321/Ahd/14 and2305/Ahd/15 dated 12/02/2019 for A.Ys. 2008-09, 2009-10 and 2010-11 has held that disallowance under Section 14A is required to be made on investments resulted into tax free income in current year for which they relied on decision of Hon’ble Delhi Special Bench in the case of Vireet Investment Pvt. Limited. The operative part of said decision is reproduced hereunder:

“As far as this grievance of the assessee is concerned, it is against the disallowance of 0.5% of the average investments as expenses relating to exempt income from such investments. There is no dispute that the year before us is the year in which rule 8 D has legal force, that the assessee did not offer any expenses on his own, and that, when rule 8D is taken into account, the expenses relatable to exempt income will have to be taken on that basis. Learned counsel, however, submits that in the light of Special Bench decision in the case of ACIT V/s Vireet Investments Private Limited [(2017) 165 ITD SB 27 (Delhi)], the computation of 0.5% of investments must remain confined to only such investments which have yielded tax exempt income during the relevant previous year. Learned Departmental Representative, on the other hand, relies on the judgment of Hon’ble Supreme Court in the case of Maxopp Investments Vs CIT[(2018) 402 ITR 640 (SC)J in support of the proposition that a reasonable disallowance in relation to exempt income must be made. That does not however dilute the principle laid down by the Special Bench m the case of Vireet Investments (supra). To this extent, we uphold the plea of the assessee and modify the orders of the authorities below by directing the Assessing Officer to compute the 0.5% of the investments yielding tax exempt income during the relevant previous year. “

On the basis of binding decision of Hon’ble Ahmedabad ITAT referred supra, disallowance under Section 14A in the case of Appellant is required to be computed after considering investment of Rs.16.21 crores, as stated supra.

(iii) So far as disallowance under Section 14A read with Rule 8D(2)(iii) is concerned, same is also restricted on above investments of Rs.16.21 crores.

(iv) On the basis of above discussion, disallowance under Section 14A in the case of Appellant is recomputed herein below:

Thus, disallowance under Section 14A made by AO is restricted to Rs 8,50,235/-. (v) So far as adjustment made by AO while computing book profit is concerned, such addition was already deleted by CIT (Appeals) in earlier assessment years. It is observed that this issue has been dealt with by Hon’ble Ahmedabad ITAT in one of the Group cases of appellant being Adani Logistic Limited for A.Y. 2014-15 in ITA No. 57/Ahd/2018 vide order dated 22nd October, 2019 and held as under:

“8. It appears that the Learned AO disallowed Rs.89,72,884/- u/s 14A of the Act by applying provision of Rule 8D while calculating income under the provision of section 115JB – MAT. It is the case of the assessee that the Learned AO erroneously disallowed u/s 14A by applying the provision of Rule 8D while calculating the income under provision of Section 115JB – MAT when it has been decided in number of judgments that so far as computation of adjusted book profit is concerned provision of section 2 and sub section 3 of section 14A cannot be imported into clause (f). In support of his argument the Ld. AO has also relied upon the judgment passed by the Special Bench of ITAT at Delhi in the matter of AC IT, Circle 17(l)-vs-Vireet Investment (P.) Ltd. On the other hand, Learned DR relied upon the order passed by the authorities below.

9. Heard the respective parties, perused the relevant materials available on record. We have also carefully considered the judgment in the matter of Vireet Investment (P.) Ltd. The relevant portion whereof is as follows: “• The question is, whether the amount or amounts of expenditure relatable to exempt income as contemplated in clause (J) to Explanation 1 to section 115JB(2) could be arrived at by resorting to provisions of section 14A or not. The department, contention, is that the object of section 14A and clause (f) to Explanation 1 to section 115JB(2) is same and, therefore, it cannot be disputed that section 14A can be resorted to for finding out the expenditure relatable to any income which is exempt. [Para 6.2] ‘ When the question arises as to the applicability of similar provisions in different parts of the statute, then it is not only legitimate but proper to read both the provisions in their context. If context is same, different meaning cannot be assigned. It is to be found out that what mischief was intended to be remedied by inserting a particular section. The intention of the legislature once is manifested in a particular section in the statute then said intention cannot be given a different meaning, if a similar provision has been incorporated in a different section in the statute. The intention of the Legislature must be found out by reading the statute as a whole. [Para 6.3]

• Literal meaning cannot always be followed logically, because sometimes it tends to defect the obvious intention of the Legislature and results in producing a wholly unreasonable result. [Para 6.4]
  Thus, the submission of Department is that when basic object and purpose of section 14A and clause (j) to Explanation 1 to section 115JB(2) is same, then it cannot be said that merely because section 14A has not been mentioned in clause (f), it has no application. The mode of computation with same purpose cannot be differently made merely because section 115JB creates a deeming section. The object of deeming provisions is to substitute the total income computed under normal provisions by that computed under MAT provisions. Submission of department is that this cannot be extended to computation for same items under normal as well as MAT provisions. Under the provisions of section 14A, both direct and indirect expenses in relation to earning of exempt income are to be reduced. Therefore, different meaning cannot be ascribed in clause (f) and, therefore, the submission of the assessee that only directly relatable expenditure is to be reduced, cannot be accepted. [Para 6.10]
• In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962. ” We find from the issue citation that in the same set of facts the computation tinder clause (f) of explanation 1 to section 115JB as has been done by the authorities below u/s 14A r.w.r. 8D of the Income Tax Act, 1962 is not permissible and hence the Ld. CIT(A) deleted such disallowance without any ambiguity so as to warrant interference. Hence, this ground of appeal preferred by the Revenue is devoid of any merit and thus dismissed. This ground of appeal preferred by the assessee is thus allowed.
  Similar view is also taken by Hon’ble Ahmedabad ITAT in the case of Torrent Cable referred supra. As Hon’ble Ahmedabad ITAT has followed the decision of Hon’ble Delhi Special Bench in the case of Vireet Investments referred supra, adjustment made by AO while computing book profit under Section 115JB for Rs.9,01,28,550/- is deleted. Thus, this ground of appeal is partly allowed.”

5. The Department is in appeal before us against the relief granted by the ld. CIT(A). The ld. Departmental Representative primarily relied upon the observations made by the Assessing Officer in the assessment order. In response, the counsel for the assessee primarily relied upon the observations made by the ld. CIT(A) in the appellate order. The counsel for the assessee submitted that the assessee was having substantial interest free funds at its disposal amounting to Rs. 1034.52 crores as against total investment of Rs. 47.45 crores made by the assessee during the year under consideration. In support of this, he drew our attention to page 6 of ld. CIT(A)’s order.

6. We have heard the rival contentions and perused the material on record. With respect to first ground of appeal raised by the Department, we find no infirmity in the order of ld. CIT(A) who after consideration of all the facts in the instant case, the judicial precedents on the subject and the order of his predecessor CIT(A) gave substantial relief to the assessee and restricted the disallowance to 8.5 lakhs u/s. 14A of the Act. The ld. CIT(A) in our view correctly observed that out of total expenditure of Rs. 314 crores, a sum of Rs. 253.50 crores was incurred for specified purpose and the same had to be excluded for the purpose of disallowance of interest expenditure u/s. 14A of the Act. Further, the ld. CIT(A) also correctly observed that since the assessee had offered an amount of Rs. 59.58 crores as interest income, such interest income was also required to be reduced from the remaining interest expenditure of Rs. 60.99 crores. Accordingly, only the net expenditure of Rs. 1.41 crores was considered for the purpose of making disallowance u/s. 14A of the Act. Further, the ld. CIT(A) only considered investments in KOG Health Food Pvt. Ltd. for Rs. 16.21 crores since this was only investments in shares of such company which had yielded exempt income during the year under consideration. Accordingly, the ld. CIT(A) had restricted the disallowance u/s. 14A to Rs. 8,50,235/-. On consideration of the complete facts, we find no infirmity in the order of ld. CIT(A) in restricting the disallowance to Rs. 8,50,235/- during the year under consideration. Accordingly, we find no infirmity in the order with respect to the relief provided u/s. 14A and the order of the ld. CIT(A) does not call for any interference. In view of the above observations, ground no. 1 of the assessee’s appeal is allowed.

6.1 With respect to ground no. 2, it is well settled law that book profit u/s. 115JB cannot be computed by including disallowance made u/s. 14A of the Act. Recently the Supreme Court of India in the case of Atria Power Corporation Ltd. [2022] 142 taxmann.com 413 (SC) dismissed the SLP of the Department against High Court ruling that disallowance made under section 14A could not be added in assessee-company’s income for purpose of computation of income under section 115JB of the Act. The Karnataka High Court in the case of J.J. Glastronics (P.) Ltd. [2022] 139 taxmann.com 375 (Karnataka) held that amounts disallowed under section 14A could not be added to net profit while computing book profit under section 115JB of the Act. The ITAT Ahmedabad in the case of Vishal Export Overseas Ltd [2022] 143 taxmann.com 305 (Ahmedabad – Trib.) held that disallowances made under section 14A read with rule 8D could not be applied to provision of section 115JB of the Act. The Delhi ITAT in the case of Vireet Investment (P.) Ltd [2017] 82 taxmann.com 415 (Delhi – Trib.) (SB) held that computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D. In view of the consistent position of law on this issue, we are hereby dismissing Department’s appeal with respect to ground number 2.

7. In the combined result, the appeal of the Department is dismissed

Order pronounced in the open court on 21-03-2023