Case Law Details
Brief of the Case
ITAT Mumbai held In the case of DCIT vs. Viraj Profiles Ltd. that section 14A provides that it mandates disallowance of expenditure ‘in relation’ to the income which does not form part of the total income while clause (f) in explanation1 to Section 115JB (2) mandates disallowance of expenditure ‘relatable’ to the income to which Section 10 (other than Section 10(38)) or Section 11 or Section 12 applies. The close perusal of the both the above provisions reveals that more or less similar language is used in both the afore-stated provisions. Further the dividend income is declared on the share investment which is exempt u/s 10(33) (not Section 10(38)). Accordingly, expenditure relatable to the exempt income to be disallowed provided the same is debited to Profit and Loss Account.
Facts of the Case
The assessee company is engaged in the business of manufacturing of S.S. Billets, Angles, Flat Bars, Channels, S.S.Wire Rods etc. During the year under consideration , the assessee company derived income of Rs.28,19,03,964/- from Business & Profession after claiming deduction of Rs.1,20,36,43,184/- u/s 10B and Rs.67,03,000/- u/s 80G.
During the course of the assessment proceedings, the assessing officer noticed that the assessee company has investments in equity shares of various companies totaling to Rs.51,03,59,701/- as on 31-03-2008. The assessee company was asked to explain as to why disallowance u/s 14A read with Rule 8D of Income Tax Rules, 1962 should not be invoked in respect of the exempt income. In response, the assessee company submitted that the assessee company has not earned any exempt income during the relevant assessment year and with prejudice to the above contentions, the assessee company submitted the working of disallowance u/s 14A. The AO rejected the contentions of the assessee company and held that since the assessee company has blocked its funds in investments not yielding any income or yielding exempt income, the invocation of Section 14A is proper.
The AO relied upon the decision of Special Bench, ITAT; Mumbai in ITA NO 8057/Mum/03 dated 20.10.2008 in the case of M/s Daga Capital Management Private Limited and held that both direct and indirect expenses are disallowable u/s 14A which have any relation with the income not chargeable to tax under Act. The AO also relied upon the decision of Hon’ble Bombay High Court in Godrej & Boyce Manufacturing Company Limited v. DCIT (ITA No. 626 of 2010 & WP no. 758 of 2010(Bom.)) and made disallowance of Rs.73,07,018/- u/s 14A read with Rule 8D(2)(ii) (Rs.58,87,196/-) and 8D(2)(iii)(Rs.14,19,892/-) of Income Tax Rules, 1962.
Similarly for computing book profits u/s 115JB , the AO added Rs.73,07,018/-being disallowance u/s 14A read with Rule 8D of Income Tax Rules, 1962 being expenditure in relation to the earning of exempt income to the book profit in accordance with clause (f) to explanation 1 to Section 115JB(2).
Contention of the Assessee
The ld counsel of the assessee relied upon the orders of the CIT (A) granting relief to the assessee company. He relied upon the Mumbai Tribunal decision in the IAT No. 69 & 70/Mum/2009 in the case of
Reliance Industrial Infrastructure Limited v. Addl. CIT to contend that no addition can be made to book profit computed u/s 115JB except as provided under explanation 1 to Section 115JB(2). The assessee company reiterated its submissions as made before the authorities below and submitted that that disallowance u/s 14A cannot be added while computing the book profit u/s 115JB as the provisions of Section14A are limited for the purpose of computation of income under Chapter IV of the Act and the same cannot be extended to the MAT provisions u/s 115JB which is a self contained code.
The assessee company also submitted that no exempt income has been earned during the assessment year. The asssessee company submitted that no expenditure has been incurred by the assessee company in relation to exempt income. The assessee company submitted that since no amount has been debited to the Profit and Loss Account as referred to in clause (f) to Explanation (1) to Section 115JB (2), the disallowance made by the AO by invoking the provision of Section 14A read with Rule 8D of Income Tax Rules, 1962 amounting to Rs.73,07,018/- , the profit as per profit and loss account cannot be increased for the purpose of arriving at the book profit. The assessee company relied upon the following judgments: a) Apollo Tyres Limited v. CIT 255 ITR 273(SC), b) CIT v. HCL Connect Systems and Services Limited 305 ITR 409 (SC), c) ACIT v. Spray Engineering devices Limited (2012) 53 SOT 70 (Chd. Trib.)
Contention of the Revenue
The ld counsel of the revenue submitted that the explanation 1(f) to Section 115JB(2) provides for disallowance of the expenditure relatable to any income to which Section10 ( other than provisions contained in clause (38) thereof) or section11 or section 12 apply and submitted that AO has rightly added Rs.73,07,018/- u/s 14A read with Section 115JB with regard to the provisions of Section 115JB(2) read with explanation 1 read with clause f of which requires any expenditure in relation to the exempt income also to be taken into consideration while computing the book profit u/s 115JB(2) .
He further submitted that it is not necessary that there is any exempt income actually earned or received by the assessee company. The assessee company having made investment in shares to the tune of Rs. 51,03,59,701/- as on 31-03-2008 , the said investment is capable of producing exempt income by way of dividend which is exempt u/s 10(33)(not Section 10(38) as stipulated in clause (f) to explanation1 to section115JB(2) .The Ld DR also stated that the CIT(A) has confirmed the action of the AO in computing disallowance of Rs. 73,07,018- u/s 14A read with Rule 8D of Income Tax Rules , 1962 , as mandated by the statute from the assessment year 2008-09 and onwards while the same is not accepted by the CIT(A) to be added while computing book profit u/s 115JB (2). The Ld. DR relied upon the following decisions to contend that the disallowance made u/s 14A read with Rule 8D of Income Tax Rules, 1962 can be added to compute Book profits u/s 115JB(2) and relied upon following decisions:- 1. ITO v. RBK Share Broking Pvt. Ltd. (2013) 37 taxmann.com 128(Mum. Trib.), 2. CIT v. JSW Energy Ltd. (2015) 60 taxmann.com 303(Bom.HC), 3. Dabur India Ltd. v. ACIT (2013) 37 taxmann.com 289(Mum. Trib.) 4. Godrej Consumer Products Limited v. Addl. CIT (2014) 48 taxmann.com 293 (Mum.Trib.).
Held by CIT (A)
The CIT (A) upheld the disallowance of Rs.73,07,018/- made by the AO u/s 14A by holding that the phrase “income which does not form part of total income” used in Section 14A is not limited to the cases where some income has actually been received and it will also apply to cases, where income is not included in the total income , whether received or not by relying on the decision of Hon’ble Delhi Tribunal in Aquarius Travels Pvt. Ltd. v. ITO (2008) 21 (II) ITCL 521 (Del-Trib.) and also relying on the decision of Delhi Tribunal In Cheminvest Ltd. v. ITO (2009) 121 ITD 318 that whenever any expenditure is incurred in relation to income which does not form part of total income, it has to suffer disallowance irrespective whether any income is earned or not.
The CIT (A) held that the assessee company has claimed interest expenditure and it has not been able to demonstrate that the investment has been made solely out of cash flows generated from operations by way of profit, it cannot claim that no interest on borrowings is disallowable. Thus, the CIT (A) confirmed the action of the AO in computing disallowance u/s 14A read with Rule 8D of Income Tax Rules , 1962 , as mandated by the statute from the assessment year 2008-09 and onwards and hence, the CIT(A) upheld the disallowance of Rs.73,07,018/- u/s 14A read with Rule 8D of Income Tax Rules, 1962.
With Respect to the re-computation of the book profit u/s 115JB by the AO by adding the sum of Rs.73,07,018/- disallowed u/s 14A, The CIT(A) allowed the appeal of the assessee company by holding that as observed in Apollo Tyres Limited v. CIT 255 ITR 273(SC) by Apex court that where Profit and Loss Account has been prepared in accordance with Part II and III of Schedule VI to the Companies Act,1956 and which has been scrutinized and certified by the statutory auditors and relevant authorities, the AO has no power to scrutinize the net profit and loss account except to the extent provided in the explanation to Section 115JB . The CIT (A) also held that the same view has been reiterated by Hon’ble Bombay High Court in Kinetic Motor Co. Ltd. v. DCIT wherein it has been held that there is no scope for the AO to make adjustment to Book Profits beyond what was authorized by the definition in Explanation1 to Section 115JB..
He further submitted that the term book profit has been defined as the net profit as per Profit and Loss Account as adjusted in accordance with the statutory additions and statutory deductions as provided. The AO cannot go beyond the net profit as shown in the Profit and Loss Account except to the extent provided in the explanation to Section 115JB and hence the CIT (A) held that the AO while computing Book Profit u/s 115JB cannot make disallowance u/s 14A as such disallowances are not covered by the exceptions as provided in the explanation to Section115JB.
Held by ITAT
We have observed that Section 115JB starts with non-obstante clause ‘Notwithstanding anything contained in any other provision in this act…” meaning thereby that the Section 115JB shall be applicable notwithstanding anything contained in any other provision of the Act and shall have over-riding effect upon other provisions of the Act. The Section 115JB stipulates payment of Minimum Alternate tax based upon the book profit computed as per provisions of Section 115JB (2). Book Profit shall be computed as per Section 115JB (2) which stipulate that Book Profit means net profit as shown in Profit and Loss Account prepared for financial year in accordance with Part II and III of Schedule VI to the Companies Act,1956 , also complying with other conditions as stipulated in Section 115JB(2) . Such book profit has to be increased by item Nos. (a) to (k) of the said Explanation 1 to Section 115JB of the Act if they are debited to the Profit and Loss Account and from such profit item Nos. (i) to (viii) of the Explanation are to be reduced. The figure arrived at after the above exercise is the book profit of the assessee for the relevant previous years. The explanation 1 clause (f) to Section 115JB (2) stipulate that amount of expenditure relatable to any exempt income, other than Section 10(38), is liable to be added back to net profit shown in Profit and Loss Account if the amount referred to therein is debited to Profit and Loss Account.
Further perusal of Section 14A of the Act provides that it mandates disallowance of expenditure ‘in relation’ to the income which does not form part of the total income under the Act while clause (f) in explanation1 to Section 115JB (2) of the Act mandates disallowance of expenditure ‘relatable’ to the income to which Section 10 (other than Section 10(38) of the Act) or Section 11 or Section 12 of the Act applies. The close perusal of the both the above provisions reveals that more or less similar language is used in both the afore-stated provisions. The dividend income is declared on the share investment which is exempt u/s 10(33) (not Section 10(38)). We also note that the clause (f) to explanation 1 to Section 115JB (2) requires expenditure relatable to the exempt income to be disallowed provided the same is debited to Profit and Loss Account while Section14A(2) mandates that if the AO is not satisfied with the correctness of the claim of the assessee with regard to the expenditure incurred by the assessee in relation to the income which does not form part of the total income , then disallowance shall be computed in accordance with the prescribed method. Rule 8D of Income Tax Rules, 1962 prescribes the method for computing disallowance of expenditure in relation to earning of exempt income. The said Rule 8D of Income Tax Act, 1961 is a machinery provision to compute disallowance of expenditure u/s 14 in relation to the income which does not form part of the total income and is held to be applicable w.e.f. assessment year 2008-09 as held by Hon’ble Bombay High Court in Godrej and Boyce Manufacturing Limited ITA No. 626 of 2010 & WP no. 758 of 2010(Bom.) decision. The impugned assessment year under appeal in present case is also assessment year 2008-09 and hence Section 14A read with Rule 8D of Income Tax Rules ,1962 is applicable.
The assessee company has relied upon on the decision of Mumbai Tribunal in Reliance Industrial Infrastructure Ltd. v. Addl. CIT in ITA No 69 & 70/ Mum/2009 whereby the Mumbai Tribunal held that reasonable disallowance it to be made u/s 14A of the Act and Section 14A of the Act cannot be imported into clause (f) of the explanation 1 to Section 115JB of the Act to make disallowance u/s 115JB of the Act as the said appeal pertains to the assessment year 2005-06 and 2006-07 which are prior to assessment year 2008-09 , while the instant case under appeal pertains to assessment year 2008-09 from which assessment year onwards, Rule 8D of Income Tax Rules, 1962 is held to be applicable by Hon’ble Bombay High Court in the judgment in the case of Godrej and Boyce Manufacturing Company Limited. We also note that decision in Reliance Industrial Infrastructure Limited is a prior decision than the decisions rendered by Mumbai Tribunal in ITO v. RBK Share Broking Pvt. Ltd. (2013) 37 taxmann.com 128(Mum. Trib.), Godrej Consumer Products Limited v. Addl. CIT (2014) 48 taxmann.com 293 (Mum.Trib.) and Dabur India Ltd v. ACIT (2013) 37 taxmann.com 289(Mum. Trib.)
Similarly, the assessee company has relied upon the decision of Appolo Tyres Limited 255 ITR 273(SC). The Hon’ble Supreme Court in above decision has held that the AO cannot tinker with the profit and loss prepared by the assessee company in accordance with the Provisions of The Companies Act,1956 and which are certified by the statutory auditors and approved by the Company in Annual General Meeting and scrutinised by the Registrar of Companie to be so maintained in accordance with the Provisions of the Companies Act, 1956 . Perusal of Section 115JB of the Act will reveal that the tinkering with the Profit and Loss Account as prepared in accordance with the Provisions of The Companies Act , 1956 is permitted to the extent provided in explanation 1 to Section 115JB(2) of the Act. We also note that clause (f) to explanation 1 to Section 115JB(2) of the Act permit the Book profit to be increased with the expenditure relatable to any income to which Section 10 (other than Section 10(38) of the Act), Section 11 or Section12 of the Act applies and hence the above decision in Apollo Tyres Limited in 255 ITR 273(SC) is not applicable to the facts of the case.
The assessee company has relied upon the decision of Hon’ble Supreme Court in HCL Connect Systems and Services Limited 305 ITR 409(SC). Infact this judgment of Hon’ble Supreme Court instead of advancing the case of the assessee company support the proposition adopted by us that adjustment to book profit as per explanation 1 to Section 115JB(2) of the Act is permitted.
The assessee company has raised the contention that it has not earned any exempt income during the assessment year and hence no disallowance can be made of expenditure relatable to earning of income to which section 10(other than Section 10(38) of the Act) or Section11 or Section 12 of the Act applies in the absence of receipt of any such exempt income. We find that this argument of the assessee company in view of the following reasons: The Revenue has issued circular no 5/2014 dated 11-2-2014 that even in case of absence of exempt income, Section 14A disallowance shall be made in case the asssessee has made investments which are capable of yielding exempt income even though there might not be an actual receipt of exempt income.
We are also guided by the decision of Special Bench, Delhi Tribunal in the case of Cheminvest Limited (2009) 121 ITD 318(SB) in which the question, whether disallowance under section 14A of the Income-tax Act can be made in a year in which no exempt income has been earned or received by the assessee, is answered affirmatively against the assessee and in favour of the revenue.”
There is no contrary decision of jurisdictional Hon’ble High Court or the Hon’ble Apex court is pointed out by the assessee company before us to advance its proposition that no disallowance of expenditure is called for u/s 14A of the Act in case no exempt income is earned or received during the assessment year despite the assessee company making investments which are capable of yielding exempt income such as Dividend etc.(Ref. Hon’ble Bombay High Court in Thane Electricity Supply Limited in (1994) 206 ITR 727(Bom. HC)).
Hon’ble Supreme Court in the case of CIT v. Rajendra Prasad Moody (1978) 115 ITR 519(SC) has discussed in detail about the allowability of expenditure in case the there is no receipt of income which clarifies to a greater extent the issue in dispute in this appeal. It was held that we fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of s. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.
In view of our foregoing discussion, we find no infirmity with the orders of the AO and we hold that the AO has rightly disallowed the expenditure of Rs.73,07,018/- by invoking the provisions of Section 14A read with Rule 8D of Income Tax Rules, 1962 for computing book profit u/s 115JB(2) read with clause (f) to explanation 1 to clause 115JB(2). We, therefore, set aside the orders of the CIT (A) and restore the orders of the AO. We order accordingly.
Accordingly appeal of revenue allowed.
