Case Law : DCIT Vs. Viraj Profiles Ltd. (ITAT Mumbai)

LEGAL CORNER – January 2016 – CASE LAW 2

Topic:

Whether or not Disallowance u/s 14A while computing book profit u/s 115JB permitted, covered in explanation to Sec.115JB (2)?

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 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.
• The assessing officer (AO) during the proceedings, noticed that the assessee has investments in equity shares of various companies totaling  to Rs.51,03,59,701/- as on 31-03-2008. The assesse 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 to the same, the assessee submitted that the company has not earned any exempt income during the relevant assessment year and without prejudice to the above contentions, the assessee submitted the working of disallowance u/s 14A.
• The AO rejected the contentions of the assessee and held that since the assessee has blocked its funds in investments not yielding any income or yielding exempt income, the invocation of Section 14A is proper.
• 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).

Appeal by assesse to Commissioner of Income-Tax (Appeals) – CIT (A):

• The assessee submitted that no exempt income has been earned during the assessment year and that no expenditure has been incurred by the assessee in relation to exempt income. Hence, 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 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.
•  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.
• 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.

AO then made an appeal Income Tax Appellate Tribunal (ITAT ) against the orders of CIT(A).

Decision by ITAT:

• It was observed that the Section 115JB shall be applicable notwithstanding anything contained in any other provision of the Act and shall have an 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).
• 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, which is against the contentions raised by assesse.
• It was held 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).

The orders of the CIT (A) was set aside and the orders of the AO was restored. Accordingly, the appeal of AO allowed.