CA Jyoti Gupta has analyzed the recent judgement of the ITAT Special Bench in ACIT Vs. Vireet Investment P. Ltd on the controversial issue whether the disallowance u/s 14A and Rule 8D is required to be adjusted while computing the book profits u/s 115JB and explained its nuances in the light of the judgement of the Bombay High Court in CIT vs. JSW Energy Ltd 60 taxmann.com 303 and other verdicts
Recently, in case of ACIT Vs. Vireet Investment P. Ltd., ITA no. 502/Del/2012 and C.O. No. 68/Del/2014, special bench was formed to discuss the following 2 convoluting issues:
– Disallowance u/s 14A, would also adjust the profits computed u/s 115JB.
– Investments which did not yielded exempt income, are to be considered in calculating disallowance u/s 14A read with rule 8D(iii).
The issue of ‘whether disallowance under section 14A of the Act, would impact the profits computed u/s 115JB is a litigative issue altogether’. There are differing views of various tribunal on this issue, some holding that 14A disallowance should not be made in the profit as per Sec.115JB, some completely opposite holding that disallowance u/s 14A ought to be made under clause ‘f’ of explanation 1 to Sec.115JB.
Recently Bombay High Court in case of, CIT vs. JSW Energy Ltd.,  60 taxmann.com 303 (Bombay), resolved the issue and held the case in favor of assessee. However, in the said case, revenue has filed a special leave petition, which has been admitted by the Supreme Court. Following was laid down by the High court:
“9. However, the tribunal also noted that by way of additional ground the assessee challenged disallowance under section 14A in calculation of book profit under section 115JB. The tribunal therefore heard both sides on additional ground and in paragraph 18 held that once the accounts are prepared in accordance with Indian Companies Act, 1956, they have been approved by the Registrar of Companies, then, the assessing officer must take those accounts into consideration. If the assessee has not debited any actual expenditure relating to the earning of the exempt income, therefore, the provisions of section 14A cannot be imported into the computation of book profit under section 115JB of the Income Tax Act, 1961. Therefore, even clause (f) of Explanation to section 115JB which refers to those amounts which are debited to the Profit and Loss account, alone can be added to the book profit, cannot apply. Then, the tribunal referred to the order passed in the case of Essar Teleholdings Ltd. (supra).”
Following arguments were put forth by the respondent and appellant:
Arguments of Assessee
It was argued by the assessee that, in case of CIT Vs. Walford Share & Stock Brokers (326 ITR 1, SC) held that there must be proximate relationship of expenditure with the exempt income for the purpose of making the disallowance. This decision was also followed by Bombay High Court in case of Godrej & Boyace Mfg. Co. Ltd. Vs. CIT 328 ITR 81. Relying on these decisions, it was stated that, Sec.115JB, would cover only the direct expenses which are actually been debited to P/L account and not indirect or expenses which are deemed to be incurred.
Further reliance was also placed on the case of Maxopp Investment Ltd., 347 ITR 272, wherein Delhi High Court held that, no disallowance could be made under Sec.14A, where no expenditure had ‘actually’ been incurred in relation to exempt income.
It was stated that, the scope of Sec.14A and Sec.115JB of the act are entirely different. Sec.14A takes within its sweep both direct and indirect expenses having proximate connection with earning of exempt income. However under clause (f) of explanation 1 to Sec.115JB, only those expenses which are debited to profit and loss account and are relatable to earning of exempt income are added back.
Arguments of Department
On the other side, the department argued that, the provisions of Sec.14A would apply both to normal profits as well as book profits, otherwise the matching concept of accountancy would get disturbed and the assessee would gain double benefit, as the income would be exempt from tax, further the expenses incurred to earn the same would be set off against the taxable income. Reliance was also placed on the decision of Goetze India Ltd., 361 ITR 505
It was further agrued that the terms, ‘relatable to’ in clause (f) in Sec.115JB is in same purport and objective as is word ‘in relation to’ used in Sec.14A.
The special bench placed its reliance on the decision of Hon’ble Delhi High Court in the case of Pr. CIT V. Bhushan Steel Ltd.: ITA No.593/2015 wherein it upheld the decision of the Tribunal in holding that disallowance under section 14A read with Rule 8D cannot be added while computing book profits as per section 115JB as Explanation to that section does not specifically mentions section 14A of the Income Tax Act, 1961. The Review Petition filed by Revenue has been dismissed by High Court vide order dated. 03.03.2017.
Accordingly, decision was rendered by the Special Bench in favor of assessee, holding that the computation u/s 115 JB is to be made without resorting to the provisions of Sec.14A.
Another issue for consideration was, whether the investments which did not yielded any exempt income during the year under consideration, are to includible in the investments as defined u/s 14A read with rule 8D.
In this regard, assessee placed its reliance on the case of Cheminvest Delhi High Court and Holcium India P. Ltd. Delhi High Court. However the department argued that the decision in case of Cheminvest Delhi High Court is not in lines with the case of Rajednra Prasad Moody 115 ITR 519 (SC), wherein it was held that, an expenditure to be allowable need not be profitable, meaning thereby that merely because there is no exempt income, expenditure relatable to unearned income cannot be disallowed. However, the special bench hold the decision in favor of assessee, holding that, the investments which did not yielded exempt income during the year under consideration, cannot be considered for making the disallowance u/s 14A read with Rule 8D(iii).
This decision was in lines with the judgment of Delhi High Court in case of ACB India Ltd. Vs. ACIT,  62 taxmann.com 71 (Delhi), wherein it was held that, for the calculation of disallowance under rule 8D(iii), total investments should not be considered, i.e. only those investments should be considered which yielded exempt income during the year under consideration.