Disallowance made u/s. 14A of the Income-tax Act, 1961 (“the Act”) could not be added to book profits of the assessee u/s. 115JB of the Act.

The assessee is a company engaged in financing industrial units in the State of Karnataka. The assessee filed its ROI for A.Y. 2009-10 on 30.09.2011 declaring the book profit at Rs. 13,60,88,457 under the provisions of section 115JB of the Act. The ROI filed by the assessee was selected for scrutiny and the AO has completed the assessment u/s. 143(3) of the Act and determined the book profit at Rs. 30,01,07,991 u/s. 115JB of the Act. The AO has made disallowance u/s. 14A of the Act r.w. Rule 8D of the Income-tax Rules, 1962 (“the Rules”) and added the same while computing book profit u/s. 115JB of the Act.

In further appeal by the assessee, the CIT(A) and the Tribunal has given partial relief to the assessee.

The assessee has raised following substantial question of law before the Hon’ble Karnataka High Court:

“Whether the tribunal is justified in law in holding that the indirect expenditure disallowed under section 14Aread with rule 8D(iii) of Rs. 24,64,632/- in computing the total income under normal provisions of the Act, is to be added to the net profit in computation of book profit for MAT purposes under section 115JB and there by importing the provision of section 14A read with rule 8D into the MAT provisions on the facts and circumstances of the case?”

The Hon’ble Karnataka High Court has held that section 115JB(1) of the Act provides the mode of computation of the total income of the assessee and tax payable on the assessee u/s. 115JB of the Act. Section 115JB(5) of the Act provides that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee being a company mentioned in this section. Therefore, any expenditure relatable to earning of income exempt u/s. 10(2A) and 10(35) of the Act is disallowed u/s. 14A of the Act and is added back to book profit under clause (f) of section 115JB of the Act, the same would amount to doing violence with the statutory provision viz., sub-sections (1) and (5) of section 115JB of the Act. It is also pertinent to mention here that the amounts mentioned in clauses (a) to (i) of Explanation to section 115JB(2) of the Act are debited to the statement of profit and loss account, then only the provisions of section 115JB of the Act would apply. The disallowance u/s. 14A of the Act is a notional disallowance and therefore, by taking recourse to section 14A of the Act, the amount cannot be added back to book profit under clause (f) of section 115JB of the Act.

It is also pertinent to mention here that similar view, which has been taken by this court in CIT Vs. Gokaldas Images (P.) Ltd. [2020] 429 ITR 526 (Kar.) was also taken by the Hon’ble Bombay High Court in the case of CIT Vs. Bengal Finance & Investments (P.) Ltd. [I.T.A. No. 337 of 2013, dated 10.02.2015]. It is pertinent to note that in the case of Jt.CIT Vs. Rolta India Ltd [2011] 330 ITR 470 (SC), the Hon’ble Supreme Court was dealing with the issue of changeability of interest u/s. 234B and 234C of the Act on failure to pay advance tax in respect of tax payable u/s. 115JA/115JB of the Act and therefore, the aforesaid decision has no impact on the issue involved in this appeal. Similarly, in Maxopp Investment Ltd. Vs. CIT [2018] 402 ITR 640 (SC), the Hon’ble Supreme Court has dealt with section 14A of the Act and has not dealt with section 115JB of the Act. Therefore, the aforesaid decision also does not apply to the fact situation of the case.

In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered in favour of the assessee and against the revenue.