Incorrect adding of additional Depreciation to Computation of Book Profit: ITAT directs AO to delete addition u/s 115JB of Income Tax Act [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) directed the Assessing Officer ( AO ) to delete the addition under Section 115JB of the Income Tax Act, 1961, citing incorrect inclusion of additional depreciation in the computation of book profit.

The Assessment Year ( AY ) 2016-17, the company filed an income tax return on November 23, 2016, declaring a total income of Rs. 1,43,67,990/- under the regular provisions of the Income Tax Act and Rs. 5,96,12,251/- under section 115JB of the Income Tax Act, 1961, which pertains to Minimum Alternate Tax (MAT). The case underwent scrutiny under the Computer Assisted Scrutiny Selection ( CASS ) system, and the necessary notices were duly served to the assessee.

The Assessing Officer ( AO ) concluded the assessment by making two additions: Rs. 6,21,921/- as disallowance under section 14A read with Rule 8D(2)(iii), of the Income Tax Act, 1961, and Rs. 4,00,000/- as depreciation on assets sold, which the assessee had claimed as a deduction. These additions were also included in the computation of book profit under section 115JB of the Income Tax Act, 1961, which deals with MAT. Dissatisfied with the AO’s decision, the assessee appealed to the Learned Commissioner of Income Tax ( Appeals ) [Ld. CIT (A)], who upheld the AO’s order. Consequently, the assessee has now appealed to the Tribunal, seeking redress.

The counsel for the assessee Parveen Lokwani argued that the assessee has entirely funded the investments from its own resources, thus incurring no direct expenses in generating such income. Furthermore, the AR contended that the investments were made by the assessee in the capacity of an investor, rather than as a daily trader, and therefore, any expenses related to such investments are directly adjusted in the cost of investment.

The counsel further asserted that the Assessing Officer ( AO ) erred in applying section 14A, as the assessee does not maintain separate books for investment activities, especially since transactions involving the purchase and sale of shares are conducted digitally through a Demat account. The counsel further argued that since the dividend income has been recorded net of taxes, brokerage, and other expenses upon receipt, no disallowance is justified under Rule 8D(2)(iii) of the Income Tax Act, 1961,

Furthermore directed attention to the financial statements, arguing that the expenses incurred by the assessee are related to its core business activities, not investment activities. Consequently, the counsel maintained that no disallowance should be made under Rule 8D (2) (Iii) of the Income Tax Act, 1961, on this basis as well.

The counsel for the revenue Manoj Kumar Sinha argued that the assessee holds a substantial amount of investments in equity shares and mutual funds, generating dividend income. The counsel pointed out that the assessee did not voluntarily set aside any amount for indirect expenses related to these investments. Consequently, the counsel contended that the Assessing Officer ( AO ) appropriately applied Rule 8D (2)(iii) of the Income Tax Act, 1961, and made the necessary disallowance.

The bench addressed the issue regarding the disallowance of depreciation. The contention raised by the assessee primarily focuses on the inclusion of the disallowed amount of depreciation in the computation of book profits under Section 115JB of the Income Tax Act, 1961

The bench further observed that the AO erred in adding the additional depreciation, as per the provisions of the Income Tax Act, to the book profits computed under Section 115JB of the Income Tax Act, 1961.

The two member bench of the tribunal comprising M.S. Pathmavathy ( Accountant member ) and Vikas Aswathy ( Judicial member ) uphold the contention raised by the assessee, and we instruct the AO to eliminate the addition made to the book profit computed under Section 115JB of the Income Tax Act, 1961, In the result, an appeal filed by the assessee was  partly allowed.

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