Book profit to be increased by Expenses debited to P&L w.r.t. exempt income, not Disallowance u/s 14A: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that while computing book profits under Section 115JB of the Income Tax Act (MAT provisions), only the actual expenditure debited to the profit and loss (P&L) account in relation to exempt income can be added back. The disallowance determined under Section 14A read with Rule 8D of the Income Tax Rules cannot be considered for such adjustments.

The assessee, engaged in manufacturing industrial gases and holding substantial investments in shares and mutual funds, had earned exempt dividend income of ₹72.84 lakh. It voluntarily disallowed ₹17.21 lakh as expenditure related to earning exempt income. However, the Assessing Officer (AO) rejected this computation and, applying Rule 8D, enhanced the disallowance to ₹72.84 lakh (restricted to exempt income). Further, the AO increased book profits under section 115JB by adding ₹55.63 lakh on account of this disallowance.

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On appeal, the CIT(A) provided partial relief but upheld the application of Rule 8D, holding that once disallowance is attracted, the AO must follow the prescribed mechanism. The assessee challenged the order before the Tribunal.

The tribunal held that Rule 8D cannot be automatically invoked. The AO must record objective dissatisfaction with the correctness of the assessee’s computation, having regard to its accounts. In this case, the assessee had adopted a scientific method by considering salaries and administrative expenses, but the AO disregarded it without proper reasoning. The Tribunal restored the assessee’s voluntary disallowance of ₹17.21 lakh.

On book profit computation under section 115JB, the ITAT emphasized that the MAT provisions are a self-contained code. The adjustments are limited to those specified in Explanation 1 to section 115JB(2). Section 14A disallowance, being a deeming fiction, cannot be superimposed on another deeming fiction under MAT.

The Tribunal relied on the Special Bench ruling in Vireet Investment (P.) Ltd. and Supreme Court precedents (Maxopp Investment and Godrej & Boyce), which reaffirmed the requirement for proper satisfaction before invoking Rule 8D.

The tribunal bench of Saktijit Dey, Vice President and Girish Agrawal, Accountant Member allowed the appeal, directing that book profit should only be increased by ₹17.21 lakh, the actual expenditure debited to P&L and not by any disallowance computed under section 14A.

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