Disallowance u/s 14A Cannot Be Added Back While Computing Book Profits u/s 115JB of Income Tax: ITAT [Read Order]

Sky Ama Infra Private Limited (assessee) received exempt dividend income of Rs. 8.63 crore from equity investments in M/s Fastway Transmissions Pvt. Ltd. (FTPL). The assessee did not offer any disallowance under Section 14A and claimed no expenses were incurred to earn the dividend income.

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The Assessing Officer (AO) rejected this plea and computed indirect expense disallowance under Rule 8D(2)(iii) at 0.5% of the average value of investments, resulting in a disallowance of Rs. 79.21 lakh.

This amount was added back both while computing income under normal provisions and book profits for Minimum Alternate Tax (MAT) under Section 115JB. The assessee ultimately paid taxes under Section 115JB of the Income Tax Act.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) confirmed the action of the AO. Aggrieved by the CIT(A)’s order, the assessee appealed to the ITAT.

The assessee argued that no expenses were incurred for earning the exempt income, and thus no disallowance under Section 14A was warranted. The assessee incurred employee benefit expenses and administrative costs without maintaining separate accounts for the investment portfolio.

The two-member bench comprising Rajpal Yadav (Vice President) and Manoj Kumar Aggarwal (Accountant Member) observed that the AO correctly applied Rule 8D for disallowance under normal provisions, as the assessee failed to prove no expenses were incurred.

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The tribunal observed that for book profits under Section 115JB, the addition was not justified, following the Special Bench decision in Vireet Investments Pvt. Ltd. It noted that it was inconceivable no efforts were made to manage the investments, and in the absence of demonstrable evidence, Rule 8D applied for computing the disallowance.

The Tribunal confirmed the disallowance for normal income computation but deleted it for MAT purposes. It directed the AO to re-compute the income accordingly. The appeal of the assessee was partly allowed.

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