No 115JB Adjustment for Section 14A: ITAT Upholds CIT(A)'s ₹71 Lakh Cap [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT), held that no adjustment under Section 115JB relating to disallowance under Section 14A of the IncomeTax Act, 1961 can be made while computing book profit, and upheld the restriction of disallowance to the extent of income exempt under Section 10(2A).

Rajesh Estates and Nirman Pvt. Ltd. was the respondent in an appeal filed by the Joint Commissioner of Income Tax, Circle 2.3.1, Mumbai. The dispute arose during assessment proceedings for Assessment Year 2017-18, when the Assessing Officer (AO) invoked Section 14A read with Rule 8D of the Income Tax Rules, 1962 to disallow expenditure relating to investments in a partnership firm and a private limited company.

The AO computed a disallowance of ₹2,97,08,765 and further made a corresponding adjustment while computing book profit under Section 115JB. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to ₹71,04,282, being the share of loss from the partnership firm excluded from total income under Section 10(2A), and deleted the adjustment under Section 115JB. Aggrieved, the Revenue preferred an appeal before the Tribunal.

The Revenue, represented by Annavaran Kosuri, argued that the CIT(A) erred in restricting the disallowance, and maintained that the formula prescribed under Rule 8D mandated disallowance at one percent of the average investments irrespective of exempt income earned. It was further contended that the AO correctly added back the disallowance while computing book profit under Section 115JB, since the expenditure related to income not forming part of total income.

The bench comprising Judicial Member, Amit Shukla and Accountant Member, Vikram Singh Yadav upheld the order of the CIT(A). The Tribunal reasoned that while Section 14A is applicable even where the investment is in a partnership firm whose share of income does not form part of total income under Section 10(2A), the disallowance cannot exceed such income excluded from taxation. The restriction of disallowance to ₹71,04,282 was therefore held justified since the amount represented the share of loss from the partnership firm.

On the issue relating to Section 115JB, the Tribunal followed the Special Bench ruling in PCIT v. Vireet Investment Pvt. Ltd. (2017), which held that disallowance computed under Rule 8D cannot be imported into clause (f) of Explanation 1 to Section 115JB. Accordingly, the book profit adjustment was deleted.

Finding no error in the reasoning adopted by the appellate authority, the Tribunal dismissed the Revenue’s appeal.

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