Section 14A Disallowance Capped at Exempt Income; No Book Profit Adjustment Under Section 115JB: ITAT Mumbai
Case Overview
The Mumbai Bench of the Income Tax Appellate Tribunal addressed two Revenue appeals arising from Assessment Years 2017-18 and 2018-19 in the matter of ACIT Vs Triton Trading Company Private Limited (ITAT Mumbai). Both appeals revolved around identical legal issues — the quantum of disallowance permissible under Section 14A read with Rule 8D(2)(ii) of the Income Tax Rules, 1962, and whether such disallowance could be incorporated into the book profit computation under Section 115JB of the Income Tax Act, 1961. The Tribunal dismissed both Revenue appeals, affirming the relief granted by the CIT(A).
Background and Assessment History
Return Filing and Assessment
For Assessment Year 2017-18, the assessee filed its original return of income on 01.11.2017, declaring total income as Nil under the normal provisions of the Act and a book profit of Rs. 91,95,215/- under Section 115JB. A revised return was subsequently filed reporting a total loss of Rs. 1,74,33,962/- under the normal provisions, while the book profit figure remained unchanged.
Assessing Officer's Action
During scrutiny assessment, the Assessing Officer observed that the assessee had earned exempt dividend income of Rs. 1,19,963/- during the relevant year. He further noted that no expenditure had been disallowed by the assessee under Section 14A read with Rule 8D(2)(ii) in relation to this exempt income. Applying the formula prescribed under Rule 8D(2)(ii), the Assessing Officer computed a disallowance of Rs. 2,71,56,617/- and added this figure to the total loss reported by the assessee. This disallowance was also incorporated into the book profit computation under Section 115JB.
It is worth noting that the assessee had, on its own, made a disallowance of Rs. 60,000/- while computing total income. However, the Assessing Officer overrode this and applied the mechanical formula under
Rule 8D(2)(ii), which yielded a disallowance amount grossly disproportionate to the exempt income actually earned.
Issues Before the CIT(A)
The assessee raised two principal contentions before the first appellate authority:
Quantum of Disallowance: The disallowance under
Section 14Aread withRule 8D(2)(ii)ought to be capped at the exempt income actually earned during the year, i.e., Rs. 1,19,963/-, and could not exceed that amount.Book Profit Adjustment: The addition of the
Section 14Adisallowance to book profit underSection 115JBwas legally impermissible and contrary to settled judicial precedent.
For both contentions, the assessee relied upon the decision of the Hon'ble Special Bench of ITAT, Delhi in the case of ACIT vs. Vireet Investment (P) Ltd. (2017) 165 ITD 27 / 188 TTJ 1 (Delhi) (SB).