By TIOL News Service

NEW DELHI, MARCH 14, 2014: THE issues before the Bench are - Whether deduction u/s 14A read with Rule 8D has to be allowed where the assessee has sufficient interest free funds and where the assessee has earned income instead of incurring expenditure in the form of interest; Whether where the disallowance under Section 14A was made on notional basis, disallowance u/s 14A could be added back for the purpose of calculation of book profit and Whether a co-developer of Special Economic Zone qualifies to be a developer for the purpose of claiming benefits u/s 115JB. And the verdict partly goes in favour of the Revenue.

Facts of the case

The assessee company was engaged in the business of real estate and other allied activities. Assessee claimed deduction under Section 14A. In the year 2008-09 the Assessing Officer disallowed an amount of Rs.27,24,000/- u/s 14A as expenses pertaining to earning of exempt income. The amount of disallowance in the year 2009-10 was Rs.20,17,000/-. Assessee had claimed exclusion of income earned by it SEZ business for the purpose of calculating profit u/s 115JB of the Act. Assessing Officer refused to exclude the income earned on the ground that if the assessee claims that income accruing to it on account of operation and maintenance of SEZ is to be excluded, it has to bring on record all facts and documents in support of such claim, but the assessee had not filed Form No.10CCB which was required to be filed for claiming deduction u/s 80IAB. Further the claim of the assessee for deduction u/s 80IAB was yet to be determined and shall remain part of book profit for computing the tax liability u/s 115JB. The third disallowance made by the Assessing Officer in assessment year 2009-10 was on account of calculation of book profit u/s 115JB. The Assessing Officer had added back disallowance u/s 14A for the purpose of calculation of book profit.

In appeal, CIT(A) reduced the disallowance u/s 14A by excluding interest expense. With regard to the exclusion of SEZ income from the total income for the purpose of calculation u/s 115JB of the Act, CIT(a) held that the provisions of sec. 115JB (6) are very clear and the income from the development and maintenance of SEZ project is not to be included for working out of book profits. Thus, income of assessee SEZ operations was to be excluded from working of book profit u/s 115JB. With respect to the disallowance made in respect of calculation of book profit, CIT(A) held that for working out book profit adjustment can be made to the book profit as per the explanation 1 to subsection 2 of section 115JB and no adjustment beyond that can be made. Therefore the adjustment made by the Assessing Officer in the book profit was deleted.

Regarding ground No.3, department submitted that since no complete details were provided, the Assessing Officer was justified in making disallowance of common interest as well as expenses. Regarding second ground of appeal, it was submitted that before Assessing Officer no details were there as to which income was from SEZ and which was not from SEZ. Therefore, the Assessing Officer was justified in excluding the alleged SEZ income from the calculation of profit u/s 115JB. It was further submitted that section 115JB is a complete code in itself and Assessing Officer made the addition for the purpose of section 115JB as the assessee had not claimed deduction u/s 80IAB of the Act.

Assessee submitted that Assessing Officer himself had held that there was no direct expenditure. It was further submitted that CIT(A) had very rightly reduced the amount of interest from the calculation of disallowance as per Rule 8D as the assessee had sufficient interest free funds. Regarding 2nd & 3rd ground for assessment year 2008-09 & 2009-10, it was submitted that clause (6) to sec. 115JB specifically exempted the income of SEZ for the purpose of calculation of book profit u/s 115JB of the Act. Regarding claim of the Assessing Officer that assessee had not claimed deduction u/s 80IAB it was argued that assessee was free to claim the deduction u/s 80IAB for 10 consecutive assessment years out of a period of 15 years beginning from the year in which SEZ was notified by the Central Govt.

Having heard the parties, the Tribunal held that,

A) + regarding disallowance u/s 14A we find that assessee had sufficient interest free funds which it had invested in mutual funds and moreover the assessee instead of incurring expenditure in the form of interest has earned income and therefore CIT(A) has rightly deleted the interest component from the disallowance of Rule 8D. The CIT(A) has very elaborately held that assessee had sufficient interest free funds and therefore we do not find any infirmity in the order of CIT(A). Therefore, ground No.1 in both the years is dismissed;

B) + regarding ground No. 2 in assessment year 2009-10 we find that the provisions of clause (g) to section 115JB refers to the amount of expenditure incurred for earning exempt income which has to be added back to the profit as per P&L A/c for the purpose of calculation of book profits u/s 115JB. However, we further find that for the purpose of making addition of such expenses to profits for the purpose of section 115JB first requirement is that amount of expenditure should have been debited in the P&L A/c. This requirement is contained in the section itself. In the present case, the disallowance was made on notional basis under section 14A and therefore CIT(A) has rightly following the order of Supreme Court in the case of Apollo Tyres Ltd. has deleted the disallowance. Moreover, the Tribunal in I.T.A. No.410/Del/ dated 27th November, 2009 followed the same. Therefore respectfully following the above, we dismiss ground No.3 in assessment year 2009-10;

C) + as regards ground No.2 in assessment year 2008-09 and ground No.3 in assessment year 2009-10 we find that the Assessing Officer has not considered the claim of assessee because of the fact that assessee had not made claim u/s 80IAB of the Act and further the Assessing Officer had not examined the claim u/s 80IAB. However, we find that assessee is eligible to claim the deduction u/s 80IAB in 10 consecutive assessment years within a period of 15 years and we also find that assessee as a co-developer also qualifies to be a developer for the purpose of claiming benefit u/s 115JB of the Act as the definition of developer includes co-developer as contained in clause (g) of section 2of SEZ Act, 2005. Therefore, there is no dispute that the assessee was eligible for exclusion of income from SEZ business for the purpose of section 115JB. However, we find that the claim of assessee with respect to SEZ income has not been examined by the Assessing Officer or by CIT(A). Therefore, in the interest of justice we remit this ground of appeal to Assessing Officer with a direction to examine the claim of assessee in respect of income from SEZ business and after arriving at the amount of profits from SEZ business, allow the same as exclusion for the purpose of determining book profits u/s 115JB of the Act.

(See 2014-TIOL-138-ITAT-DEL)