Can the Rule 8D figure be added back to book profit under clause (f) of the Explanation to s.115JB?
The Karnataka High Court held it cannot. A disallowance under s.14A is a notional disallowance, and the amount cannot be added back to book profit under clause (f) by taking recourse to s.14A. Clause (f) can operate only on amounts actually debited to the profit and loss account.
Decided by the High Court (Alok Aradhe J and V. Srishananda J) on 2021-01-04, reported as I.T.A. No.203/2015 (High Court of Karnataka at Bengaluru). It bears on section 14A, section Rule 8D, section 115JB, section 115JB(1), section 115JB(5), section 10(2A), section 10(35), section 260A of the Income Tax Act 1961, in Deductions & Disallowances, Capital Gains Exemptions and How Tax Law Is Read matters.
This is the High Court authority for the position the Special Bench took in Vireet Investment, and it is the answer to an addition that is usually made mechanically, by carrying the Rule 8D number straight across into the MAT computation. The reasoning is worth understanding because it decides where the boundary lies: s.115JB(1) prescribes its own mode of computation and s.115JB(5) applies the other provisions of the Act only 'save as otherwise provided in this section', so importing the s.14A machinery does violence to sub-sections (1) and (5). The practical consequence is that clause (f) still bites, but only on expenditure actually debited and actually relatable to s.10, s.11 or s.12 income — the Assessing Officer must identify it from the accounts, not compute it. The Court also disposed of the two authorities the Revenue habitually cites: Rolta India is about interest under s.234B and s.234C, and Maxopp did not deal with s.115JB at all.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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An appeal by the assessee under s.260A. The Assessing Officer completed the assessment under s.143(3) and determined book profit under s.115JB. The Commissioner (Appeals) partly allowed the appeal, granting relief on the s.14A read with Rule 8D disallowance. The Tribunal held that a disallowance of Rs 49,75,359 under s.14A was to be added back while computing book profits under s.115JB. The substantial question admitted was whether the Tribunal was justified in holding that indirect expenditure disallowed under s.14A read with Rule 8D(iii), of Rs 24,64,632, in computing total income under the normal provisions was to be added to net profit in computing book profit for MAT under s.115JB, thereby importing s.14A read with Rule 8D into the MAT provisions. The Revenue relied on the assessee having earned income exempt under s.10(2A) and s.10(35) and argued that the earlier decision of the same Court in Gokaldas Images required reconsideration, since disallowance of expenditure in relation to s.10 income is provided only in s.14A and not in clause (f) of Explanation 1 to s.115JB, which would render s.14A otiose.
The substantial questions of law were answered in favour of the assessee and against the Revenue, the Tribunal's order was quashed insofar as it recorded findings against the assessee, and the appeal was allowed. The amount disallowed under s.14A cannot be added back to book profit under clause (f) of s.115JB.
The Court read s.115JB(1), which prescribes the mode of computation of total income and tax under that section, with s.115JB(5), which applies the other provisions of the Act only save as otherwise provided in the section. On that scheme, to disallow expenditure relatable to income exempt under s.10(2A) and s.10(35) under s.14A and then add it back to book profit under clause (f) would amount to doing violence to sub-sections (1) and (5) of s.115JB. It added that the amounts in clauses (a) to (i) of the Explanation to s.115JB(2) operate only where they have been debited to the statement of profit and loss, and that a disallowance under s.14A is a notional disallowance, so the amount cannot be added back under clause (f) by taking recourse to s.14A. The Court followed its own decision in CIT v. Gokaldas Images (P) Ltd. and noted the Bombay High Court in CIT-8 v. Bengal Finance & Investments Pvt. Ltd. It held that Rolta India, which concerned interest under s.234B and s.234C on tax payable under s.115JA and s.115JB, had no impact on the issue, and that Maxopp Investment dealt with s.14A and not with s.115JB and therefore did not apply.
The disallowance under Section 14A of the Act is a notional disallowance and therefore, by taking recourse to Section 14A of the Act, the amount cannot be added back to book profit under clause (f) of Section 115JB of the Act.
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Handle my notice → Ask a CA on WhatsAppThe Karnataka High Court held it cannot. A disallowance under s.14A is a notional disallowance, and the amount cannot be added back to book profit under clause (f) by taking recourse to s.14A. Clause (f) can operate only on amounts actually debited to the profit and loss account. This was decided by the High Court (Alok Aradhe J and V. Srishananda J) and bears on section 14A, section Rule 8D, section 115JB, section 115JB(1), section 115JB(5), section 10(2A), section 10(35), section 260A of the Income Tax Act 1961. It is reported as I.T.A. No.203/2015 (High Court of Karnataka at Bengaluru). This is the High Court authority for the position the Special Bench took in Vireet Investment, and it is the answer to an addition that is usually made mechanically, by carrying the Rule 8D number straight across into the MAT computation. The reasoning is worth understanding because it decides where the boundary lies: s.115JB(1) prescribes its own mode of computation and s.115JB(5) applies the other provisions of the Act only 'save as otherwise provided in this section', so importing the s.14A machinery does violence to sub-sections (1) and (5). The practical consequence is that clause (f) still bites, but only on expenditure actually debited and actually relatable to s.10, s.11 or s.12 income — the Assessing Officer must identify it from the accounts, not compute it. The Court also disposed of the two authorities the Revenue habitually cites: Rolta India is about interest under s.234B and s.234C, and Maxopp did not deal with s.115JB at all. If it applies to you, the first step is this: Separate the two computations in your reply and insist that the officer justify the clause (f) figure from the debits in the profit and loss account, independently of Rule 8D.
An appeal by the assessee under s.260A. The Assessing Officer completed the assessment under s.143(3) and determined book profit under s.115JB. The Commissioner (Appeals) partly allowed the appeal, granting relief on the s.14A read with Rule 8D disallowance. The Tribunal held that a disallowance of Rs 49,75,359 under s.14A was to be added back while computing book profits under s.115JB. The substantial question admitted was whether the Tribunal was justified in holding that indirect expenditure disallowed under s.14A read with Rule 8D(iii), of Rs 24,64,632, in computing total income under the normal provisions was to be added to net profit in computing book profit for MAT under s.115JB, thereby importing s.14A read with Rule 8D into the MAT provisions. The Revenue relied on the assessee having earned income exempt under s.10(2A) and s.10(35) and argued that the earlier decision of the same Court in Gokaldas Images required reconsideration, since disallowance of expenditure in relation to s.10 income is provided only in s.14A and not in clause (f) of Explanation 1 to s.115JB, which would render s.14A otiose. The matter was decided on 2021-01-04 by the High Court (Alok Aradhe J and V. Srishananda J). On those facts the High Court held as follows. The substantial questions of law were answered in favour of the assessee and against the Revenue, the Tribunal's order was quashed insofar as it recorded findings against the assessee, and the appeal was allowed. The amount disallowed under s.14A cannot be added back to book profit under clause (f) of s.115JB.
The Court read s.115JB(1), which prescribes the mode of computation of total income and tax under that section, with s.115JB(5), which applies the other provisions of the Act only save as otherwise provided in the section. On that scheme, to disallow expenditure relatable to income exempt under s.10(2A) and s.10(35) under s.14A and then add it back to book profit under clause (f) would amount to doing violence to sub-sections (1) and (5) of s.115JB. It added that the amounts in clauses (a) to (i) of the Explanation to s.115JB(2) operate only where they have been debited to the statement of profit and loss, and that a disallowance under s.14A is a notional disallowance, so the amount cannot be added back under clause (f) by taking recourse to s.14A. The Court followed its own decision in CIT v. Gokaldas Images (P) Ltd. and noted the Bombay High Court in CIT-8 v. Bengal Finance & Investments Pvt. Ltd. It held that Rolta India, which concerned interest under s.234B and s.234C on tax payable under s.115JA and s.115JB, had no impact on the issue, and that Maxopp Investment dealt with s.14A and not with s.115JB and therefore did not apply. In the words reproduced by the source cited on this page: "The disallowance under Section 14A of the Act is a notional disallowance and therefore, by taking recourse to Section 14A of the Act, the amount cannot be added back to book profit under clause (f) of Section 115JB of the Act." The decision followed or applied Commissioner of Income Tax, Bangalore v. Gokaldas Images (P) Ltd. — followed; Commissioner of Income Tax-8 v. M/s Bengal Finance & Investments Pvt. Ltd. (I.T.A. No.337/2013, Bombay High Court) — noted as taking a similar view; CIT v. Rolta India Ltd. — held inapplicable; Maxopp Investment Ltd. v. CIT — held inapplicable to s.115JB.
It was decided by the High Court on 2021-01-04 and is reported as I.T.A. No.203/2015 (High Court of Karnataka at Bengaluru). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 14A, section Rule 8D, section 115JB, section 115JB(1), section 115JB(5), section 10(2A), section 10(35), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The substantial questions of law were answered in favour of the assessee and against the Revenue, the Tribunal's order was quashed insofar as it recorded findings against the assessee, and the appeal was allowed. The amount disallowed under s.14A cannot be added back to book profit under clause (f) of s.115JB. It arises in Deductions & Disallowances, Capital Gains Exemptions and How Tax Law Is Read matters, on section 14A, section Rule 8D, section 115JB, section 115JB(1), section 115JB(5), section 10(2A), section 10(35), section 260A of the Income Tax Act 1961, and was decided by Alok Aradhe J and V. Srishananda J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the officer has simply carried the Rule 8D number across, take this as a jurisdictional objection to the addition rather than a quantum point. Be ready to concede that some expenditure actually debited may be relatable to exempt income — the Court did not hold clause (f) inoperative, only that s.14A cannot supply its figure. Check the assessment year against the current text of clause (f) and against the MAT rate applicable to your year; do not take the rate from the extract in this judgment.
Validity check could not be completed. Validity check could not be completed; no later decision considering this judgment was searched for and no Supreme Court treatment was traced. The conclusion is the same as that of the Special Bench of the Tribunal in ACIT v. Vireet Investment Private Limited, which the library already carries. Two things a later pass should establish before this is relied on as settled: whether any High Court has taken the contrary view on clause (f), and whether the Finance Act 2022 Explanation to s.14A has been argued to change the position for book profit — nothing read in this pass addresses that, and the Explanation on its face speaks only to s.14A and not to s.115JB. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report does not hold together on its own facts and the reader should know that before citing it. The cause title and the recital of jurisdiction give ITA No.203/2015 arising out of an ITAT order dated 9 January 2015 in ITA No.1410/Bang/2013 for AY 2008-09, but the facts paragraph describes a return for AY 2009-10 and a Tribunal order dated 2 May 2014, and describes the assessee as an undertaking of the Government of Karnataka engaged in financing industrial units in the State — which is not this appellant. That phrase was separately checked through /docfragment/ and it is genuinely in the judgment, so the inconsistency is in the report itself and not in the retrieval. The substantial question of law, the analysis and the disposal are internally consistent and are what this entry rests on. The extract of s.115JB(1) in the judgment carries the rate of eighteen and one-half per cent in force for the year in issue; the MAT rate has since been changed and should be checked for the reader's own year rather than taken from the extract. Paragraph numbers are not printed in the portion retrieved, so the quote is sourced to the analysis section rather than to a numbered paragraph. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The substantial questions of law were answered in favour of the assessee and against the Revenue, the Tribunal's order was quashed insofar as it recorded findings against the assessee, and the appeal was allowed. The amount disallowed under s.14A cannot be added back to book profit under clause (f) of s.115JB.
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