2024 (10) TMI 1667 - AT - Income Tax

Disallowance u/s.14A r.w. Rule 8D - expenditure incurred towards earning exempt income - HELD THAT - We are of the opinion that similar issue came for consideration before this Tribunal in assessee s own case 2024 (8) TMI 1570 - ITAT BANGALORE wherein it has been held that provisions of Section 14A read with rule 8D of the Income Tax Rules are prospective in nature and cannot be applied to any assessment year prior to Assessment Year 2008-09. Applicability of provisions of section 115JB - HELD THAT - Similar issue came for consideration recently in the case of Union Bank of India and Central Bank of India 2024 (9) TMI 789 - ITAT MUMBAI in which the Special Bench of ITAT held once under the Income Tax Act Legislature itself has made a distinction for the aforesaid banks including the assessee are not covered as banking company then this further buttresses the point that these banks are separate and distinct from other banking companies. Accordingly the question referred to Special Bench is decided in favour of the assessee banks that clause (b) to sub section (2) of section 115JB of the Income-tax Act inserted by Finance Act 2012 w.e.f. 1-4-2013 that is from assessment year 2013-14 onwards are not applicable to the banks constituted as corresponding new bank in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 and therefore the provision of Section 115JB cannot be applied and consequently the tax on book profits (MAT) are not applicable to such banks. Decided in favour of assessee.

Summary

The core legal questions considered by the Tribunal in these appeals pertain to the assessment years 2013-14 and 2014-15 and are as follows:

1. Whether the disallowance under section 14A of the Income Tax Act, 1961 (the Act), read with Rule 8D, in respect of expenditure incurred towards earning exempt income, was justified.

2. Whether the provisions of Minimum Alternate Tax (MAT) under section 115JB of the Act are applicable to the assessee bank, which is a nationalized bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (Acquisition Act), and not a company registered under the Companies Act.

3. Whether additions made to arrive at book profit under section 115JB of the Act were beyond the scope of the section and hence liable to be set aside.

4. Ancillary issues such as the principles of natural justice and procedural compliance were raised but not pressed or adjudicated upon.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

Legal Framework and Precedents: Section 14A(1) of the Act prohibits deduction of expenditure incurred in relation to income which does not form part of total income under the Act (i.e., exempt income). Sub-sections (2) and (3) empower the Assessing Officer (AO) to determine such expenditure by prescribed methods if not satisfied with the assessee's claim. Rule 8D prescribes the method for computing such disallowance.

Judicial precedents, including Supreme Court rulings, have clarified that for section 14A to apply, there must be actual expenditure incurred (a "pay out") relating to exempt income. Mere receipt of exempt income, such as dividend income, without incurring any expenditure, does not attract disallowance under section 14A. This principle was reiterated in the Tribunal's earlier decisions in the assessee's own case and upheld by the jurisdictional High Court, which held that dividend income cannot be treated as expenditure to invoke section 14A.

Court's Interpretation and Reasoning: The Tribunal examined the AO's and CIT(A)'s orders confirming disallowance of Rs.59.56 crores under section 14A. The Tribunal noted that the assessee had not incurred any expenditure related to earning exempt income (dividends). The Tribunal relied on its earlier decision dated 31.01.2020 and subsequent judgments of the jurisdictional High Court, which ruled that section 14A read with Rule 8D is prospective and cannot be applied retrospectively to assessment years prior to AY 2008-09, and that no disallowance can be made where no expenditure is incurred.

Application of Law to Facts: Since the assessee did not incur any expenditure in relation to exempt income, the disallowance under section 14A was not sustainable.

Treatment of Competing Arguments: The Revenue contended in support of the disallowance, but the Tribunal noted that the revenue's Special Leave Petition (SLP) against the High Court judgment was admitted but no status was furnished. Hence, the Tribunal was bound by the High Court's decision.

Conclusion: The Tribunal allowed the ground of appeal challenging the disallowance under section 14A, holding that the disallowance was not justified.

2. Applicability of Provisions of Section 115JB (MAT) to the Assessee Bank:

Legal Framework and Precedents: Section 115JB imposes MAT on companies if tax payable on total income is less than 18.5% of book profit. Sub-section (2) of section 115JB specifies that the profit and loss account for computing book profit shall be prepared in accordance with the Companies Act, 1956 or the Act governing the company, as applicable.

The assessee bank is a nationalized bank constituted under the Acquisition Act and not incorporated under the Companies Act. Section 11 of the Acquisition Act deems such banks to be "Indian companies" for the purposes of the Income Tax Act but does not deem them companies under the Companies Act. The Companies Act, 2013, excludes banking companies governed by the Banking Regulation Act, 1949, from the applicability of certain provisions including section 129 relating to financial statements.

Several judicial decisions, including those of the jurisdictional High Court and various ITAT benches, have held that MAT provisions under section 115JB do not apply to nationalized banks constituted under the Acquisition Act as they are not companies under the Companies Act. The Special Bench of ITAT Mumbai in Union Bank of India and Central Bank of India cases held that the amended provisions of section 115JB(2)(b) effective from AY 2013-14 do not apply to such banks.

Court's Interpretation and Reasoning: The Tribunal analyzed the definitions of "company" under the Income Tax Act and Companies Act, and the deeming provisions under the Acquisition Act. It held that the deeming fiction in section 11 of the Acquisition Act applies only for the Income Tax Act and does not extend to the Companies Act. Therefore, the assessee bank is not a company under the Companies Act and hence section 115JB(2)(b) does not apply.

The Tribunal also relied on the exclusion of banking companies from the applicability of section 129 of the Companies Act, 2013, and the legislative intent as reflected in notifications under section 194A(3) of the Income Tax Act, which treat nationalized banks as separate from banking companies for tax deduction at source purposes.

Application of Law to Facts: The assessee bank's accounts are prepared under the Banking Regulation Act and not the Companies Act. Hence, the computation provisions of section 115JB(2) do not apply.

Treatment of Competing Arguments: The Revenue relied on contrary decisions such as the ITAT Mumbai bench ruling in Bank of India's case, but the Tribunal noted the absence of any jurisdictional High Court decision against the assessee and preferred the consistent view of the jurisdictional High Court and the Special Bench of ITAT Mumbai.

Conclusion: The Tribunal allowed the ground of appeal on the applicability of section 115JB, holding that MAT provisions are not applicable to the assessee bank.

3. Additions to Book Profits under Section 115JB:

This ground was consequential to the applicability of section 115JB. Since the Tribunal held that section 115JB is not applicable to the assessee bank, the issue of additions made to book profits under this section became infructuous and was not adjudicated upon.

4. Other Grounds:

Grounds relating to general objections and alleged violation of natural justice were either not pressed or dismissed as not pressed and hence did not require adjudication.

Significant Holdings:

On Section 14A Disallowance:

"In view of aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this court is answered in favour of the assessee and against the revenue."

"We allow this ground taken by the assessee."

On Applicability of Section 115JB:

"The expression 'company' used in section 115JB(2)(b) is to be inferred to be company under the Companies Act and not to an entity which is deemed by a fiction to be a company for the purpose of the Income Tax Act."

"We hold that Section 11 of the Acquisition Act which deals with a corresponding new bank treated as Indian company for the purpose of Income Tax, however, Clause (b) in Sub-Section 2 to Section 115JB does not permit treatment of such bank as a company for the purpose of the said clause."

"Accordingly, the question referred to Special Bench is decided in favour of the assessee banks that clause (b) to sub section (2) of section 115JB of the Income-tax Act inserted by Finance Act, 2012 w.e.f. 1-4-2013, that is, from assessment year 2013-14 onwards, are not applicable to the banks constituted as 'corresponding new bank' in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and therefore, the provision of Section 115JB cannot be applied and consequently, the tax on book profits (MAT) are not applicable to such banks."

On Additions to Book Profits:

Since section 115JB was held inapplicable, the additions made for computing book profit under this section are not sustainable and the ground became infructuous.

Final Determinations:

The Tribunal partly allowed the appeals of the assessee by:

- Setting aside the disallowance under section 14A of the Act as no expenditure was incurred in relation to exempt income.

- Holding that the provisions of section 115JB (MAT) do not apply to the assessee bank as it is not a company under the Companies Act but a nationalized bank constituted under the Acquisition Act.

- Declaring the consequential additions to book profit under section 115JB as infructuous.