Disallowance Under Section 14A Cannot Be Added When

Disallowance Under Section 14A Cannot Be Added When Computing Book Profits Under Section 115JB

Issue

Whether expenses disallowed under Section 14A read with Rule 8D can be added back to compute book profits under Section 115JB under Explanation 1(f) of the Income-tax Act, 1961.

Facts

The Assessing Officer (AO) computed the tax liability of the assessee under the Minimum Alternate Tax (MAT) provisions of Section 115JB.
During the assessment, the AO determined a disallowance of expenditure incurred in relation to exempt income under Section 14A read with Rule 8D.
While calculating the book profit under Section 115JB, the AO added back the amount disallowed under Section 14A by invoking Explanation 1(f) to Section 115JB.
The assessee challenged the AO’s action of importing Section 14A/Rule 8D disallowance into the computation of MAT book profit.

Decision

Section 14A and Rule 8D cannot be imported into the computation of book profit under Section 115JB.
Explanation 1(f) to Section 115JB operates independently and does not automatically apply to expenses disallowed under Section 14A.
The addition made by the AO under Section 14A read with Rule 8D could not be added while computing book profits under Section 115JB. Decided in favor of the assessee.

Key Takeaways

Independent Computation Framework: Section 115JB is a self-contained code; adjustments to net profit shown in the profit & loss account can only be made strictly in accordance with the specific Explanations provided under Section 115JB.
Inapplicability of Rule 8D to MAT: Disallowance computed under Section 14A read with Rule 8D cannot be routinely or automatically added back under Explanation 1(f) to Section 115JB.
Inviolability of Financial Statements: Unless specific statutory adjustments are authorized under Section 115JB, the Assessing Officer cannot rewrite the profit and loss account prepared in accordance with the Companies Act.

HIGH COURT OF DELHI

Principal Commissioner of Income-tax

Jindal Saw Ltd.

Dinesh Mehta and Rajneesh Kumar Gupta, JJ.

IT Appeal No. 437 of 2026
CM APPL. Nos. 35536 and 35537 of 2026

JULY 8, 2026

Gaurav Gupta, SSC, Ms. Aryama Singh Rajput, Adv., Shivendra Singh and Yojit Pareek, JSCs for the Appellant. Rohit Jain, Saksham Singhal and Tavish Venna, Advs. for the Respondent.

ORDER

1. The instant appeal has been preferred on the following questions:-

“2.1 Whether on the facts and the circumstances of the case, ITAT is justified in deleting the disallowance under section 14A of the l.T. Act amounting to Rs.8,51,49,991/-

2.2 Whether for application of Section 14A of the Income Tax Act, 1961 the earning of exempt income is an essential legal requirement?

2.3 Whether the term in relation to’ as used in Section 14A of the Act contemplates a direct and proximate nexus between ‘expenditure incurred’ and earning of exempt income?

2.4 Whether ITAT is legally justified in deleting disallowance under section 14A of the Act because the assessee had not earned tax exempt income during the year, under considering the legislative intent of introduction of Section 14A by the Finance Act, 2001 and subsequent clarification issued by CBDT vide circular No. 5/2014 dated 10/02/2014?

2.5 Whether the ITAT is legally justified in deleting the disallowance under section 14A of the Act by not considering a legal principle that allowablity/disallowability of expenditure under the Act is not conditional upon the earning of the income as held by Hon’ble Supreme Court in the case of CIT v. Rajendra Prasad Moody (1978) 1.

2.6 Whether on the facts and circumstances of the case ITAT is justified in deleting the disallowance u/s 40(a)(ia) of the Income-tax Act, 1961 amounting to Rs. 3,31,95,556/-?

2.7 Whether on the facts and circumstances of the case ITAT is justified in deleting the disallowance under section 40(a)(ia) of the Income-tax Act, 1961 amounting to Rs. 3,31,95,556/- by ignoring the order under sections 201(1) and 201(1A) passed by ITO(TDS) on 28.03.2011.

2.8 Whether on the facts and circumstances of the case ITAT is justified in deleting the disallowance u/s 40(a)(ia) of the Income-tax Act, 1961 amounting lo Rs. 3,31,95,556/- by ignoring the detailed finding of the Assessing Officer?

2.9 Whether on the facts and circumstances of the case ITAT is justified in ignoring the Explanation 1(f) to section 115JB (2) of the Income Tax Act, 1961 which provides for the calculation of book profit as increased by the amount or amounts of expenditure relatable to any income to which section 10 (other than the provision in clause (38) shall apply. Hence, the disallowing under section 14A read with Rule 8D has been rightly made while computing book profit under section 115JB of the Income Tax Act 1961?”

2. Mr.Jain, learned counsel appearing on behalf of the respondent-assesee, at the outset, submitted that so far as the first issue regarding deletion of disallowance under Section 14A of the Income Tax Act, 1961 (hereinafter referred to as ^the Act of 1961′) concerned, the same has been decided by this Court against the Department in the case of Pr. CIT v. Caraf Builders & Constructions (P.) Ltd 414 ITR 122 (Delhi) and an SLP filed thereagainst also has been rejected by the Hon’ble the Supreme Court.

3. While adverting to question Nos. 2.7 and 2.8 relating to Section 40(a)(ia) of the Act of 1961, he submitted that the Assessing Officer (hereinafter referred to as ‘AO’) had disallowed the expenditure of Rs.3,31,95,556/-, simply because the assessee had deducted tax under Section 194C of the Act of 1961 whereas according to the AO, it should have been under Section 194I of the Act of 1961.

4. Mr.Jain, further submitted that the order dated 28.03.2011 passed under 201(1) and 201(1A) of the Act relied upon by the AO are concerned, the Tribunal has set aside the same and since the AO’s view that the tax was deducted under the wrong provision itself has been reversed, there cannot be any justification for disallowing the expenditure.

5. Having heard learned counsel for the parties, we are of the view that when appropriate tax has been deducted, simply because it has been deducted under a provision, the assessee can neither be held to be in default nor can the amount be disallowed by invoking Section 40(a)(ia) of the Act of 1961. More particularly, when the Tribunal has set aside the order holding the assessee to be in default, these grounds of appeal are, therefore, also decided against the Revenue.

6. The next question is question no.2.9, which is reproduced hereunder:-

“2.9. Whether on the facts and circumstances of the case ITAT is justified in ignoring the Explanation 1(f) to section 115JB (2) of the Income Tax Act, 1961 which provides for the calculation of book profit as increased by the amount or amounts of expenditure relatable to any income to which section 10 (other than the provision in clause (38) shall apply. Hence, the disallowing under section 14A read with Rule 8D has been rightly made while computing book profit under section 115JB of the Income Tax Act 1961? “

7. In relation to above question, Mr. Jain, learned counsel for the assessee submitted that the same has been decided by this Court in titled Pr. CIT v. Bhushan Steel Ltd [IT Appeal No. 593 of 2015].

8. Mr. Gaurav Gupta, learned Senior Standing Counsel for the Revenue, is not in a position to dispute the aforesaid position of fact and law.

9. The aforesaid ground of appeal too is, therefore, decided against the Revenue in light of judgment in the case of Bhushan Steel Ltd (supra).

10. As a result, the appeal filed by the Revenue is hereby dismissed.

11. All pending applications, including the application(s) seeking condonation of delay in filing/re-filing also stand disposed of.