Disallowance Irrelevant Where Tax Liability Arises Under MAT: ITAT Ahmedabad

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) on 26 March, reiterated that a disallowance computed under Rule 8D of the Income Tax Rules cannot be imported into the computation of book profit under the Minimum Alternate Tax (MAT) provisions.

The Bench, comprising Judicial Member Suchitra Kamble and Accountant Member Narendra Prasad Sinha, allowed the appeal filed by Shalby Ltd., observing that even if the alleged disallowance were made, it would not impact the taxpayer's liability, as the tax for the relevant assessment year arose entirely under the MAT provisions. The Tribunal held:

“As regarding disallowance under section 14A read with rule 8D of the Rules, this aspect was not examined by the AO while completing the assessment. However, the undisputed fact is that the taxpayer had discharged its tax liability for the current assessment year under the MAT provision under section 115JB of the Act. The Hon'ble Gujarat High Court has held in the case of Gujarat Fluorochemicals Limited (supra) that no addition in the book profit could be made on the basis of calculations worked out under section 14A of the Act.”

The issue arose when the Assessing Officer (AO) did not invoke Section 14A read with Rule 8D while completing the assessment, despite Shalby Ltd. earning exempt income.

The Principal Commissioner of Income Tax (PCIT) subsequently sought to revise the assessment under Section 263, claiming the omission rendered the order erroneous and prejudicial to the interests of the Revenue.

The Tribunal held that any disallowance under Rule 8D could not be added to book profit for computing tax under Section 115JB. Since Shalby Ltd.'s liability arose solely under MAT, the AO's omission did not prejudice the Revenue. The Tribunal further noted:

“Even if certain disallowance is made in accordance with Rule 8D, that addition cannot be imported to the book profit of the taxpayer. Since the taxpayer was having only tax liability on the book profit in the current year, the omission of the AO in not considering the provision of Rule 8D of the Act cannot be held as prejudicial to the interest of revenue.”

Accordingly, the Tribunal allowed the appeal, reinforcing the settled principle that adjustments under Section 14A do not extend to MAT computations.

For Appellant: Aseem Thakkar, AR

For Respondent: R P Rastogi, CIT-DR