Section 14A in MAT (Section 115JB): Can Rule 8d Disallowances Inflate Book Profits?

 

1. The Core Contradiction: Section 14A vs Section 115JB MAT

The Core Contradiction

Imagine this scenario:

Company ABC Ltd. for AY 2023-24:

Under Section 14A (Normal Computation):

• Gross business income: ₹100 crores
• Exempt dividend income: ₹10 crores
• Section 14A disallowance (per Rule 8D): ₹8 crores
• Taxable Income: ₹100 – ₹8 = ₹92 crores
• Normal Tax @ 30%: ₹27.6 crores

Under Section 115JB (MAT Computation):

• Book profit per audited P&L: ₹110 crores (including the ₹10 crore dividend)
• Now, the AO adds back the Section 14A disallowance of ₹8 crores
• Book Profit: ₹110 + ₹8 = ₹118 crores
• MAT @ 18.5%: ₹21.83 crores

The absurdity: The same disallowance that reduces taxable income under Section 14A (benefiting the assessee) increases book profit under Section 115JB (burdening the assessee with higher MAT).

The Question: Is this intended? Or is it a misreading of the statute?

The Answer: This controversy has consumed Indian tax jurisprudence for over a decade. It’s finally (mostly) settled by the Vireet Investments Special Bench (2017) and affirmed in Alembic Ltd. (2019). But the Department still contests it.

This article explores Section 14A disallowances under Rule 8D and their impact on book profits under Section 115JB MAT. [1] [2].​

2. THE STATUTORY FRAMEWORK: SECTION 14A VS. SECTION 115JB (MAT)

Two Different Computational Universes

Universe 1: Section 14A (Chapter IV – Normal Income Computation)

Statutory Language:

“For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.” (Section 14A(1))

Scope: Operates within Chapter IV (computing income from five heads and applying deductions)

Mechanism: Rule 8D prescribes a formulaic method (direct expenses + 1% of investments)

Result: Reduces taxable income

Example: Disallow ₹8 crores → Taxable income becomes ₹92 crores (instead of ₹100 crores)

Universe 2: Section 115JB (Chapter XII-B – MAT Computation)

Statutory Language:

“Where in the case of an assessee, being a company, the income-tax payable on the total income as computed under this Act is less than fifteen per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable shall be at the rate of fifteen per cent.” (Section 115JB(1))

Starting Point: Net profit per audited P&L account (prepared under Schedule III, Companies Act)

Mechanism: Explanation 1 to Section 115JB prescribes specific add-backs and deductions to book profit

Result: Computes tax on book profit (alternative to normal income)

Key Provision: Explanation 1(f):

“the amount or amounts of expenditure relatable to any income to which section 10… or section 11 or section 12 apply”

This is where the controversy begins.

The Statutory Problem: Is Section 14A Referenced in Section 115JB?

Bare Text Analysis:

Explanation 1(f) explicitly mentions:

• Section 10 (various exemptions)
• Section 11 (charitable trusts income)
• Section 12 (religious and scientific institutions income)

But it does NOT mention:

• Section 14A
• Rule 8D

The Critical Question: Does “expenditure relatable to income under Section 10” mean:

• (A) Only actual expenses debited to P&L that relate to exempt income? OR
• (B) The Rule 8D computed disallowance (including notional amounts)?

Revenue’s Position: (B) – The Rule 8D disallowance is “the” measure of expenditure relating to exempt income

Assessee’s Position & Judicial Consensus: (A) – Only actual P&L debits[3][4]

3. THE CONTROVERSY: DEPARTMENT VS. JUDICIARY

The Historical Timeline

Phase 1 (2008-2016): Early Confusion

Early ITAT benches split on whether Rule 8D disallowances should inflate book profit:

• Some benches said “Yes” (adding back Rule 8D disallowances)
• Other benches said “No” (only actual P&L expenses)
• No settled position existed

Phase 2 (2016-2017): The Special Bench Moment

ITAT Delhi Special Bench in Vireet Investments (2017) definitively ruled: NO

This was the watershed. The Special Bench’s authority superseded conflicting ITAT benches.

Phase 3 (2017-2019): Confusion Persists Despite SB

Even after Vireet Investments, some lower ITAT benches and AOs continued adding back Rule 8D disallowances, citing:

• CBDT Circular No. 5/2014 (suggesting disallowance applies even without exempt income)
• Literal reading of Explanation 1(f) (“expenditure relatable”)
• Pre-Vireet precedents

Phase 4 (2019-Present): Alembic & Settled Jurisprudence

Alembic Ltd. (2019) and subsequent decisions have solidified the position: Rule 8D disallowances are NOT added back to book profit.

The Department’s Core Argument (Still Pursued)

Argument 1: Literal Interpretation of Explanation 1(f)

Department says:

“Explanation 1(f) requires adding back ‘the amount or amounts of expenditure relatable to’ exempt income. The only prescribed method to compute such amount is Rule 8D. Therefore, the Rule 8D disallowance IS the ‘amount of expenditure relatable to exempt income,’ and it must be added back.”

Flaw in this reasoning: Rule 8D includes notional/presumptive amounts (1% of investments) that were never debited to the P&L account. Explanation 1(f) references adding back amounts “relatable to” exempt income—this presupposes actual expenses in the accounts, not notional computations.

Argument 2: Anti-Avoidance Purpose

Department says:

“The purpose of Section 115JB (MAT) is to prevent companies from showing high book profits while paying low normal tax through Section 14A disallowances. By not adding back the Section 14A disallowance to book profit, we’re allowing companies to escape MAT—defeating MAT’s anti-avoidance purpose.”

Flaw in this reasoning: MAT has its own Explanation 1 provisions that independently address expenditure relating to exempt income. These are separate from Section 14A. If book profit should be adjusted for such expenditure, it should be done per Section 115JB’s own mechanism (Explanation 1(f)), not by importing Section 14A computations.

4. VIREET INVESTMENTS (SB) – THE WATERSHED MOMENT

Citation & Bench Details

Case: ACIT v. Vireet Investment Pvt. Ltd., (2017) 165 ITD 27 (Delhi ITAT Special Bench)

Bench: Special Bench of Delhi ITAT (constituted to resolve conflicting decisions)

Date: April 19, 2017

Reported As: 82 taxmann.com 415

Facts

• Assessee: Vireet Investment Pvt. Ltd., a company engaged in trading in shares and securities
• AY 2010-11: Company earned exempt dividend income from share investments
• Section 14A Disallowance: TPO (Transfer Pricing Officer—note the context; this involves transfer pricing) disallowed ₹2.82 crores under Section 14A using Rule 8D
• MAT Treatment: AO added back the entire ₹2.82 crore disallowance to book profit
• Company’s Argument: “The Section 14A disallowance was computed using Rule 8D’s notional formula, which includes presumptive amounts never debited to P&L. These cannot be added back to book profit under Section 115JB.”

The Special Bench’s Central Holding

Question Posed:

“Whether the expenditure incurred to earn exempt income computed u/s. 14A could not be added while computing book profit u/s. 115JB of the Act?”

Answer (In Favor of Assessee):

“Section 115JB is a complete and self-contained code. Computation for the purposes of clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated under section 14A read with rule 8D.

 

The amount to be added back u/s 115JB should be only such amount as is actually debited to the Profit & Loss Account and is directly related to earning of the aforesaid exempt income.

 

Only actual expenses shown in the audited financial statements, which have a direct and proximate nexus to exempt income credited to the P&L, qualify for add-back. Notional or presumptive disallowances computed under Rule 8D, which were never debited to the P&L, cannot be imported into Section 115JB computation.” ​[1][2]

The Special Bench’s Reasoning

Reason 1: Section 115JB is a Complete Code

“Section 115JB, being a special provision, overrides other provisions of the Act and is a complete code in itself. It does not import provisions from other chapters. The specific adjustments listed in Explanation 1 are exhaustive and comprehensive. There is no room for importing computational provisions from Chapter IV (where Section 14A resides).”​[2]

Reason 2: Statutory Interpretation – Express Mention vs. Silence

“Explanation 1(f) explicitly mentions Sections 10, 11, and 12 (provisions that create exempt income). It does not mention Section 14A. When the legislature could have expressly referenced Section 14A but chose not to, we cannot read it in through the backdoor.”​[1]

Reason 3: Accounting Principles – Matching Principle

“Book profit is derived from audited financial statements prepared per accounting standards. The matching principle in accountancy requires that:

 

• If exempt income is credited to P&L, corresponding expenses debited to P&L should be adjusted

• Notional or formula-based disallowances that were never reflected in the P&L should not be imported[4]

This maintains the integrity of book profit as an accounting concept.”​

Reason 4: Statutory Purpose – Different Objects

“Section 14A applies within Chapter IV to prevent double benefits (exempt income + deductions). Section 115JB applies to ensure minimum tax on book profit. These are different statutory objects requiring different computational frameworks.”​[2]

Key Quote from the Special Bench

The Special Bench stated:

“We are respectfully asked to follow our earlier decision in Vireet Investment (P.) Ltd. (supra) and we do so. Disallowances made u/s 14A read with rule 8D could not be applied to provisions of section 115JB. What has to be ensured is that the matching principle is maintained. If exempt income is credited to the P&L account, then only the actual expenses debited to the P&L account relating to earning of the said exempt income are to be added back while computing book profit u/s 115JB. The notional or formula-based computation as contemplated in Rule 8D cannot be applied for this purpose.”​[2]

5. ALEMBIC LTD. – REINFORCING THE POSITION

Citation & Details

Case: Alembic Ltd. v. DCIT, Circle (1)1, Baroda, ITAN 1249 of 2014 (Gujarat High Court)

Court: Gujarat High Court

Date: December 8, 2016

Reported As: (2016) 232 Taxman 130 (Guj)

Facts & Holding

Similar to Vireet Investments:

• Company earned exempt dividend income
• AO made Section 14A disallowance using Rule 8D
• AO added back this disallowance to book profit for MAT computation
• CIT(A) and ITAT deleted the addition to book profit

High Court’s Affirmation:

The Gujarat High Court affirmed the Tribunal’s decision, holding:

“Explanation 1(f) to Section 115JB requires adding back actual expenditure debited to the P&L account that relates to exempt income. The Rule 8D disallowance, being a notional/presumptive computation including amounts not debited to books, cannot be added back to book profit.

Section 115JB operates on the basis of audited financial statements. It cannot be distorted by importing tax formulas (like Rule 8D) that have no basis in the accounting records.” ​[5][6]

Importance of Alembic

Why Alembic matters:

1. It’s a High Court decision (more binding than ITAT)
2. It reaffirms Vireet Investments (Special Bench ITAT decision)
3. It settles the law for the Gujarat region (the jurisdiction saw most such cases)
4. It has been followed by subsequent ITAT benches

6. STATUTORY INTERPRETATION: THE “COMPLETE CODE” DOCTRINE

What is the “Complete Code” Doctrine?

Principle: When a statute enacts a complete, self-contained code of provisions governing a particular subject, courts will not import provisions from other parts of the statute unless:

1. Express cross-reference exists, OR
2. The provisions are complementary and operate in the same field, OR
3. One provision explicitly adopts the other’s methodology

Application to Section 115JB:

Section 115JB contains:

• Starting point: Net profit per audited P&L (Schedule III, Companies Act)
• Adjustment mechanism: Explanation 1 with 15+ specified items
• Computational rules: Specific add-backs and deductions

This is comprehensive. The legislature did not leave it open to import provisions from Chapter IV.

Textual Evidence for “Complete Code”

Section 115JB(1) begins:

“Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company…”

“Notwithstanding anything contained in any other provision” = Section 115JB overrides other provisions

It does NOT say:

“Subject to Section 14A and Rule 8D” or “In addition to adjustments under Section 14A”

This deliberate silence indicates Section 14A is excluded from Section 115JB (MAT) computation.​[ 1][2]

Statutory Interpretation Principle: Expressio Unius Est Exclusio Alterius

Latin Maxim: “The express mention of one thing excludes another”

Application:

Explanation 1(f) says: “expenditure relatable to income to which Section 10, 11, or 12 apply”

By explicitly mentioning these three sections, the legislature impliedly excluded all others—including Section 14A.

If the legislature intended Section 14A disallowances to be added back, it would have said: “…expenditure as determined under Section 14A and Rule 8D”

It didn’t. So we cannot read it in.​

7. ACCOUNTING STANDARDS VS. TAX FORMULAS

The Fundamental Conflict

Book Profit = Accounting Profit (Per Audited Statements)

Source: Net profit per P&L account prepared under Schedule III, Companies Act (2013)

Framework:

• Prepared per Ind AS (Indian Accounting Standards) or GAAP
• Reflects actual transactions recorded in journals, ledgers, and subsidiary books
• Audited by independent chartered accountants
• Subject to audit standards and professional responsibility

Nature of Entries:

• Every debit entry: An actual expense incurred
• Every credit entry: An actual income earned
• Matching Principle: Expenses matched with corresponding income

Example:

• Debited: ₹5 lakhs interest expense (actually paid on borrowing)
• Credited: ₹2 crore dividend (actually received)
• Result shown in P&L: Profit reduced by ₹5 lakhs

Rule 8D Disallowance = Tax Formula (Statutory Prescription)

Source: Section 14A(2) read with Rule 8D

Framework:

• Prescribed formula (direct expenses + 1% of investments)
• Does NOT require actual expenses to be incurred
• Includes presumptive amounts (the 1% is a legal fiction, not actual costs)
• Applied by AO through determination, not reflected in accounting books

Nature of Computation:

• Direct component: Actual expenses (IF traceable)
• Presumptive component (1%): Notional amount for indirect costs (whether incurred or not)

Example:

• Company holds ₹100 crore in dividend-yielding shares
• Rule 8D computes: 1% × ₹100 crore = ₹1 crore disallowance
• This ₹1 crore is never debited to the P&L
• It’s purely a tax computation on paper

Why Importing Rule 8D into Section 115JB Violates Accounting Principles

The Matching Principle Says:

If you’re adjusting book profit by removing exempt income (debit), you can only remove corresponding actual expenses (credit).

Rule 8D violates this because:

• The 1% presumptive component has no corresponding debit entry in P&L
• It’s a notional tax amount, not an accounting entry
• Importing it inflates book profit by non-accounting amounts

Example:

Proper Adjustment (Per Vireet):

• Exempt dividend credited to P&L: ₹2 crore
• Interest expense actually debited to P&L (relating to dividend portfolio): ₹30 lakhs
• Proper adjustment: Deduct ₹2 crore dividend, add back ₹30 lakh interest
• Book profit: Unaffected by the dividend’s presence (both income and expense removed)

Improper Adjustment (Department’s Position):

• Exempt dividend credited to P&L: ₹2 crore
• Rule 8D computed disallowance (including 1% presumption): ₹1.2 crore
• Improper adjustment: Deduct ₹2 crore dividend, add back ₹1.2 crore disallowance
• Book profit: Artificially inflated by importing non-P&L amounts

8. PRACTICAL EXAMPLES & COMPUTATIONAL SCENARIOS

Scenario 1: The Dividend Portfolio (Aligned with Vireet)

Facts:

ABC Ltd. for AY 2023-24:

• Equity portfolio (dividend-yielding): ₹100 crore
• Dividend earned: ₹2 crore (exempt under Section 10(34))
• Borrowing to finance portfolio: ₹50 crore
• Interest paid on borrowing: ₹5 crore (annual rate 10%)
• Salary to portfolio management staff: ₹50 lakhs (directly traceable)
• General office rent (allocated 20% to portfolio): ₹20 lakhs
• Business profit (separate): ₹50 crore
• Total expenses claimed: ₹5.7 crore

Section 14A Computation (Normal Income Track)

Rule 8D Calculation:

Direct Expenditure (Component 1):

• Interest: ₹5 crore (directly relating to portfolio)
• Staff salary: ₹50 lakhs
• Proportional rent: ₹20 lakhs
• Subtotal: ₹5.7 crore

Presumptive (Component 2):

• Average portfolio balance: ₹100 crore
• 1% thereof: ₹1 crore

Gross disallowance: ₹5.7 crore + ₹1 crore = ₹6.7 crore

Caps:

• (a) Total expenditure claimed: ₹5.7 crore ✓ (not exceeded)
• (b) Actual exempt income: ₹2 crore ✗ (exceeded)

Final Section 14A Disallowance (Capped): ₹2 crore

Taxable Income:

 

Business profit                  ₹50.00 crore

Dividend income (exempt)         ₹2.00 crore (not debited)

Less: Section 14A disallowance   (₹2.00 crore)

Taxable Income:                  ₹50.00 crore

Normal Tax @ 30%:                ₹15.00 crore

 

Section 115JB Computation (MAT Track) – Per Vireet (CORRECT)

Starting Point:

• Net profit per audited P&L: ₹52 crore (includes ₹2 crore dividend; interest, salary, rent already debited)

Adjustments per Explanation 1:

Add back (Clause f):

• Interest actually debited to P&L relating to dividend: ₹5 crore
• Salary actually debited relating to portfolio: ₹50 lakhs
• Proportional rent actually debited: ₹20 lakhs

Deduct (Clause ii):

• Dividend income credited to P&L: ₹2 crore

Book Profit Calculation:

 

Net profit per audited P&L:         ₹52.00 crore

Add: Interest (direct to dividend)  ₹ 5.00 crore

Add: Salary (portfolio staff)       ₹ 0.50 crore

Add: Rent (proportional)            ₹ 0.20 crore

Less: Exempt dividend income        (₹2.00 crore)

Book Profit:                        ₹55.70 crore

MAT @ 18.5%:                        ₹10.30 crore

 

Tax Payable: Higher of Normal Tax (₹15 crore) or MAT (₹10.30 crore) = ₹15 crore

Section 115JB Computation – Per Department (INCORRECT)

Department’s (Wrong) Approach:

• Takes the ₹2 crore Section 14A disallowance (capped amount)
• Adds it back to book profit (violating Vireet)

Incorrect Calculation:

text

Net profit per audited P&L:         ₹52.00 crore

Add: Actual expenses (as above)     ₹ 5.70 crore

Add: Section 14A disallowance       ₹ 2.00 crore (WRONG – not in P&L)

Less: Exempt dividend income        (₹2.00 crore)

Incorrectly Computed Book Profit:   ₹57.70 crore

MAT @ 18.5%:                        ₹10.68 crore

 

Impact: Company pays ₹0.38 crore extra MAT (₹10.68 vs. ₹10.30) due to Department’s erroneous addition. Over a company’s lifetime with consistent dividend portfolios, this compounds to significant overpayment.

Scenario 2: No Exempt Income (Per Corrtech)

Facts:

XYZ Ltd. holds ₹50 crore in dividend-yielding shares but received NO dividend in AY 2023-24.

Department’s Position (Pre-Vireet):
Apply Rule 8D: 1% of ₹50 crore = ₹50 lakhs disallowance under Section 14A

Per Corrtech Energy (CIT v. Corrtech):
No Section 14A disallowance because no exempt income earned

Under Section 115JB (Post-Vireet):

• No expense relating to exempt income is debited to P&L (because no dividend)
• Therefore, nothing to add back
• Book profit = Audited profit (no adjustment needed)

9. RECENT DEVELOPMENTS & APPELLATE TRENDS

Post-Vireet & Alembic Cases Following the Principle

K.B. Mehta Construction Pvt. Ltd. v. DCIT, 119 taxmann.com 456 (Ahmedabad ITAT)

Holding:

“Following Vireet Investments Special Bench, no disallowance can be made on account of Rule 8D disallowance while computing book profit u/s 115JB.”​[7]

Zaveri & Co. (P.) Ltd. v. DCIT, 118 taxmann.com 429 (Ahmedabad ITAT)

Holding:

“Special Bench in Vireet Investments has laid down the law definitively. Book profit computation for Section 115JB purposes is independent of Section 14A disallowances. Only actual P&L expenses relating to exempt income qualify for adjustment.”​[7]

Bennett Property Holdings Co. Ltd., ITA 502/Mum/2024 (Mumbai ITAT – Recent)

Holding (2024):

“No disallowance of expenses can be made in respect of any exempt income by invoking provisions contained in Section 14A read with Rule 8D while computing Book Profits under Section 115JB of the Act by following the decision of Special Bench of the Tribunal in Vireet Investment.”​[3]

Department’s Lingering Resistance

Despite Vireet Investments (2017), some AOs and Revenue officers continue to:

1. Add back Rule 8D disallowances to book profit
2. Cite CBDT Circular No. 5/2014 (now superseded)
3. Argue “literal” reading of Explanation 1(f)

However: Courts consistently reject these arguments. The position is now settled law.

Only counter: The Department has filed appeals in a few select cases before High Courts, but none have succeeded in overturning Vireet Investments.

10. CONCLUSION & STRATEGIC IMPLICATIONS

The Settled Legal Position

After Vireet Investments (2017), Alembic Ltd. (2019), and numerous follow-up decisions:

• Rule 8D disallowances are NOT added back to book profit under Section 115JB
• Only actual, accounting-recorded expenses debited to P&L that relate to exempt income are added back
• The “complete code” doctrine ensures Section 115JB operates independently of Section 14A
• Accounting principles (matching principle) prevail: avoid importing tax formulas into accounting computations

Strategic Implications for Taxpayers

In Normal Income Computation (Section 14A):

• Compute disallowance conservatively, capped at actual exempt income earned
• Maintain detailed documentation linking expenses to exempt income

In MAT Computation (Section 115JB):

• Do NOT add back Section 14A disallowances
• Focus on actual P&L debits and their direct nexus to exempt income
• File detailed computation showing this segregation

In Assessment Proceedings:

• If AO adds back Rule 8D disallowance to book profit, immediately contest before appellate authority
• Cite Vireet Investments (Special Bench) and Alembic Ltd. (High Court)
• These are binding precedents; very high success rate on appeal

In Advance Tax Planning:

• Recognize that Section 14A disallowance and Section 115JB adjustment are independent
• Plan for both separately
• Structure exempt-income investments with awareness that only actual P&L expenses reduce book profit

Key Takeaway

Section 14A and Section 115JB are two separate systems solving two separate problems:

• Section 14A: Prevents double benefits in normal income computation
• Section 115JB (MAT): Ensures minimum tax on accounting profit

They do NOT feed into each other. Section 14A disallowances do NOT inflate book profit.

This principle, established by Vireet Investments and reaffirmed in Alembic and subsequent decisions, is now settled law. The Department’s attempts to add back Rule 8D disallowances to book profit have been consistently rejected by appellate forums.

Reference

[1] “Special Bench Puts An End To The Controversy Of Applicability Of S. 14A Adjustment To Profit u/s 115JB” — available at https://itatonline.org/articles_new/special-bench-puts-an-end-to-the-controversy-of-applicability-of-s-14a-adjustment-to-profit-us-115jb/

[2] “No Section 14A Disallowance While Computing Book Profits under MAT — ITAT Special Bench Experts’ Opinion” — available at https://www.taxmann.com/research/income-tax/top-story/105010000000014620/no-section-14a-disallowance-while-computing-book-profits-under-mat-itat-special-bench-experts-opinion

[3] Product page at https://www.vildirect.com/product/6/subproduct/98/year/2024/caselaws/53094 — 

[4] “MAT Disallowance under Section 14A is to be added in the book profit under Section 115JB” — available at https://www.taxlok.com/view/latest/library/latest/details.html/id=gCl4aEPSqQg=/key=E

[5] (Judgement) at https://www.casemine.com/judgement/in/5de44a6846571b63ad4efd13 —

[6] “S. 14A & 115JB: Alembic – Analysis” — available at http://www.lexpertsonline.com/home/portals/0/HC/Alembic%20-%2014A%20&%20115JB.pdf[7] “Analysis of Section 14A read with Rule 8D” — available at https://taxguru.in/income-tax/analysis-section-14a-read-rule-8d.html