Appeal success in Income Tax case: Disallowance recalculated, education cess deductible.

The appeal in ITA No.2547/Mum/2019 for A.Y.2012-13 involved disallowance u/s.14A of the Income Tax Act. The AO's disallowance was directed to be re-computed by considering only investments yielding exempt income under Rule 8D(2)(iii). Additionally, the deduction of education cess u/s.37(1) of the Act was allowed as deductible expenditure based on judicial decisions and legislative history. The appeal of the assessee was allowed for statistical purposes, with the orders pronounced on 27/11/2020.

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Issues involved:
1. Disallowance u/s.14A of the Income Tax Act, 1961.
2. Deduction of education cess u/s.37(1) of the Act.

Issue 1: Disallowance u/s.14A of the Income Tax Act, 1961:
The appeal in ITA No.2547/Mum/2019 for A.Y.2012-13 concerns the disallowance u/s.14A of the Act r.w.r.14A of the Act r.w.r. 8D of the Rules. The assessee, a Non-Banking Finance Company (NBFC), declared total income of &8377; 2,16,21,270/- for A.Y.2012-13, with dividend income of &8377; 9,84,75,987/- claimed as exempt. The assessee voluntarily disallowed &8377; 5,40,000/- towards expenses incurred for earning dividend income u/s.14A of the Act. The ld. AO made a final disallowance of &8377; 6,95,073/- after reducing the voluntarily disallowed amount. The ld. AO applied the third limb of Rule 8D(2) of the Rules, considering all investments. The special Bench of Delhi Tribunal in Vireet Investments vs. ACIT held that only investments yielding exempt income should be considered for disallowance under Rule 8D(2). The ld. AO is directed to re-compute the disallowance u/s.14A by considering only investments yielding exempt income under Rule 8D(2)(iii). Ground Nos.1 – 1.3 raised by the assessee are allowed for statistical purposes.

Issue 2: Deduction of education cess u/s.37(1) of the Act:
The additional ground raised by the assessee on 20/11/2020 claims deduction of education cess u/s.37(1) of the Act while computing business income. The additional ground is a legal issue and is admitted for adjudication. The issue is covered in favor of the assessee by the decision of the Hon’ble Jurisdictional High Court, Goa Bench in Sesa Goa Ltd., vs. JCIT. The expression “cess” is not included in Section 40(a)(ii) of the Act, making “cess” allowable as deductible expenditure. Various judicial decisions and the legislative history support this interpretation. The ITAT reasoned that “cess” collected as part of income tax should be construed as “tax”, but the mode of collection is not determinative. The Supreme Court's decision in Unicorn Industries case does not apply to the present matter. The additional ground raised by the assessee is allowed.

In conclusion, the appeal of the assessee is allowed for statistical purposes, and the orders were pronounced on 27/11/2020.

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