2020 (11) TMI 943 - AT - Income Tax

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 ... Disallowance u/s.14A r.w.r. 8D - Computation of deduction - HELD THAT:- AO had duly recorded his satisfaction as to why the computation mechanism provided by the assessee is incorrect and also had applied the computation mechanism provided in Rule 8D(2)(iii) of the Rules by considering all the investments. Special Bench of Delhi Tribunal in the case of Vireet Investments vs. ACIT [2017 (6) TMI 1124 - ITAT DELHI] categorically held that only those investments which had actually yielded exempt income should be considered for the purpose of working out the disallowance under third limb of Rule 8D(2) of the Rules. Assessee had furnished the workings for the same on without prejudice basis in page 7 of the paper book. The ld. AO is directed to go through the same and re-compute the disallowance u/s.14A by considering only those investments which had actually yielded exempt income under Rule 8D(2)(iii) of the Rules. On such re-computation, the ld. AO is also directed to reduce the sum of ₹ 5,40,000/- being the amount already disallowed voluntarily by the assessee. Ground Nos.1 – 1.3 raised by the assessee are allowed for statistical purposes. Deduction of education cess u/s.37(1) - additional ground raised by the assessee - HELD THAT:- As in the light of the decision of the Hon’ble Supreme Court in the case of NTPC Ltd [1996 (12) TMI 7 - SUPREME COURT], the additional ground raised by the assessee is admitted and taken up for adjudication We find that the issue raised in additional ground is squarely covered in favour of the assessee by the decision in the case of Sesa Goa Ltd., vs. JCIT [2020 (3) TMI 347 - BOMBAY HIGH COURT] wherein it was categorically held that the expression “cess” ought not to be read or included in the expression “any rate of tax levied” as appeared in Section 40a(ii) - Additional ground raised by the assessee is allowed. 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.