2021 (5) TMI 241 - AT - Income Tax

Tribunal rules in favor of assessee on expenditure assessment, allows education cess deduction

Bachhraj Factories Pvt. Ltd. Versus ACIT, Circle-3 (1) (1), Mumbai

Bachhraj Factories Pvt. Ltd. Versus ACIT, Circle-3 (1) (1), Mumbai - TMI Issues Involved:1. Disallowance under section 14A in respect of expenditure attributable to earning exempt income.2. Deduction in respect of education cess paid.Issue-wise Detailed Analysis:Disallowance under section 14A in respect of expenditure attributable to earning exempt income:Facts and Arguments:- The assessee filed a return of income declaring a total income of Rs. 4,38,95,600 for the A.Y.2014-15. The case was selected for scrutiny, and notices under sections 143(2) and 142(1) were issued.- The assessee is engaged in the business of ginning and pressing of cotton and earned exempt income from investments in shares and mutual funds.- The Assessing Officer (AO) applied the provisions of section 14A read with Rule 8D to assess the expenditure to earn the exempt income at Rs. 26,34,970, whereas the assessee had suo-moto disallowed expenses of Rs. 1,55,774.- The CIT(A) partly allowed the claim of the assessee, but the assessee filed an appeal before the Tribunal.Tribunal's Findings:- The Tribunal noted that the investment which did not yield exempt income should be excluded while assessing the expenditure to earn the exempt income under section 14A read with Rule 8D(2).- The assessee's representative relied on the decision of the Hon’ble Delhi High Court in the case of ACIT Vs. Vireet Investment P. Ltd., which supported the exclusion of investments not yielding exempt income.- The Tribunal concluded that the CIT(A) erred in upholding the disallowance without excluding the investments that did not yield exempt income. Therefore, the Tribunal directed the AO to reassess the expenditure in line with the decision in Vireet Investment P. Ltd.Conclusion:The Tribunal decided in favor of the assessee, directing the AO to exclude investments that did not yield exempt income while assessing the expenditure under section 14A read with Rule 8D(2).Deduction in respect of education cess paid:Facts and Arguments:- The assessee challenged the disallowance of education cess while assessing the income tax paid during the year.- The assessee's representative argued that the deduction for education cess should be allowed, relying on the decision of the Hon’ble Bombay High Court in the case of Sesa Goa.Tribunal's Findings:- The Tribunal referred to the decision in Sesa Goa, where it was held that the term 'any rate or tax levied' in section 40(a)(ii) does not include 'cess,' and thus, the amounts paid towards 'cess' are deductible.- The Tribunal noted the legislative history and CBDT Circular No. F. No. 91/58/66-ITJ(19), which clarified that 'cess' is not included in the disallowable items under section 40(a)(ii).- The Tribunal concluded that the deduction for education cess should be granted to the assessee.Conclusion:The Tribunal decided in favor of the assessee, allowing the deduction for education cess on the income tax paid during the year.Final Order:The appeal of the assessee was partly allowed, with the Tribunal directing necessary adjustments to the disallowance under section 14A and granting the deduction for education cess. The order was pronounced in the open court on 07/04/2021.