2021 (9) TMI 1126 - AT - Income Tax

Tribunal limits disallowance under section 14A, allows deduction for education cess.

The Tribunal allowed the appeal, directing the Assessing Officer to limit the disallowance under section 14A to the exempt income amount and to permit the ... Disallowance u/s 14A r.w.r. 8D - addition to the extent of exempt income - HELD THAT:- It is true that the assessee has suo moto disallowed ₹ 1,34,268/- on exempt income of ₹ 14,451/-. However, in light of the decision of M/S. CARAF BUILDERS & CONSTRUCTIONS PVT. LTD.[2018 (12) TMI 410 - DELHI HIGH COURT] contention of the assessee cannot be brushed aside lightly. We, therefore, direct the Assessing Officer to restrict the disallowance to the extent of exempt income as disallowance u/s. 14A of the Act cannot exceed exempt income. Education cess and secondary and higher education cess as a disallowable expenditure u/s. 40(a)(ii) - HELD THAT:- We find that such claim has been allowed by the co-ordinate benches in several cases and we refer to the decision in the case of EXLSERVICES. COM (INDIA) PVT. LTD. [2021 (9) TMI 361 - ITAT DELHI] as held education cess is an allowable deduction while computing the income under the head 'Profits and gains from profession or business'.Assessing Officer is directed to allow the deduction on cess, education cess and higher education cess. Issues:1. Disallowance under section 14A of the Income Tax Act, 1961.2. Disallowance of education cess and secondary and higher education cess under section 40A(ii) of the Act.Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:The appeal pertains to the addition made under section 14A of the Act, concerning exempt income and disallowance under rule 8D. The Assessing Officer computed disallowance at Rs. 5,07,008, while the exempt income was only Rs. 14,451. The assessee contended that the disallowance should be limited to the exempt income amount. The Commissioner of Income Tax (Appeals) restricted the disallowance to Rs. 1,34,268, considering the assessee's self-disallowed amount. The appellant cited the decision of the Delhi High Court in Caraf Builders and Constructions Pvt Ltd case, emphasizing that disallowance under section 14A cannot exceed exempt income. The Tribunal agreed with the appellant, directing the Assessing Officer to restrict the disallowance to the exempt income of Rs. 14,451.Issue 2: Disallowance of education cess and secondary and higher education cess under section 40A(ii) of the Act:The additional ground raised by the assessee concerned the disallowance of education cess and secondary and higher education cess under section 40A(ii) of the Act. The appellant relied on precedents where similar claims were allowed, including the case of ExlServices.Com India Pvt Ltd. The Tribunal noted that the issue had been decided in favor of the assessee in earlier years and observed that the facts in the present case were identical to those in the previous cases. Referring to the decision of the Rajasthan High Court and the CBDT circular, the Tribunal directed the Assessing Officer to allow the deduction for the education cess and higher education cess. The Tribunal upheld the additional ground, instructing the AO to permit the deduction on cess amounts.In conclusion, the Tribunal allowed the appeal of the assessee, directing the Assessing Officer to restrict the disallowance under section 14A to the exempt income amount and to allow the deduction for education cess and higher education cess under section 40A(ii) of the Act.