Tribunal Partially Upholds Department's Appeal: Disallowances, FCCB Premium, and Education Cess Examined.

The Tribunal partially allowed the department's appeal (ITA No. 2439/Kol/2018) and dismissed the assessee's appeal (ITA No. 2184/Kol/2018). The Tribunal upheld the CIT(A)'s decision to delete disallowances under Rule 8D(2)(ii) and restrict disallowances under Rule 8D(2)(iii). It also upheld the allowance of premium on redemption of FCCB as a business expense. However, it sided with the department regarding bad debts from the Renukoot unit post-slump sale, disallowing the claim. The Tribunal dismissed the additional ground on the deduction of Education Cess, aligning with the SC's view that it is not deductible.

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Issues Involved:
1. Deletion of disallowance computed under Rule 8D(2)(ii) and restriction of disallowance under Rule 8D(2)(iii).
2. Allowability of premium on redemption of Foreign Currency Convertible Bonds (FCCB) as an expense.
3. Allowability of bad debts written off from the Renukoot unit post slump sale.
4. Deduction of Education Cess as an allowable expenditure.

Issue-wise Detailed Analysis:

Ground No. 1: Deletion of Disallowance Computed under Rule 8D(2)(ii) and Restriction under Rule 8D(2)(iii)
The department contested the deletion of disallowance made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962, for expenses incurred to earn tax-exempt income. The AO disallowed Rs. 4,00,13,918/- under Rule 8D(2)(ii) & (iii). However, the CIT(A) deleted the disallowance under Rule 8D(2)(ii) citing that the loan was for specific purposes and the assessee had sufficient own funds. This decision was based on the Hon’ble Calcutta High Court ruling in "CIT Vs. REI Agro Industries Ltd." The CIT(A) also restricted the disallowance under Rule 8D(2)(iii) to only those investments that earned exempt income, relying on the decisions of the Hon’ble Calcutta High Court in "CIT Vs. REI Agro" and the Hon’ble Delhi High Court in "ACB India Ltd Vs. ACIT." The department could not provide any contrary decision, leading to the dismissal of this ground of appeal.

Ground No. 2: Allowability of Premium on Redemption of FCCB as an Expense
The department contested the deletion of disallowance of Rs. 6,15,27,170/- made by the AO for the premium paid on redemption of FCCB. The AO disallowed the expense, noting it was not routed through the Profit & Loss account and was used for purchasing fixed capital assets. However, the CIT(A) allowed the expense, treating it as interest on borrowed funds used for business purposes. The assessee's counsel argued that interest on capital borrowed for business is deductible under Section 36(1)(iii) of the Act, regardless of accounting entries. The Tribunal upheld the CIT(A)'s decision, noting that the issue was previously decided in favor of the assessee by the Co-ordinate Bench.

Ground No. 3: Allowability of Bad Debts Written Off from Renukoot Unit Post Slump Sale
The department challenged the CIT(A)'s decision to allow bad debts of Rs. 59,91,093/- written off from the Renukoot unit, which was transferred through a slump sale. The AO noted that the assets and liabilities of the unit were transferred to the purchaser, Aditya Birla Chemicals (India) Ltd., and thus the bad debts should not be claimed. The CIT(A) directed that the bad debts be considered in the net worth calculation of the unit. However, the Tribunal sided with the AO, stating that the assessee's claim was not justified as the unit was sold, and the assets/liabilities were transferred. This ground was allowed in favor of the department.

Assessee’s Appeal:
The assessee's appeal (ITA No. 2184/Kol/2018) included grounds related to the bad debts written off, which were already discussed and dismissed in the department's appeal.

Additional Ground: Deduction of Education Cess
The assessee argued that Education Cess should be allowed as a deductible expenditure, relying on the CBDT Circular No. 91/58/66-ITJ(19) and decisions from the Hon’ble Rajasthan High Court and the Hon’ble Kolkata Tribunal. However, the Tribunal referred to the Hon’ble Supreme Court's decision in "CIT Vs. K. Srinivasan," which held that surcharge and additional surcharge are part of income tax. Since Education Cess is considered an additional surcharge, it is not deductible. This additional ground was dismissed.

Conclusion:
The department's appeal (ITA No. 2439/Kol/2018) is partly allowed, and the assessee's appeal (ITA No. 2184/Kol/2018) is dismissed. The order was pronounced in open court on 26-10-2021.

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