2022 (1) TMI 233 - AT - Income Tax

Tribunal partially allows appeal, rules for assessee on disallowances. Section 14A, 35(2AB) overturned, Education Cess deduction permitted.

The appeal was partly allowed by the Tribunal, ruling in favor of the assessee on various grounds. The disallowances under section 14A and section 35(2AB) ... Disallowance under section 14A - Mandatory satisfaction before invoking section 14A - Computation of book profit for MAT under section 115JB - Weighted deduction under section 35(2AB) - Deductibility of Education Cess as expenditureDisallowance under section 14A - Mandatory satisfaction before invoking section 14A - Deletion of the disallowance of Rs. 38,29,184 made by the Assessing Officer under section 14A. - HELD THAT: - The Tribunal noted that in the two immediately preceding assessment years the AO had failed to record the mandatory satisfaction before making a disallowance under section 14A and the addition was deleted. The facts for the assessment year 2015-16 are mutatis mutandis similar, and the Departmental Representative accepted this fact. Following the precedent in the assessee's own case for earlier years, the Tribunal concluded that the AO had not satisfied the mandatory pre-condition required before invoking section 14A and therefore the addition could not be sustained. [Paras 4]Deletion of the disallowance of Rs. 38,29,184 under section 14A.Computation of book profit for MAT under section 115JB - Disallowance under section 14A - Removal of the increased disallowance under section 14A from the computation of book profit under section 115JB. - HELD THAT: - The Tribunal observed that the identical issue arose in preceding years and considered relevant authorities including the decision cited as Pr. CIT v. M/s. Bhushan Steel Ltd. The Tribunal followed the view that no disallowance under section 14A can be made in computing income under section 115JB and therefore the increase of disallowance in the MAT book profit could not be sustained. [Paras 5, 6]Disallowance under section 14A excluded from the computation of book profit under section 115JB.Weighted deduction under section 35(2AB) - Allowing weighted deduction in respect of the amount not allowed by DSIR (Rs. 29.00 lakh) which the AO disallowed. - HELD THAT: - The Tribunal noted that the factual position mirrors that of earlier assessment years where it had allowed the weighted deduction notwithstanding the DSIR's reduction, observing that the amendment to the relevant rules took effect only from 01-07-2016 and thus did not apply to the claim for the year under appeal. Applying the same reasoning to the instant year, the Tribunal held that the assessee's claim for weighted deduction on the disputed amount must be allowed. [Paras 8, 9]Weighted deduction under section 35(2AB) allowed in respect of the amount disallowed by DSIR.Deductibility of Education Cess as expenditure - Admission and allowance of the additional ground that Education Cess paid is deductible for the year, subject to verification. - HELD THAT: - Relying on the principle that a Tribunal may entertain a question of law not raised below where relevant facts are on record, the Tribunal admitted the additional ground. It observed that the Jurisdictional Bombay High Court in Sesa Goa Ltd. v. JCIT and the Rajasthan High Court in Chambal Fertilisers have held that Education Cess is not a disallowable expenditure under section 40(a)(ii). In view of these precedents, the Tribunal directed allowance of the deduction for Education Cess after verification of the claim. [Paras 10, 11, 12]Deduction for Education Cess admitted and directed to be allowed after verification.Final Conclusion: The appeal is partly allowed: the section 14A disallowance of Rs. 38,29,184 is deleted; that amount is excluded from book profit under section 115JB; the weighted deduction under section 35(2AB) is allowed for the disputed amount; and the claim for deduction of Education Cess is admitted and directed to be allowed subject to verification. Issues:1. Disallowance under section 14A of the Income-tax Act, 1961.2. Disallowance under section 14A in the computation of book profit under section 115JB.3. Disallowance of weighted deduction under section 35(2AB).4. Claim of deduction of Education Cess paid for the year.Issue 1: Disallowance under section 14A of the Income-tax Act, 1961:The appeal challenges the disallowance of Rs. 38,29,184 made by the Assessing Officer under section 14A. The assessee earned exempt income of Rs. 5.42 crore, and a disallowance of Rs. 20.00 lakh was offered suo motu under section 14A. However, the AO computed a higher disallowance under Rule 8D(2) leading to the addition of Rs. 38,29,184. The Tribunal, considering past precedents, held that the AO failed to record mandatory satisfaction before making the disallowance. Following the precedent, the addition was deleted.Issue 2: Disallowance under section 14A in the computation of book profit under section 115JB:The next ground of appeal concerns the increase of disallowance under section 14A in the computation of book profit under section 115JB. The Tribunal referred to relevant judgments and held that no disallowance can be made under section 14A in the computation of income under section 115JB. Following the precedent, the ground of appeal was allowed.Issue 3: Disallowance of weighted deduction under section 35(2AB):The third ground challenges the disallowance of weighted deduction of Rs. 29.00 lakh under section 35(2AB). The assessee claimed a deduction of Rs. 11.57 crore, which was reduced by the DSIR to Rs. 11.28 crore. The amount not allowed by the DSIR was held to be ineligible for weighted deduction under section 35(2AB). The Tribunal, following past decisions, granted the weighted deduction on the amount not allowed by the DSIR, as the relevant rules amendment did not apply to mar the claim.Issue 4: Claim of deduction of Education Cess paid for the year:The assessee raised an additional ground seeking a deduction of Education Cess paid amounting to Rs. 1,09,37,976. Citing relevant case law, the Tribunal admitted the additional ground for disposal on merits. Referring to judgments by the jurisdictional High Courts, the Tribunal directed to allow the deduction for Education Cess after verification, as it is not considered disallowable expenditure under the Act.In conclusion, the appeal was partly allowed, with the Tribunal ruling in favor of the assessee on various grounds, including the disallowances under section 14A and section 35(2AB), and allowing the deduction for Education Cess paid.