Assessee wins on Section 14A disallowance and education cess deduction issues after successful appeal

ITAT Ahmedabad allowed the appeal on two grounds. First, regarding disallowance under section 14A read with Rule 8D, the tribunal held that since the assessee had interest-free funds exceeding investments generating exempt income and the AO failed to record dissatisfaction under section 14A(2) before invoking Rule 8D, the disallowance was unsustainable. Second, concerning education cess deduction under section 37, the tribunal directed the AO to dispose of the assessee's Form 69 application for withdrawal of claim following retrospective amendment to section 40(a)(ii) by Finance Act 2022, noting the application was filed within prescribed period and format.

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Issues Involved:
1. Disallowance u/s 14A read with Rule 8D of Income-tax Rules, 1962.
2. Deduction claimed u/s 37 for education cess and higher secondary education cess.

Summary:

Issue 1: Disallowance u/s 14A read with Rule 8D
- Facts: The assessee, a company engaged in manufacturing and sale of chewing tobacco, filed returns for AY 2018-19 and 2020-21. The Assessing Officer (AO) made disallowances u/s 14A r.w.r. 8D for both years.
- Assessee's Argument: The AO did not record dissatisfaction with the assessee's suo moto disallowance, which is a prerequisite for invoking Rule 8D. The assessee cited judgments from the Hon'ble Jurisdictional High Court in support.
- Tribunal's Findings: The AO failed to record dissatisfaction as required u/s 14A(2). The Tribunal cited precedents from the Hon'ble Gujarat High Court, emphasizing that the AO must record dissatisfaction before applying Rule 8D. The Tribunal deleted the disallowance for both AY 2018-19 and 2020-21.

Issue 2: Deduction claimed u/s 37 for education cess and higher secondary education cess
- Facts: For AY 2020-21, the assessee claimed education cess as a deductible business expenditure. The AO disallowed this based on the amendment in Section 40 by the Finance Act, 2022.
- Assessee's Argument: The assessee complied with the provisions of Section 155(18) and Rule 132 by filing Form No.69 before the due date, requesting recomputation without the deduction for cess.
- Tribunal's Findings: The Tribunal directed the AO to dispose of the application in Form No.69 and pass an order in accordance with the law. The Tribunal allowed the ground for statistical purposes.

Conclusion:
- ITA No. 1006/Ahd/2023: Appeal allowed, disallowance u/s 14A deleted.
- ITA No. 1007/Ahd/2023: Appeal allowed for statistical purposes, AO directed to address the application in Form No.69.

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