TaxTMI 
TaxTMI 
2021 (11) TMI 705
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....section 14A in respect of expenditure attributable to earning exempt income: 1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the disallowance under section 14A in respect of expenditure attributable to earning of exempt income. 2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in invoking the provisions of Rule 8D without recording non-satisfaction with the correctness of the disallowance of Rs. 4,59,311/- made by the appellant on a reasonable basis. 3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that the appellant cannot challenge the non-recording of satisfaction before making the disallowance as per Rule 8D on the ground that the appellant had itself made a suo-moto disallowance. 4. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not appreciating the fact that disallowance under section 14A can be made only in respect of ....
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....s in the nature of stock-in-trade. Deduction in respect of education cess paid: 12. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that education cess on income-tax paid during the year is not an allowable expenditure under section 40(a)(ii) of the Act. 13. On the facts and in the circumstances of the case and in law, the appellant prays that the Assessing Officer be directed to grant deduction in respect of education cess on dividend distribution tax paid during the year since the same is not subject to disallowance under section 40(a)(ii) of the Act. 14. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in relying on the decision of the Hon'ble Bombay High Court in the case of Lubrizol India Ltd. vs. CIT [1991] 54 Taxman 363 (Bombay), which is distinguishable on facts since the said decision deals with allowability of deduction in respect of surtax. Each of the above grounds of appeal is without prejudice and in the alternative to each other. The appellant hereby reserves the right to add to, ....
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....n amount of Rs. 63,31,687/-. Accordingly, vide his order passed u/s 143(3), dated 30.11.2016 the A.O determined the income of the assessee company at Rs. 53,63,69,370/-. 4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A) the assessee assailed the disallowance that was computed by the A.O u/s 14A r.w Rule 8D. Although the CIT(A) principally upheld the disallowance made by the A.O u/s 14A of the Act, however, he directed the A.O to exclude the investments that had yielded taxable income while computing the disallowance u/s 14A of the Act. Also, the assessee had sought deduction of "education cess" on income tax paid during the year. However, the CIT(A) holding a conviction that as income tax was not allowable u/s 40(a)(ii) of the Act, therefore, on the same footing education cess was also not to be allowed as a deduction. Backed by his aforesaid observations the CIT(A) partly allowed the appeal. 5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. It was submitted by the ld. Authorized Representative (for short 'A.R') for the assessee that the A.O without recording any satisfaction tha....
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....d jurisdiction for dislodging the disallowance that was on a suo-motto basis offered by the assessee u/s 14A of the Act and therein substituting the same by that as was computed by him by triggering the mechanism provided in Rule 8D. ; and (ii). that as to whether or not the CIT(A) is right in law and facts of the case in concluding that the "education cess" is not allowable as a deduction u/s 40(a)(ii) of the Act. 7. Before adverting to the issue in question i.e as to whether or not the A.O had rightly assumed jurisdiction and dislodged the assessee's claim that no expenditure could be attributed for earning of the exempt dividend income, we think it apt to first cull out the position of law as regards the same. The Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC) had, inter alia, held, that the A.O is obligated to mention the reasons while concluding that the claim of the assessee that no expenditure was incurred to earn the exempt dividend income was not to be accepted. It was observed by the Hon'ble Apex court that sub-section (2) and (3) of Sec. 14A of the Act r.w Rule 8D merely prescribe a formula for de....
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....er Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While It is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case." Also, the aforesaid view was once again reiterated by the Hon'ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). In its aforesaid order, it was, inter alia, observed by the Hon'ble Court that before taking recourse to the theory of apportionment and computing the disallowance under Sec. 14A(2) r.w. R....
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....dividend income of Rs. 13,85,03,376/-. It was exempted under the IT Act. The Assessee claimed that he did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the Assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The Assessee only issued the cheques. The AO disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the Assessee could not have invested in the mutual funds. The AO took the view that section 14A clearly applied to the Assessee's case. The AO accordingly invoked Rule 8D and computed the disallowance at 0.5% of Rs. 381,67,09,7317-, the average investment. Then, he disallowed Rs. 1,90,83,548/-. The Assessee appealed to the CIT(A). Indeed, the appellate authority confirmed the AO's disallowance. Of course, the Tribunal reversed it. Let us see whether the Tribunal's view is sustainable. 12. Section 14A, inserted by the Finance Act 2001 with retrospective effect from 1 April 1962, aims to disallow expenditure incurred in relation to....
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....n interesting word about this 'inequitable and unfair1 provision. According to Kanga & Palkhiwala, on a cursory reading, section 14A seeks to prevent a deduction that may result when income does not form part of the taxable income. But the expenditure incurred to earn that income is allowable as a deduction. However, this section and Rule 8D have been amended several times. Those amendments have resulted in highly unfair consequences for Assessees who earn dividend income. The object of exempting dividend income under section 10(34) and income from mutual funds under section 10(33) was to encourage investments in shares and promote savings. 15. Dividends are not taxed in the hands of the shareholder, but it would be incorrect and anomalous, according to the revising author, to state that dividends are a category of income which does not suffer any tax. The object of section 14A is to disallow expenditure on income which has not suffered tax. That said, under section 115-O, the dividend is taxed at the time of distribution at the prescribed rate. That means, tax is paid by the company irrespective of whether an Assessee has income below the taxable limit. Had the divide....
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.... of section 14A(I) but has not justified how the expenditure the Assessee incurred during the relevant year related to the income not forming part of its total income. The AO, according to the Tribunal, straightaway applied Rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section I4A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the Assessee, the Assessing Officer must give a clear finding with reference to the Assessee's accounts as to how the other expenditure claimed by the Assessee out of the....
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....egal fees, employee salary, general expenses etc. had before rejecting the disallowance that was offered by the assessee on a suo-motto deemed basis, failed to give a clear finding with reference to the assessee's accounts as to how the other expenditure that were claimed by the assessee in respect of its non-exempt income was related to its exempt income. In our considered view, the failure on the part of the A.O to record his satisfaction that having regard to the accounts of the assessee, as placed before him, it was not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee, therein, divests him of the jurisdiction for dislodging the claim of the assessee and substituting the same by an amount arrived at by triggering the mechanism provided in Rule 8D. Accordingly, backed by our aforesaid observations, we are unable to persuade ourselves to subscribe to the view taken by the CIT(A) who had upheld the disallowance made by the A.O u/s 14A of the Act. We, thus, set-aside the order of the CIT(A) and vacate the additional disallowance of the Rs. 63,31,687/- made by the A.O u/s 14A of the Act. The Grounds of appeal Nos. 1 to 11 are....
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....ided that "any rate or tax levied" on "profits and gains of business or profession" shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession", but then, there was no reference to any "cess". Also, the High Court observed that there was no scope to accept that "cess" being in the nature of a "tax" was equally not deductible in computing the income chargeable under the head "profits and gains of business or profession". It was further observed that if the legislature would had intended to prohibit the deduction of amounts paid by an assessee towards say, "education cess" or any other "cess", then, it could have easily included a reference to "cess" in clause (ii) of Section 40(a). On the basis of its aforesaid observations, the Hon'ble High Court had concluded that now when the legislature had not provided for any prohibition on the deduction of any amount paid towards "cess" in clause (ii) of Sec. 40(a), therefore, holding to the contrary would amount to reading something which is not to be found in the text of the provision of Sec. 40(a)(ii). Accordingly, the Hon'ble High Court had concluded that there was no prohibition o....
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.... In New Shorrock Spinning and Manufacturing Co. Ltd. Vs Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it. 19. Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT vs Motors & General Stores 66 ITR 692 (SC)]. 20. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presump....
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.... profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains" 25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word "cess" from the aforesaid clause from the Income Tax Bill, 1961. The effect of the omission of the word "cess" is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head " profits and gains of business or profession". Since the deletion of expression "cess" from the Income Tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute. 26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No.91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :- "Interpretation of provision of Section 40(a)(ii) of IT Act, 1961-Clarification regarding. "Recently a case has come to the notice of the Board where the Income Tax Officer ha....
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....d Palkhivala's "The Law and Practice of Income Tax" (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to the decision of Privy Council in CIT Vs Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government 15 TXA17&18-13 dt.28.02.2020 Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd Vs CIT [82 ITR 580] that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction s....
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.... that since "cess" is collected as a part of the income tax and fringe benefit tax, therefore, such "cess" is to be construed as "tax". According to us, there is no scope for such implications, when construing a taxing statute. Even, though, "cess" may be collected as a part of income tax, that does not render such "cess", either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the IT Act. The mode of collection, is really not determinative in such matters. 34. Ms. Linhares, has relied upon M/s Unicorn Industries Vs Union of India and others, 2019 SCC Online SC 1567 in support of her contention that "cess" is nothing but "tax" and therefore, there is no question of deduction of amounts paid towards "cess" when it comes to computation of income chargeable under the head profits or gains of any business or profession. 35. The issue involved in Unicorn Industries ( supra ) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the 'education cess, higher education cess and National Calamity Contingent Duty (NCCD)' on it could be construed as "duty of excise" which....
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....mmissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant - Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant - Assessee, both before the Commissioner (Appeals) as well as the ITAT. 39. In CIT Vs Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336, one of the questions of law which came to be framed was whether on the facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra ) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze (supra) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd Vs CIT (199 ITR 351) to hold that the Appellate Authorities....