2021 (9) TMI 1464 - AT - Income Tax

Disallowance u/s 14A - Necessity to record satisfaction - HELD THAT - Although, the CIT(A) had observed that the possibility of use of services of staff, office and establishment relating to the proprietary business of the assessee for making investments in shares and mutual funds could not be ruled out, however, we find, that he too had failed to record his satisfaction that having regards to the accounts of the assessee, it was not possible to accept the correctness of the assessee s claim that no disallowance of any expenditure was called for u/s 14A. Assessee had maintained separate books of accounts for his activity of making investments in shares and mutual funds. Accordingly, in case the A.O; or the CIT(A) in exercise of his powers which are coterminous with that of an A.O, sought to disallow the claim of the assessee that no expenses could be attributed to earning of the exempt dividend income by him, then, there was an innate obligation cast upon them to have recorded the requisite satisfaction that having regard to the accounts of the assessee, as placed before them, it was not possible to generate the requisite satisfaction with regards to the correctness of the aforesaid claim of the assessee. We are afraid that as there is a clear lapse on the part of the lower authorities in validly assuming jurisdiction for dislodging the assessee s claim that no disallowance u/s 14A was called for in his hands, therefore, the disallowance worked out by the A.O u/s 14A r.w. Rule 8D(2)(iii) which thereafter had been sustained by the CIT(A) cannot be upheld and is liable to be vacated. The Ground of appeal no.1 is allowed in terms of our aforesaid observations. Claim of education cess on the tax payable by him should have been allowed while computing his income for the year under consideration - HELD THAT - Claim of the Ld. A.R that unlike rates and taxes the amount paid by an assessee towards Education Cess or any other cess viz. the Secondary and Higher Education Cess is not a disallowable expenditure u/s 40(a)(ii) we find that the said issue is squarely covered by the recent order of the Hon ble High Court of Bombay in the case of Sesa Goa Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT therein conclude that Education Cess and the Secondary and Higher Education Cess is not disallowable as a deduction u/s 40(a)(ii) of the Act. Accordingly, we herein restore the issue to the file of the A.O with a direction to give consequential effect to our aforesaid observations. The additional ground of appeal raised by the assessee is allowed in terms of our aforesaid observations.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Deduction of education cess while computing income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The assessee challenged the disallowance of Rs.11,13,567/- under Section 14A of the Income Tax Act, which pertains to expenses related to earning exempt income. The assessee argued that no such expenses were claimed as he maintained separate books for personal investments and business operations. The Assessing Officer (A.O) disallowed the amount without recording satisfaction regarding the necessity of such disallowance, which is a requirement as per the judgments of the Hon’ble Supreme Court in cases like Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT and Maxopp Investments Ltd. Vs. CIT. The CIT(A) upheld the A.O's decision, suggesting that the use of business resources for earning exempt income could not be ruled out. However, the Tribunal found that neither the A.O nor the CIT(A) recorded the necessary satisfaction regarding the correctness of the assessee’s claim. The Tribunal concluded that the disallowance under Section 14A was invalid due to the lack of recorded satisfaction and vacated the disallowance of Rs.11,13,567/-.

2. Deduction of Education Cess:

The assessee raised an additional ground claiming that education cess should be allowed as a deduction while computing income. This claim was based on the recent judgment of the Hon’ble High Court of Bombay in Sesa Goa Limited vs. Joint Commissioner of Income-tax, which held that education cess is not included in the term "tax" under Section 40(a)(ii) of the Income Tax Act and thus is deductible. The Tribunal admitted this additional ground, noting it as a purely legal issue not requiring further fact verification. The Tribunal referred to the Bombay High Court's detailed reasoning, which included legislative history and CBDT Circular No. F. No.91/58/66-ITJ(19), dated 18th May 1967, which clarified that "cess" is not disallowable under Section 40(a)(ii). Consequently, the Tribunal directed the A.O to allow the deduction of education cess in computing the assessee’s income.

Conclusion:

The appeal was allowed in favor of the assessee. The disallowance under Section 14A was vacated due to the lack of recorded satisfaction by the A.O and CIT(A). Additionally, the Tribunal directed the A.O to allow the deduction of education cess based on the Bombay High Court's judgment in Sesa Goa Limited. The order was pronounced on 01.09.2021.