2019 (12) TMI 980 - AT - Income Tax

Disallowance u/s 14A - assessee submitted before the AO that the investments in SBI Mutual Fund were made out of own surplus funds and no funds were borrowed for this purpose - AO after recording reasons and following CBDT Circular No. 5/2014 dated 11.02.2014 made disallowance - HELD THAT - Keeping in view the judgment of Hon ble Delhi High Court in the case Cheminvest Ltd. Vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT - Further, in the case of IL FS Energy Development Company Ltd., 2017 (8) TMI 732 - DELHI HIGH COURT 2017 399 ITR 483 (Del) held that the Circular of the CBDT cannot override the provisions of the Section 14A. Hence, we hereby hold that the order of the ld. CIT (A) is not legally valid in confirming the disallowance made by the Assessing Officer. Claim of Excise Duty subsidy and interest subsidy - capital receipt OR revenue receipt - HELD THAT - The similar subsidy has been allowed as capital receipt and also the issue of computation of profits u/s 115JB has been examined by the Co-ordinate Bench of Tribunal in M/s Dhanuka Agritech Ltd. 2019 (11) TMI 750 - ITAT DELHI wherein the appeal of the assessee is allowed. The same is squarely applicable to the facts of the instant case. Further, the matter stands squarely covered by the order of the Hon ble Jammu Kashmir High Court in the case of Shri Balaji Alloys Vs CIT 2011 (1) TMI 394 - JAMMU AND KASHMIR HIGH COURT - Appeal of the assessee on the ground of Excise Duty subsidy and interest subsidy as capital receipt is hereby allowed. Claim of education cess as an allowable expenditure - Allowable deduction u/s 37 - HELD THAT - The similar issue of allowability of cess u/s 37 has been examined in ITC LTD. 2019 (4) TMI 1574 - ITAT KOLKATA wherein the amount of the cess paid has been held to be an allowable deduction. We find that in the case of Chambal Fertilizers and Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT held that in view of the Circular of CBDT where the word cess is deleted, the claim of the assessee for deduction is acceptable. In that case, the Hon ble High Court held that there is difference between the cess and tax and cess cannot be equated with the cess. Hence, keeping in view the provisions of the Act, Circular of the CBDT and judicial pronouncements, we hereby hold that the assessee is eligible to claim the deduction of the cess as per the provisions of Section 37 of the Income Tax Act.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Treatment of subsidy received under the 'New Industrial Policy and Other Concessions Scheme' as capital receipt.
3. Allowability of education cess as an expenditure under Section 37.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee contested the disallowance of ?2,50,000 under Section 14A read with Rule 8D, arguing that investments in SBI Mutual Funds were made from surplus funds, not borrowed, hence no expenses were liable for disallowance. The Assessing Officer, following CBDT Circular No. 5/2014, disallowed the amount. The Tribunal, referencing the Delhi High Court's judgment in Cheminvest Ltd. Vs CIT and the Supreme Court's decision in Chitti Logistics, held that no disallowance was warranted as the assessee did not earn any exempt income. Consequently, the Tribunal found the CIT(A)'s confirmation of the disallowance legally invalid.

2. Treatment of Subsidy as Capital Receipt:
The assessee received interest and excise duty subsidies under the New Industrial Policy for Jammu & Kashmir, which were initially treated as revenue receipts. The Tribunal accepted the additional ground raised by the assessee for treating these subsidies as capital receipts, citing the Supreme Court's judgment in National Thermal Power Co. Ltd. Vs CIT. The Tribunal emphasized the purpose of the subsidies—to promote industrial development and employment in J&K—aligning with the Jammu & Kashmir High Court's ruling in Shree Balaji Alloys Vs CIT, which classified such subsidies as capital receipts. The Tribunal also referenced the Supreme Court's dismissal of the department's appeal in Shree Balaji Alloys, reinforcing the classification of these subsidies as capital receipts.

3. Allowability of Education Cess as an Expenditure:
The Tribunal addressed the allowability of education cess under Section 37, referencing CBDT Circular No. 91/58/66, which clarified that 'cess' is not disallowed under Section 40(a)(ii). The Tribunal also noted the Rajasthan High Court's decision in Chambal Fertilizers and Chemicals Ltd., which differentiated between 'cess' and 'tax,' allowing the deduction of cess. Consequently, the Tribunal held that the assessee was eligible to claim the deduction of cess as per Section 37.

Conclusion:
The Tribunal allowed the appeal, ruling in favor of the assessee on all grounds. The disallowance under Section 14A was deemed invalid, the subsidies were classified as capital receipts, and the education cess was allowed as a deductible expenditure. The judgment emphasized the importance of judicial precedents and legislative intent in determining tax liabilities.