2021 (2) TMI 1138 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D(2) - disallowance offered by the assessee suo-moto - HELD THAT - Assessee reflects the share capital reserves and surplus to an extent of Rs. 32, 38, 52, 976/- which is admittedly more than the investments made. Further we note that Note No. 9 in Assets clearly discloses the Non-Current Assets to an extent of Rs. 16, 18, 55, 626/- showing that the assessee made investments during the year under consideration out of which Rs. 1, 00, 00, 000/- invested in government bonds. It is needless to say that the investments made in government bonds yield no dividend but only interest. It is a settled proposition that if the own funds are more than the investments made should be presumed that the assessee made investments from its own funds. As discussed above the assessee made investments to the tune of Rs. 15.18 crores in the year under consideration to which the Balance Sheet as on 31-03-2012 clearly shows as non-current investments and also shows own funds at Rs. 32, 38, 52, 976/- which is more than the investments made. Therefore the interest expenses disallowed under Rule 8D(2)(ii) is not maintainable. The disallowance relating to 0.5% of investments to the tune of Rs. 6, 47, 273/- is confirmed. Thus suo-moto disallowance made by the assessee under Rule 8D(2)(ii) of Rs. 12, 20, 303/- and the enhanced disallowance made by the Assessing Officer of Rs. 3, 31, 763/- totaling to Rs. 15, 52, 067/- requires to be deleted for the reasons indicated above and the disallowance under Rule 8D(2)(iii) is confirmed. Thus the order of CIT(A) is set aside and the ground Nos. 1 to 4 raised by the assessee are partly allowed. Deduction paid towards Education Cess under Finance Act while computing the taxable income - HELD THAT - The Hon ble High Court of Bombay in the case of Sesa Goa Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT was pleased to hold that the Education Cess is an allowable expenditure as per the provision of the I.T. Act. - we direct the AO to allow deduction in respect of Education Cess paid by the assessee. Accordingly the additional ground raised by the assessee is allowed.

Summary

Issues:
1. Disallowance under section 14A r.w. Rule 8D(2) of the I.T. Rules.
2. Deduction of Education Cess under Finance Act while computing taxable income.

Issue 1: Disallowance under section 14A r.w. Rule 8D(2) of the I.T. Rules:
The appellant contested the disallowance of Rs. 18,67,577 made under section 14A r.w. Rule 8D(2) by the CIT(A). The appellant argued that since its own funds exceeded the investments made, it should be presumed that the investments were made from its own funds. The appellant had made investments of Rs. 15.18 crores, and its Balance Sheet showed own funds of Rs. 32,38,52,976, which exceeded the investments. The Tribunal agreed that the disallowance under Rule 8D(2)(ii) was not maintainable in this case. The disallowance relating to 0.5% of investments amounting to Rs. 6,47,273 was confirmed, but the total disallowance made by the AO was set aside. The Tribunal directed the deletion of the disallowance made by the appellant and the AO, totaling Rs. 15,52,067, under Rule 8D(2)(ii), while confirming the disallowance under Rule 8D(2)(iii).

Issue 2: Deduction of Education Cess under Finance Act while computing taxable income:
The appellant sought a deduction of Rs. 5,25,000 paid towards Education Cess under the Finance Act when computing taxable income. The Tribunal noted that the Hon'ble High Court of Bombay had held that Education Cess is an allowable expenditure under the Income Tax Act. Referring to relevant case law, the Tribunal directed the AO to allow the deduction of Education Cess paid by the appellant. The Tribunal allowed the additional ground raised by the appellant, emphasizing that Education Cess is an allowable expenditure as per the provisions of Section 40(a)(ii) of the Income Tax Act, 1961. The Tribunal found no supporting evidence from the Revenue to contest this position.

In conclusion, the Tribunal partly allowed the appellant's appeal, directing the AO to allow the deduction of Education Cess paid by the appellant and setting aside the disallowance under Rule 8D(2)(ii) while confirming the disallowance under Rule 8D(2)(iii).