2021 (3) TMI 157 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - exclusion of income derived from strategic investments for the purpose of computation of disallowance - HELD THAT - The observation on i.e. exclusion of tax exempt income derived from a strategic investments, is not a correct view in the light of the decision of the Supreme Court in Maxopp Investment Ltd. Vs. Commissioner of Income Tax, 2018 (3) TMI 805 - SUPREME COURT . Accordingly, the observations are set aside. However, its observations with respect to the calculation of disallowance under Section 14A being confined to investments that derived tax exempt income are valid in the light of the Division Bench ruling in ACB India Ltd. v. ACIT, 2015 (4) TMI 224 - DELHI HIGH COURT - In view of the above clarification, the ITAT's order, to the extent that it makes observations with respect to exclusion of income derived from strategic investments, is hereby set aside. Deduction in respect of 'Education Cess' and 'Secondary and Higher Education Cess' - HELD THAT - Keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66-ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon'ble High Court of Bombay and Hon'ble High Court of Rajasthan, we hereby direct the revenue to consider the claim of deduction of the 'Education Cess' as per the provisions of Section 37 of the Income Tax Act.

Summary

Issues:
- Disallowance of administrative expenses under Rule 8D
- Application of Rule 8D for disallowance u/s. 14A
- Exclusion of tax exempt income from strategic investments
- Disallowance calculation based on investments
- Additional grounds for deduction of Education Cess

Analysis:
1. The judgment involved appeals by the assessee and the revenue against the order of the ld. CIT(A)-39, New Delhi. The assessee raised grounds regarding the disallowance of administrative expenses under Rule 8D, emphasizing arbitrariness and lack of justification. The revenue contested the CIT(A)'s deletion of a substantial disallowance u/s. 14A, questioning the application of Rule 8D and the amount restricted by the CIT(A).

2. The Tribunal considered the relevant facts, including dividend income, disallowed amounts, and average investments. Following the Hon'ble High Court's order clarifying the exclusion of income from strategic investments, the revised disallowance was determined based on the judgment in ACB India Ltd. v. ACIT and Maxopp Investment Ltd. The disallowance calculation was adjusted to include investments in subsidiary companies.

3. The Tribunal admitted additional grounds raised by the assessee under Rule 11, citing the broad powers of the Tribunal to consider new legal issues affecting tax liability. The issue of Education Cess deduction was addressed, referencing various judicial decisions and circulars to direct the revenue to consider the claim under Section 37 of the Income Tax Act.

4. Ultimately, the appeal of the assessee was partly allowed, and the revenue's appeal was allowed for statistical purposes. The Tribunal's comprehensive analysis considered legal precedents, statutory provisions, and judicial pronouncements to arrive at a balanced decision on the contentious issues raised in the appeals.

5. The judgment exemplifies a meticulous examination of the legal nuances surrounding disallowances, application of rules, exclusion of specific income sources, and the admissibility of additional grounds for deduction claims. The Tribunal's adherence to legal principles and precedents ensured a fair and reasoned outcome in the complex tax dispute presented before it.