2021 (7) TMI 77 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - It is settled principle that when the share capital, reserves and surplus funds are more than the investments made, shall be presumed that the investments made from own funds. Therefore, the disallowance under interest expenditure involving Rule 8D(2)(ii) is not required in view of decision of Hon ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. reported in 2016 (3) TMI 755 - BOMBAY HIGH COURT Recording of satisfaction of the AO in respect of computation of expenditure relating to exempt income - It is settled principle that the adoption of methodology contemplated in Rule 8D(2) is not mechanical proceeding which requires the satisfaction of the Assessing Officer. In this case as discussed above already, there was no satisfaction of the Assessing Officer regarding the expenditure disallowed by the assessee on its own. Therefore, the disallowance made by the Assessing Officer without recording satisfaction is liable to be deleted. Regarding the order of this Tribunal in earlier years involving the assessment years 2009-10 and 2010-11 in assessee s own case rendered a finding the disallowance made by the assessee on account of expenditure relating to exempt income is fair and reasonable. Though the said order is not applicable to the year under consideration but however no contrary finding brought on record by the ld. AR in this regard. Therefore, the disallowance made by the AO as upheld by the CIT(A) is deleted and we hold that the disallowance made by the assessee on its own is justified. Thus, grounds raised by the assessee are allowed Education Cess under Finance Act while computing the taxable income - HELD THAT - We note that the assessee paid Education Cess while computing the taxable income under normal provisions of the I.T. Act. 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. Thus 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:
Challenge to disallowance made under Rule 8D(2) of the I.T. Rules without recording satisfaction. Claim for deduction of Education Cess under Finance Act while computing taxable income.

Analysis:
*Issue 1 - Disallowance under Rule 8D(2):* The appellant challenged the disallowance confirmed by CIT(A) under Rule 8D(2) without recording satisfaction. The appellant argued that its own disallowance at 15% was reasonable, with the remaining 85% allocated to manufacturing activities. The AO mechanically invoked Rule 8D(2) without justifying why the appellant's disallowance was incorrect. The Tribunal noted that the AO's disallowance lacked satisfaction and referred to a previous case where the Tribunal upheld the appellant's 15% disallowance. As the AO failed to provide a valid reason for rejecting the appellant's calculation, the disallowance was deemed unjustified and deleted.

*Issue 2 - Deduction of Education Cess:* The appellant sought a deduction for Education Cess paid while computing taxable income. Citing relevant case law, the appellant argued that Education Cess is an allowable expenditure under the I.T. Act. The Tribunal referenced a High Court decision supporting the deductibility of Education Cess and directed the AO to allow the deduction. As the Education Cess was found to be an allowable expenditure, the additional ground raised by the appellant was allowed.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the appellant on both issues. The disallowance under Rule 8D(2) was deleted due to the lack of satisfaction by the AO, and the deduction for Education Cess was permitted following legal precedents.