2021 (8) TMI 703 - AT - Income Tax

Disallowance u/s.14A by applying computation mechanism provided in Rule 8D(2)(iii) - Voluntary disallowance made by the assessee - HELD THAT - There was absolutely no satisfaction recorded by the ld. AO in his assessment order as to how the voluntary disallowance made by the assessee is incorrect having regard to the correctness of the accounts of the assessee. Such satisfaction is mandated to be recorded in terms of Section 14A(2) read with rule 8D(1) of the Rules. Non-recording of such mandatory satisfaction on an objective basis with cogent reasons would make the entire addition illegal. Accordingly, the grounds raised with regard to disallowance made u/s.14A of the Act both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act are hereby allowed. AO is directed to delete the entire disallowance made u/s.14A of the Act and retain the voluntary disallowance u/s.14A of the Act both under normal provisions as well as in the computation of book profits u/s.115JB of the Act. Disallowance of loss in connection with bonds/debentures written off - assessee had made investments in the debentures / bonds - HELD THAT - Considering the fact that the debenture interest income earned by the assessee in the earlier years had been duly offered to tax under the head income from business and assessed as such, we hold that the loss by way of write off of investments which is arising in the ordinary course of business of money lending becomes allowable deduction u/s.36(1)(vii) of the Act. Accordingly, we hold that assessee would be entitled for deduction in respect of debentures / bonds written off u/s.36(1)(vii) of the Act. The grounds raised by the assessee in this regard are hereby allowed. Deduction for education cess on income tax paid during the year - HELD THAT - We find that this additional ground raised by the assessee is purely a legal issue and does not involve verification of any facts and hence, we deem it fit to admit the same and take up for adjudication. We find that this issue is no longer res-integra in view of the decision of of Sesa Goa Ltd., vs. JCIT 2020 (3) TMI 347 - BOMBAY HIGH COURT as held for education cess, higher and secondary education cess are liable for deduction in computing income chargeable under the head profits and gains of business or profession . Accordingly, the additional ground raised by the assessee in this regard vide letter dated 04/10/2018 is hereby allowed. Non-granting of set off in respect of short term capital loss - HELD THAT - We find that the ld. CIT(A) in his order had merely dismissed the claim of the assessee on the ground that the same does not arise from the order of the ld. AO. Admittedly, assessee had indeed disclosed deemed short term capital loss in the return of income. It is the duty of the ld. AO to look into the same and check the eligibility of set off of the same with other short term capital gains. This has admittedly not been done by the ld. AO in the instant case. Hence, we deem it fit and appropriate to remand this issue to the file of the ld. AO for denovo adjudication of the said issue raised in ground Nos. 10 11 of the assessee. Accordingly, the ground as allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of loss in connection with bonds/debentures written off.
3. Non-granting of set off in respect of short-term capital loss.
4. Deduction for education cess on income tax paid.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The first issue concerns the disallowance made under Section 14A read with Rule 8D(2) of the Income Tax Rules. The assessee, a non-banking finance company, earned dividend income of ?140,81,65,689 and claimed it as exempt under Section 10(34). The assessee voluntarily disallowed ?83,96,478 as expenditure incurred for earning exempt income. The Assessing Officer (AO) ignored this and directly applied Rule 8D(2)(iii), resulting in a disallowance of ?11,17,55,415, which was later restricted to ?3,39,22,376. The Tribunal found that the AO did not record satisfaction as required under Section 14A(2) and Rule 8D(1), making the addition illegal. Consequently, the Tribunal directed the deletion of the disallowance, retaining only the voluntary disallowance of ?83,96,478.

2. Disallowance of loss in connection with bonds/debentures written off:
The second issue pertains to the disallowance of ?10,02,61,073 related to bonds/debentures written off. The assessee claimed this deduction under Section 36(1)(vii) as the investments were made in the ordinary course of business and had become irrecoverable. The Tribunal agreed with the assessee, noting that the debenture interest income had been taxed under 'income from business' in earlier years. Therefore, the write-off was allowable under Section 36(1)(vii).

3. Non-granting of set off in respect of short-term capital loss:
The third issue involves the non-granting of set off for a deemed short-term capital loss of ?1,91,827. The AO ignored this loss in the assessment, and the CIT(A) dismissed the claim, stating it did not arise from the AO's order. The Tribunal found that the loss was disclosed in the return and remanded the issue to the AO for reconsideration.

4. Deduction for education cess on income tax paid:
The fourth issue concerns the deduction for education cess on income tax. The Tribunal admitted this additional ground as a legal issue requiring no factual verification. Citing the Bombay High Court's decision in Sesa Goa Ltd. vs. JCIT, the Tribunal held that education cess is deductible in computing income under 'profits and gains of business or profession.'

Other Grounds:
- The assessee did not press the grounds related to the write-off of proportionate premium on leasehold land and refund of dividend distribution tax, leading to their dismissal.
- The Tribunal allowed the additional ground concerning the deduction for education cess for all assessment years involved.

Conclusion:
The appeals were partly allowed, with significant relief granted on the disallowance under Section 14A, the write-off of bonds/debentures, and the deduction for education cess. The issue of short-term capital loss was remanded for reconsideration.