2021 (9) TMI 643 - AT - Income Tax

Disallowance u/s 14A - CIT(A) restricted the disallowance with a direction to rework the disallowance under Rule 8D(2)(ii) of the Income Tax Rules - main contention of ld. AR is that the disallowance should not exceed the exempt income earned - HELD THAT - As decided in M/S. NIRVED TRADERS PVT. LTD. 2019 (4) TMI 1738 - BOMBAY HIGH COURT as relying on CHEMINVEST LIMITED 2015 (9) TMI 238 - DELHI HIGH COURT limiting the disallowance to the exempt income earned therein. In the present case as discussed above, there is no dispute that the assessee earned exempt income and by applying the decision of Hon'ble High Court of Bombay we restrict the disallowance to the extent exempt income earned. Accordingly, the order of CIT(A) is set aside and the grounds raised by the assessee in this regard are allowed. Seeking deduction paid towards 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 provision of the I.T. Act. The Hon'ble High Court of Bombay in the case of Sesa Goa Ltd. 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.. Therefore, in view of the above decision, 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 of the Income Tax Act.
2. Deduction of Education Cess under the Finance Act.

Issue 1: Disallowance under section 14A of the Income Tax Act:
The appeal was against the CIT(A)'s order restricting the disallowance made by the AO under section 14A of the Act for the assessment year 2014-15. The AO disallowed expenses of &8377; 62,26,625/- under Rule 8D(2)(iii) as expenses attributable to exempt income earned from investments in IDFC Mutual Fund. The CIT(A) directed the AO to rework the disallowance under Rule 8D(2)(ii) of the Rules. The assessee contended that the disallowance should not exceed the exempt income earned, citing legal precedents. The Tribunal referred to the case of M/s. Nirved Traders Pvt. Ltd. where the disallowance was limited to the exempt income earned. Following this decision, the Tribunal set aside the CIT(A)'s order and allowed the grounds raised by the assessee.

Issue 2: Deduction of Education Cess under the Finance Act:
The assessee raised additional grounds seeking deduction of Education Cess paid while computing taxable income. The Tribunal noted that the Education Cess is an allowable expenditure as per the provisions of the Income Tax Act, citing the case of Sesa Goa Ltd. The Tribunal referred to a decision involving Chambal Fertilisers and Chemicals Ltd. where the High Court held that Cess is not tax and is an allowable expenditure. Relying on legal precedents, the Tribunal directed the AO to allow deduction for Education Cess paid by the assessee. Consequently, the additional ground raised by the assessee was allowed, and the appeal of the assessee was allowed.

In conclusion, the Tribunal ruled in favor of the assessee on both issues, setting aside the CIT(A)'s order regarding disallowance under section 14A and allowing the deduction of Education Cess under the Finance Act.