2022 (1) TMI 94 - AT - Income Tax

Disallowance of expenditure incurred on failed IPO ( failed public issue) - Whether CIT(A) erred in concluding that failed IPO expenditure are covered by section 35(D)(2) instead of section 37 or section 28/29 of Income Tax Act 1961 - whether expenditure on failed public issue should be allowed proportionately? - HELD THAT - The issue in the present appeal is no more res-integra as the issue is decided in assessee s own case 2021 (6) TMI 1082 - ITAT PUNE following the decision of the Hon ble Jurisdictional High Court in the case of CIT Vs. Nimbus Communication Ltd. 2011 (12) TMI 696 - BOMBAY HIGH COURT and CIT Vs. M/s. Essar Oil Limited 2008 (10) TMI 649 - BOMBAY HIGH COURT in favour of the assessee company. Disallowance u/s.14A r.w.r. 8D - HELD THAT - As decided in own case 2021 (6) TMI 1082 - ITAT PUNE well settled position of law that while computing the amount of disallowance under clause (iii) of Rule 8D(2) of the Rules the average value of investments which yielded the exempt income alone to be considered for the purpose of arriving at average value of investment as envisaged therein - this ground of appeal is remitted to the file of the Assessing Officer to calculate the amount of disallowance under clause (iii) of Rule 8D(2) on the above lines indicated above. Thus this ground of appeal is partly allowed. 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. That therefore from the legal perspective the issue of education cess is an allowable expenditure as per provisions of Section 40(a)(ii) of the Act and placing reliance on the decision of the Hon ble Bombay High Court (supra.) we direct the Assessing Officer to allow deduction in respect of Education Cess paid by the assessee. Accordingly the additional ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of IPO expenditure of ?24,78,871.
2. Disallowance under section 14A of ?30,29,773.
3. Deduction of ?18,50,000 paid towards Education Cess.

Issue-wise Detailed Analysis:

1. Disallowance of IPO Expenditure of ?24,78,871:
The assessee challenged the disallowance of ?24,78,871 incurred on a failed IPO. The Tribunal noted that this issue had already been decided in the assessee's favor in the previous assessment year (AY 2012-13) by the Coordinate Bench of the Tribunal, following the decision of the Hon’ble Jurisdictional High Court in CIT Vs. Nimbus Communication Ltd. and CIT Vs. M/s. Essar Oil Limited. The Tribunal reiterated that expenditure on an abandoned IPO should be treated as revenue expenditure under section 37 of the Income Tax Act, 1961, as no new asset of enduring benefit was created. Consequently, the Tribunal directed the Assessing Officer to allow the expenditure incurred on the abandoned IPO as revenue expenditure, thereby allowing Ground No.1 raised by the assessee.

2. Disallowance under Section 14A of ?30,29,773:
The assessee contested the notional allocation of ?30,29,773 for earning exempt income, which was disallowed under section 14A. The Tribunal referred to the decision in the assessee's own case for the preceding year (AY 2012-13), where it was established that no interest-bearing funds were utilized for making investments. The Tribunal directed the Assessing Officer not to make any addition on account of interest expenditure under Rule 8D. Regarding indirect expenses for earning exempt income, the Tribunal accepted the assessee’s submission that the disallowance should be restricted to the lower of the exempt income and 0.5% of the average value of investments that yielded the exempt income. The Tribunal remitted this issue to the Assessing Officer to calculate the disallowance accordingly, thereby partly allowing Ground No.2.

3. Deduction of ?18,50,000 Paid Towards Education Cess:
The assessee raised an additional ground seeking deduction of ?18,50,000 paid towards Education Cess. The Tribunal noted that the issue was purely legal and did not require further examination of facts. The Tribunal referred to the decision of the Hon’ble Bombay High Court in the case of Sesa Goa Ltd., which held that Education Cess is an allowable expenditure under the Income Tax Act. The Tribunal directed the Assessing Officer to allow the deduction in respect of Education Cess paid by the assessee, thereby allowing the additional ground raised by the assessee.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal directing the allowance of IPO expenditure as revenue expenditure, remitting the issue of disallowance under section 14A for recalculation, and allowing the deduction for Education Cess. The order was pronounced on December 24, 2021.