2022 (1) TMI 680 - AT - Income Tax

Disallowance u/s 14A r.w Rule 8D - suo moto disallowance made by assessee - Whether disallowance u/s 14A be restricted to the extent of the exempt dividend income? - HELD THAT - We are principally in agreement with the claim of the ld. A.R that the amount of disallowance u/s 14A cannot exceed the amount of the exempt income - the disallowance u/s 14A be restricted to the amount of the exempt dividend income that was received by the assessee during the year, therein, direct the A.O accordingly. Amount paid by an assessee towards Education Cess or any Other cess viz. the Secondary and Higher Education Cess - Whether disallowable expenditure u/s 40(a)(ii) ? - HELD THAT - We find that the said issue is squarely covered by the recent order of the Hon ble High Court of Bombay in the case of Sesa Goa Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT had concluded that now when the legislature had not provided for any prohibition on the deduction of any amount paid towards cess in clause (ii) of Sec. 40(a), therefore, holding to the contrary would amount to reading something which is not to be found in the text of the provision of Sec. 40(a)(ii). Accordingly, the Hon ble High Court had concluded that there was no prohibition on the deduction of any amount paid towards cess in Sec. 40(a)(ii), while computing the income chargeable under the head profits and gains of business or profession . We therein conclude that as Education Cess and Secondary and Higher Education Cess is not disallowable as a deduction u/s 40(a)(ii) of the Act, therefore, the claim of the assessee seeking deduction of the same while computing its income for the year under consideration merits acceptance. The additional ground of appeal no. 3 raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961.
2. Disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii).
3. Deductibility of education cess and higher education cess while computing total income.

Detailed Analysis:

1. Disallowance of Expenditure under Section 14A:
The assessee challenged the CIT(A)’s confirmation of a disallowance of ?26,99,512/- under Section 14A by applying Rule 8D. The CIT(A) did not follow the ITAT Pune’s previous decisions for the assessee’s own case, which limited the disallowance to ?1,79,050/-. The assessee argued that the Assessing Officer (A.O) did not record any satisfaction regarding the correctness of the claimed expenditure, which is a prerequisite for invoking Rule 8D. The Tribunal agreed with the assessee’s contention that the disallowance under Section 14A cannot exceed the exempt income received, which was ?9,93,863/- in this case. Consequently, the Tribunal directed the A.O to restrict the disallowance to this amount.

2. Disallowance of Interest Expenditure under Section 14A read with Rule 8D(2)(ii):
The assessee raised additional grounds challenging the disallowance of ?46,25,109/- as interest expenditure under Section 14A read with Rule 8D(2)(ii). The CIT(A) had directed the A.O to verify whether the assessee had sufficient self-owned funds to source the investments in exempt income-yielding shares and to re-compute the disallowance accordingly. The Tribunal upheld this direction, emphasizing that interest expenditure directly related to earning taxable income should be excluded from the disallowance computation.

3. Deductibility of Education Cess and Higher Education Cess:
The assessee argued that education cess and higher education cess should be allowed as deductions while computing total income, based on the judgment of the Hon’ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax. The Tribunal noted that the issue was covered by this judgment, which held that there is no prohibition on the deduction of amounts paid towards education cess under Section 40(a)(ii) of the Income-tax Act, 1961. The Tribunal, therefore, allowed the assessee’s claim for deduction of education cess and higher education cess.

Conclusion:
The Tribunal allowed the assessee’s appeal, directing the A.O to restrict the disallowance under Section 14A to ?9,93,863/-, verify and re-compute the interest expenditure disallowance, and allow the deduction of education cess and higher education cess. The general ground of appeal was dismissed as not pressed. The order was pronounced in the open court on 05/01/2022.