2022 (2) TMI 395 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - A.O was of the opinion that there is always an element of indirect expenditure for earning such exempt income which the assessee has not completely identified and offered to tax - HELD THAT - We are of the considered view, on hearing the submissions of the parties herein that as per the view taken by the Hon ble Special Bench of the Tribunal in Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI the A.O would exclude investments which do not yield any exempt income for the year under consideration while computing the disallowance u/s 14A r.w.r. 8D(2)(iii). Accordingly, we set aside the order of the learned CIT(A) and remand the matter back to file of the A.O as indicated hereinabove. A.O shall comply with principles of natural justice while re-adjudicating the issue. Grounds No. 1 and 2 and additional ground No. 1 are allowed for statistical purpose. Disallowance of the claim of additional depreciation u/s 32(1)(iia) - Whether assessee is entitled to 50% of the additional depreciation u/s 32(1)(iia) for subsequent assessment year ? - HELD THAT - Hon ble Karnataka High Court in the Rittal India Pvt. Ltd. case 2016 (1) TMI 81 - KARNATAKA HIGH COURT had given the right to the assessee to claim the remaining unclaimed 50% depreciation in the subsequent assessment year and at that time the proviso to section 32 was also not there but right now with the insertion of such proviso, this right has been statutorily recognized. That as regards, whether such proviso would apply to past periods or not, the judgment of the Hon ble Madras High Court (supra.) which is still operational and it has been held that the said proviso was only clarificatory in nature and would thus apply to pending cases covering past periods also. Thus, Grounds No.6 and 7 raised in appeal by the assessee are allowed. Education cess and secondary and higher education cess paid be allowed as a deduction while computing the total income of the assessee - admission of the additional ground - HELD THAT - The assessee had correctly placed reliance on the decision of the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. 1996 (12) TMI 7 - SUPREME COURT for admission of this legal ground. We find that Hon ble Bombay High Court in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT has held that the Education Cess and Secondary and Higher Education cess are allowable as a deduction while computing the income of the assessee. Respectfully following the said judicial pronouncement, we direct the A.O to allow the deduction on account of education cess and secondary and higher education cess paid for the year under consideration by the assessee. We therefore, allow this ground of the assessee.

Summary

Issues Involved:

1. Disallowance of expenses under Section 14A of the Income-tax Act, 1961, applying Rule 8D of the Income-tax Rules, 1962.
2. Exclusion of strategic investments from the average value of investments while calculating disallowance under Rule 8D(2)(iii).
3. Disallowance of the claim of additional depreciation under Section 32(1)(iia) of the Income-tax Act, 1961.
4. Allowability of education cess and secondary and higher education cess as a deduction while computing the total income.

Detailed Analysis:

1. Disallowance of Expenses under Section 14A:

The issue pertains to the disallowance of expenses under Section 14A read with Rule 8D of the Income-tax Rules, 1962. The Assessing Officer (A.O) believed there was an element of indirect expenditure for earning exempt income, which the assessee had not identified. The assessee argued that the investments were made for business purposes and that there was no nexus between borrowed funds and tax-free investments. The A.O, however, held that disallowance under Section 14A is made irrespective of the intention to earn exempt income. The A.O was not satisfied with the assessee's disallowance of ?9,39,317 and calculated a disallowance of ?25,26,340. The CIT(A) upheld the A.O's decision but adjusted the disallowance to ?16,92,897 after considering direct expenses.

2. Exclusion of Strategic Investments:

The assessee contended that while computing disallowance under Rule 8D(2)(iii), investments that did not yield exempt income during the year should be excluded. The Tribunal referred to the decision of the Special Bench in Vireet Investments Pvt. Ltd., which held that only those investments yielding exempt income should be considered. The Tribunal agreed with this view and remanded the matter back to the A.O to exclude non-yielding investments while computing the disallowance.

3. Additional Depreciation under Section 32(1)(iia):

The issue involved the disallowance of additional depreciation of ?1,20,21,505 for plant and machinery acquired and installed for less than 180 days in the preceding financial year. The assessee cited the Bombay High Court's decision in Pr. CIT Vs. Godrej Industries Ltd., which allowed 50% of additional depreciation in the subsequent year. The Tribunal noted that the Karnataka High Court in Rittal India Pvt. Ltd. and the Madras High Court in CIT Vs. Shri T.P. Textiles Pvt. Ltd. supported this view. The Tribunal followed these precedents and allowed the assessee's claim for the remaining 50% additional depreciation in the subsequent year.

4. Education Cess and Secondary and Higher Education Cess:

The assessee raised an additional ground for allowing education cess and secondary and higher education cess as a deduction while computing total income. The Tribunal admitted this legal issue and referred to the Bombay High Court's decision in Sesa Goa Ltd., which held that these cesses are allowable deductions. The Tribunal directed the A.O to allow the deduction for the cesses paid by the assessee for the year under consideration.

Conclusion:

The Tribunal allowed the appeal partly for statistical purposes, remanding the matter back to the A.O for re-adjudication on the disallowance under Section 14A, excluding non-yielding investments, and directed the A.O to allow deductions for education cess and secondary and higher education cess. The Tribunal also allowed the claim for additional depreciation following judicial precedents.