TMI Blog2020 (9) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company in the form of share capital and free reserves were substantially more than the corresponding investments made as noted by us, we are of the view that the disallowance made by the AO and confirmed by the Ld. CIT(A) on account of interest u/s 14A of the Act read with rule 8D(2)(ii) of the Rules is not sustainable and the same is directed to be deleted. Disallowance made u/s 14A of the Act on account of common administrative expenses by applying rule 8D(2)(iii) - Once the claim of assessee of having not incurred any common expenses in relation to the earning of exempt income is found to be not correct and the disallowance u/s 14A on account of such expenses is liable to be worked out by applying the formula given in rule 8D(2)(iii) of the Rules, the basis given therein cannot be altered or changed as sought by assessee, unless and until the basis so given in the formula is found to be patently untenable in the facts and circumstances of a particular case - No merit in this contention of the assessee and reject the same. The issue raised by the assessee relating to the disallowance u/s 14A of the Act read with rule 8D of the Rules as raised partly allowed. Educat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect expenditure incurred for earning tax free income even though no such disallowance was warranted on the facts of the case. 5] The learned CIT(A) failed to appreciate that the assessee had not incurred indirect expenditure of ₹ 82,41,026/- for earning the exempt income and hence, and therefore, the disallowance made was not justified on the facts of the case. 6] Without prejudice to the above grounds, the assessee submits that the investment made in partnership firms is not a tax free investment since the income earned by the firm is subjected to income tax and hence, the investment in partnership firm may be excluded from the amount of 'tax free investments' while computing the disallowance u/s 14A as per Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules, 1962. 2. The assessee in the present case is a company which is engaged in the business of retail and wholesale trading of tobacco, tea, lime, etc. The return of income for the year under consideration was filed by it on 30.09.2013 declaring a total income of ₹ 21,56,49,944/-. In the said return, the following income earned during the year under consideration was claimed to be exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that expenses incurred by the assessee on account of various heads claimed under general administrative expenses, thus were partly attributable to the earning of the exempt income and disallowance out of the same on proportionate basis was called for u/s 14A of the Act. He accordingly, applied rule 8D of the Income Tax Rules to work out the disallowance to be made u/s 14A of the Act on account of interest at ₹ 24,26,253/- and on account of other common expenses at ₹ 82,41,026/- and a total disallowance of ₹ 1,06,67,279/- was made by him u/s 14A of the Act. 4. The disallowance made by the AO u/s 14A of the Act read with rule 8D of the Rules was challenged by the assessee in the appeal filed before the Ld.CIT(A) and the following submissions were made on behalf of the assessee company in support of its case on this issue: During the course of appellate proceedings before the Ld.CIT(A): 1] In this year, the assessee has derived exempt income of ₹ 38,66,80IB(10) of the Act,659/-. The exempt income, mainly includes share of profit received by the assessee from two firms namely Malpani Estates and Giriraj Enterprises of ₹ 38,28,31,389/-. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ₹ 155.87 Crores as opening tax free investments and ₹ 173.77 Crores as closing tax free investments. However, the correct amount is ₹ 173.77 Crores as opening tax free investments and ₹ 155.87 Crores as closing tax free investments. The relevant chart is enclosed on page 37 of the paper book. Now, it is submitted that the assessee has own funds available with it in the form of share capital and reserves which are much higher than the opening the closing tax free investments. The copy of the balance sheet of the assessee is enclosed on pages, 1-25 of the paper book. As per the balance sheet, the share capital and reserves of the assessee as on 31/03/2013 were ₹ 27l.85 Crores and ₹ 214.91 Crores as on 31/03/2012. Since, the assessee has own funds much higher than the investments made by the assessee in tax free securities and in the absence of any direct nexus that the borrowed funds have been utilized for making tax free investments, no disallowance of interest expenditure can be made u/s. 14A r. w. Rule 8D. In this context, the assessee places reliance on the following decisions wherein the courts have held that if the assessee has surplus fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit earned by it over the years which has resulted in higher capital investment amounting to ₹ 84.99 Crores should be reduced while computing the disallowance u/s. 14A r.w. Rule 8D. 6] Without prejudice to the above contentions, assuming without admitting that some disallowance is justified u/s 14A r. w. Rule 8D, the assessee submits that the investment made in partnership firms is not a tax free investment. It is to be noted that the income earned by the firm is already subjected to income tax and hence, the same cannot be treated as a tax free investment for the purposes of section 14A r. w. Rule 8D. Thus, the assessee submits that investment in partnership firm may be excluded from the amount of 'tax free investments' while computing the disallowance u/s 14A as per Rule 8D (2)(ii) and Rule 8D (2)(iii) of the Rules. 7] As regards, other investments made by the assessee, it is submitted that these are very few and most of them are made in the earlier years. The assessee has also earned part of its exempt income from investments made in NHAI Bonds and LIC in respect of which it has not incurred any indirect expenditure. Thus, it is submitted that no administ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion before the undersigned so as to ensure the above that the provisions of Rule 8D(2) was not applicable in its case for not considering the entire investment for the purpose of computation of disallowance under the said provisions. The various decisions cited by the appellant, in my opinion, are not applicable on the facts of appellant's case and also after the amendment of the provisions of Rule 8D(2) as above. I, therefore, do not find any reason to interfere with the findings given by the AO. Accordingly, the disallowance made of ₹ 1,06,67,279/- is hereby confirmed. Ground Nos. 1 to 7 raised by the appellant is accordingly dismissed. 6. The Ld. Counsel for the assessee at the outset invited our attention to the relevant balance sheet of the assessee placed at page No. 2 of paper book to show that the interest free funds of its own were available with the assessee company aggregating to ₹ 271.85 crores in the form of share capital and free reserves. He contended that since the said funds were much more than the corresponding investments of ₹ 173.77 crores on which exempt income was earned by the asseessee , there was a presumption that the said inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company out of its own interest free funds and there was no utilization of interest bearing borrowed funds for making such investment so as to warrant any disallowance of interest u/s 14A of the Act. This contention of the Ld. Counsel for the assessee is duly supported by the decision of Hon ble Jurisdictional High Court in the case of CIT Vs. Reliance Utilities Power Ltd. (supra), wherein it was held that if the assessee had interest free funds of its own which were more than the investment capable of earning exempt income, it could be presumed that the said investments were made from interest free funds available with the assessee and not from the interest bearing borrowed funds so as to warrant the disallowance u/s 14A of the Act. This decision rendered in the case of CIT Vs. Reliance Utilities Power Ltd. (supra) was subsequently followed by the Hon ble Bombay High Court in the case of HDFC Bank Ltd Vs. DCIT 366 ITR 505 (Bom) to hold that where both the interest free funds and interest bearing funds are available and the interest free funds are more than the investments made, the presumption is that the investment in tax free securities would have been made out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the facts and circumstances of a particular case. We, therefore, find no merit in this contention of the assessee and reject the same. The issue raised by the assessee relating to the disallowance u/s 14A of the Act read with rule 8D of the Rules as raised in ground Nos.1 to 6 is thus, partly allowed. 10. During the course of appellate proceedings before the Tribunal, the assessee has raised an additional ground, which reads as under: 1] The assessee submits that the education cess and secondary and high education cess amounting to ₹ 20,37,889/- may kindly be allowed as a deduction while computing the total income of the assessee. 11. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Although the Ld. DR has not specifically raised any objection for the admission of this additional ground raised by the assessee, he has made a submission on merit on the issue raised in the said additional ground to the effect that the education cess being in the nature of surcharge as explained in the relevant Memorandum explaining the intention of the relevant provisions, the same is not allowable as deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act. 30. The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income-tax Appeal No. 52/2018 decided on 31st July, 2018 (Chambal Fertilisers and Chemicals Ltd. v. CIT Range-2, Kota), by reference to the aforesaid CBDT Circular dated 18th May, 1967 has held that the 1TAT erred in holding that the education cess is a disallowable expenditure under section 40(a)(ii) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e involved was whether the 'education cess, higher education cess and National Calamity Contingent Duty (NCCD)' on it could be construed as duty of excise which was exempted in terms of Notification dated 9th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression duty of excise and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was upheld by the Apex Court in Unicorn Industries (supra). 36. The aforesaid means that the Supreme Court refused to regard the levy of education cess, higher education cess and NCCD as duty of excise when it came to construing exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts paid by the Appellant - Assessee towards the cess can never be regarded as the amounts paid towards the tax so as to attract provisions of Section 40(a)(ii) of the IT Act. All th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd. v. CIT 199 ITR 351 to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which may be filed by the Assessee. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law. 40. The decision in Goetze (supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impinge on the powers of the ITAT under section 254 of the said Act. This means that in Goetze (supra), the Hon'ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This is the distinction drawn by the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the ITAT failed to note in the impugned order. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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