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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ : NEW DELHI
Before: SHRI N.K. BILLAIYA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised in both the aforesaid appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion.
Appellant, M/s. Inductis (India) Pvt. Ltd. (hereinafter referred to as ‘the assessee’) by filing the present appeals sought to passed by the Commissioner of Income - tax (Appeals)-4, New Delhi & AO in consonance with the orders passed by the ld. DRP/TPO qua the AYs 2013-14 & 2014-15 respectively on the grounds inter alia that:-
“ITA No.1510/Del/2018 (AY 2013-14) 1. That the Learned Commissioner of Income Tax (Appeals) ["CIT(A)"] erred on the facts of the case and in law in upholding the action of Learned Assessing Officer ["Ld. AO"] in disallowing an amount of Rs.2,251,065 under section 14A of the Income-tax Act, 1961 ("the Act"), read With Rule 8D of the Income-tax Rules, 1962 ("the Rules"). 1.1 That the Ld. C!T(A) erred on the facts of the case and in law in upholding the action of the Ld. AO 'in computing the said disallowance of Rs.2,251,065 as per Rule 8D of the Rules read With section 14A of the Act, being 0.5% of the average of opening and closing investment in mutual funds pertaining to financial year 2012-13. 1.2 That the Ld. C!T(A) erred on facts and in law in confirming the aforesaid disallowance Without appreciating that no expenditure was actually incurred in earning the exempt dividend income, which was actually a mere reinvestment of units issued as dividend to the Appellant on mutual funds held by it. (AY 2014-15) 1. That on the facts and in the circumstances of the case and in law, the order passed by the Learned Assessing Officer ("Ld. AO") is bad in law.
2. That the Learned Dispute Resolution Panel ("Ld. DRP”)/ Ld.AO erred in law and on the facts and in the circumstances of the case in disallowing an amount of Rs.3,575,677 under Section 14A of the Income-tax Act, 1961 ("the Act") read with Rule 8D of the Income-tax Rules, 1962 ("the Rules"). 2.1 That the Ld. DRP/ Ld. AO erred in law and on the facts and in the circumstances of the case in computing the said disallowance of Rs.3,575,677 as per Rule 8D of the Rules read with section 14A of the Act, being 0.5% of the average of opening and closing investment in mutual funds pertaining to Financial Year 2013-14.
2.2 That the Ld. DRP/Ld. AO erred in law and on the facts and in the circumstances of the case in disallowing an amount of Rs.3,575,677 on account of deemed expenses by stating that since no ,separate investment division or different infrastructure establishment has been made by the appellant for earning of dividend income on the investments made in mutual funds, the disallowance is to be made in terms of Section 14A read with Rule 8D2(iii) of the Rules. 2.3 That the Ld. DRP/Ld. AO erred in law and on the facts and in the circumstances of the case in making the aforesaid disallowance without appreciating that no expenditure was actually incurred in earning the exempt dividend income, which was actually a mere automatic reinvestment as dividend accruing to the Appellant on mutual funds held by it. 2.4 That the Ld. DRP/Ld. AO erred in law and on the facts and in the circumstances of the case in disallowing the aforesaid amount of deemed expenses without establishing/ specifying nexus of same with earning of exempt income. 2.5 That the Ld. DRP/ Ld. AO erred in law and on the facts and in the circumstances of the case in relying upon the CBDT Circular No. 04/2014 without appreciating the fact that the said CBDT Circular No. 4/2014 have been overruled by the Jurisdictional High Court of Delhi in the case of PCIT vs. IL & FS Energy Development Company Ltd.: 399 ITR 483 (Delhi).
That the Ld. AO has grossly erred in law and on the facts and in circumstances of the case in not allowing credit of Minimum Alternate Tax of Rs.20,967,078 as claimed by the Appellant in the return of income.
4. That the Ld. AO has grossly erred in law and on the facts and in circumstances of the case by initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation.
That the Ld. AO has erred in law and on the facts of the case by charging interest under section 234B and 234C of the Act.”
3. Briefly stated the facts necessary for adjudication of the controversy at hand are : assessee is into providing Decision Analytic Services for custom-made data-driven solutions to a variety of business applications. During the scrutiny proceedings, dividend income of Rs.3,13,94,353/- & Rs.5,34,50,201/- for AYs 2013-14 & 2014-15 respectively and claimed the same as exempt under section 10(35) of the Income-tax Act, 1961 (for short ‘the Act’), without disallowing any amount of expenditure for earning this dividend income. AO by invoking the provisions contained u/s 14A read with Rule 8D of the Income-tax Rules, 1962 (for short ‘the Rules) made a disallowance of Rs.22,60,300/- & Rs.35,75,677/- for AYs 2013-14 & 2014-15 respectively on the ground that since the assessee has not maintained any separate investment division, the infrastructure and establishment developed by the assessee company for the purpose of business has been used for work of investment in equity shares.
In AY 2014-15, AO has also not allowed credit of Minimum Alternative Tax (MAT) of Rs.2,09,67,078/- as claimed by the assessee in the return of income. Consequently, AO framed the assessment on the total income of Rs.14,38,41,103/- & Rs.13,62,99,340/- for AYs 2013-14 & 2014-15 respectively.
5. Assessee carried the matter before the ld. CIT(A) and ld. DRP by way of filing the appeals who has deleted/dismissed the addition/objections by allowing the appeals. Feeling aggrieved, the present appeals.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Assessee by moving applications in appeals pertaining to AYs 2013-14 & 2014-15 sought to admit the additional ground of appeal under Rule 11 of the Income Tax (Appellate Tribunal)
Rules, 1963, which is identical in both the years, as under :-
“That on the facts and circumstances of the case and in law the education cess (EC) and secondary and higher education cess (SHEC) on income-tax is an allowable expenditure for computing total income as per the provisions of the Income-tax Act, 1961.” on the ground that additional ground sought to be raised is purely legal in nature and does not require any investigation of facts.
Since ground sought to be raised by the assessee is legal in nature which can be raised at any stage of proceedings and necessary for complete and final adjudication of the controversy at hand, the same is allowed without going into the merits of the cases.
GROUND NOS.1 & 5 (AY 2014-15)
Ground No.1 of AY 2014-15 needs no findings being general in nature and having not been pressed by the ld. AR for the 234B and 234C of the Act needs no specific finding being consequential in nature.
GROUNDS NO.1, 1.1 & 1.2 (AY 2013-14) GROUNDS NO.2, 2.1, 2.2, 2.3, 2.4 & 2.5 (AY 2014-15)
Ld. AR for the assessee challenging the impugned order contended inter alia that the AO before invoking the provisions contained u/s 14A read with Rule 8D failed to record his dissatisfaction with the working given by the assessee that they have not incurred any expenditure to earn the dividend income; that no new investment has been made during the years under consideration rather dividend has been reinvested; that all the investment has been made in the Debt Oriented Funds; that in the earlier three years, identical issue has already been decided by the Tribunal in favour of the assessee and relied upon the decisions rendered by Hon’ble High Court in case of Maxopp Investment Ltd. (2012) 347 ITR 272 (Del.) and the coordinate Bench of the Tribunal in case of Petronet LNG Ltd. in for AY 2009-10 & Ors..
However, on the other hand, ld. DR for the Revenue to repel the arguments addressed by the ld. AR for the assessee contended inter alia that AO has recorded satisfaction and has duly discussed investment made by the assessee which cannot be made without incurring additional expenditure. Ld. DR for the Revenue to repel this argument referred to assessment order wherein AO has discussed in detail the indirect expenses incurred by the assessee company to earn the dividend income. Ld. DR has also referred to para 5.3 of the impugned order passed by the ld. CIT (A).
Undisputedly, assessee company has earned dividend income of Rs.3,13,94,353/- & Rs.5,34,50,201/- in AYs 2013-14 & 2014-15 respectively, the years under consideration. It is also not in dispute that the assessee company has not made any suo motu disallowance for incurring expenses to earn dividend income.
It is categoric case of the assessee company that they have not incurred any expenses to earn the dividend income because during the year under consideration, no new investment has been made rather dividend has been reinvested. Perusal of the complete fund statement, available at page 59 of the paper book, shows that during the year under consideration, assessee has made investment in the equity shares of its wholly owned subsidiary to the tune of Rs.42,95,505/- in AY 2013-14 and also made investment of Rs.71,39,10,225/- in mutual fund of ICICI Prudential Liquidity Fund. was called upon to explain as to why disallowance u/s 14A read with Rule 8D should not be made, assessee company categorically brought on record that, “it has not incurred any direct or indirect expenses in making the investment nor there is any financial cost of borrowed funds for making the investment.” Ld. AR for the assessee also contended that the AO has invoked the provisions u/s 14A read with Rule 8D without recording his dissatisfaction that assessee company has not incurred any expenditure to earn the (supra). Ld. AR for the assessee also contended that no interest bearing funds have ever been used for investment to earn the dividend income.
When we examine the contentions raised by the ld. AR for the assessee that no satisfaction has been recorded by the AO rather invoked the provisions contained u/s 14A read with Rule 8D mechanically in the light of the observations made by the AO, it has come on record that generic observations have been given by the AO without disputing the financials of the assessee company which are audited one. When assessee has come up with a categoric defence that no expenditure has been incurred to earn the dividend income during the years under assessment and that all the reinvested” (Debt Oriented Funds) and that no direct investment has been made rather dividend has been reinvested by the company during the years under assessment and has brought on record complete fund statement issued by the ICICI Prudential Fund wherein the entire investment shown in the year under consideration is “dividend reinvested” (Debt Oriented Funds), AO was required to record his categoric dissatisfaction as to working of the assessee that such and such expenses have been incurred to earn dividend income, but not shown.
Furthermore, when we examine sub-para 5.3 of the impugned order passed by the ld. CIT (A) he has also failed to bring on record the working for incurring of expenses for making investment and earning dividend by the assessee company rather upheld the findings returned by AO mechanically. Ld. CIT (A) in AY 2013-14 observed that:-
“I have carefully examined the issue. In a hotch-potch of various activities being concomitant, it may not be possible to find out the actual expenditure – incurred in relation to earning of exempt income. Under these circumstances, the A.O. has no option but to resort to section 14A particularly when the assessee claims to have incurred no expenditure in this regard. There may not be any requirement of separate investment division but to say that no resources were utilized to earn exempt income and the earning was on automatic mode is not an acceptable argument. Even to keep the investment in automatic income earning mode in itself is a major ./2018 ITA No.5205/Del./2018 business decision taken by the resource manager of the company. The quality and quantity of return on investment, the magnitude and timing of investment and whether such investments make prudent business decision and is synchronized with the overall financial health and business objectives of the company – these decisions need continuous monitoring and updation using various resources of the company.”
When ld. CIT (A) himself recorded that, “it may not be possible to find out the actual expenditure incurred in relation to the earning of exempt income”, it is difficult to reject the working brought on record by the assessee too that no expenditure has been incurred to earn dividend income by the assessee. Moreover, the entire investment made by the assessee during the years under assessment is “dividend reinvested” and in these circumstances, the provisions contained u/s 14A read with Rule 8D cannot be invoked mechanically.
In AY 2014-15 also, AO has mechanically applied section 14A read with Rule 8D without recording any dissatisfaction as to the working given by the assessee as to not incurring any expenses to earn the dividend income rather based his findings on the basis of generic observations that such a huge investment cannot be made without incurring expenditure. For AY 2014-15 also, assessee has brought on record fund statement also showing entire investment for the year under assessment as “dividend reinvested” the findings returned by the AO by holding that, “the disallowance under Rule 8D(2)(iii) of the Income-tax Rules is mandatory in nature in a case where the assessee has claimed exempt income and consequently rejected the objections raised by the assessee.”
Hon’ble Delhi High Court in a case cited as Maxopp Investment Ltd. (supra) while deciding the identical issue as to how provisions contained u/s 14A read with Rule 8D are to be invoked by the AO held as under :-
“Section 14A even prior to the introduction of sub- sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of .sub-section (2) of section 14A . Prior to that, the assessee was free to adopt any reasonable and acceptable method. So, even for the pre- rule 80 period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. Even where the assessee claims that no expenditure has been incurred in' relation to income which does not form part of the total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of ./2018 ITA No.5205/Del./2018 expenditure for the purposes of section 14A(1). In case, the Assessing Officer is not, on the basis of the objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.”
Hon’ble Apex Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT – 394 ITR 449 (SC) thrashed the issue in controversy as to invoking of the provisions contained under Rule 8D of the Rules by observing as under :-
“37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”
By following the law laid down by Hon’ble Apex Court in judgment cited as Godrej & Boyce Manufacturing Company Ltd. Ltd. (supra), we are of the considered view that disallowance to the tune of Rs.22,60,300/- & Rs.35,75,677/- for Assessment Years 2013-14 & 2014-15 respectively by mechanically applying the provisions contained u/s 14A read with Rule 8D(2) are not sustainable in the eyes of law because sub-section (2) & (3) of section 14A with Rule 8D of the Rules has only prescribed a formula for determination of an expenditure to earn the income which does not form part of the total income under the Act, which can only be invoked if the AO is not satisfied with the claim of the assessee.
So, we are of the considered view that when AO/CIT(A)/DRP have not come up with factual working that such and such expenses have been incurred by the assessee to earn the dividend income by recording their dissatisfaction with the working of the assessee company, rather mechanically invoked the provisions contained u/s 14A r/w Rule 8D which is not permissible. Moreover, AO has not found any fault in the audited financials of the assessee showing no expenditure in earning dividend income.
It is a matter of fact that the entire investment during the year under consideration is on account of dividend reinvested company to put in their administrative and managerial manpower for making investment. So, AO is directed to delete the disallowance of Rs.22,60,300/- & Rs.35,75,677/- for Assessment Years 2013-14 & 2014-15 respectively after due verification that apart from “dividend reinvested” no other investment has been made by the assessee company. So, Grounds No.1, 1.1 & 1.2 and Grounds No.2, 2.1, 2.2, 2.3, 2.4 & 2.5 of AYs 2013-14 & AY 2014-15 respectively are determined in favour of the assessee.
GROUND NO.3 (AY 2014-15)
Assessee challenged the order passed by the AO/CIT(A) in not allowing credit of Minimum Alternate Tax (MAT) of Rs.2,09,67,078/- as claimed in the return of income. Ld. AR for the assessee brought to the notice of the Bench that application u/s 154 of the Act has already been filed with the AO which is pending adjudication. Accordingly, we direct AO to decide the application moved by the assessee u/s 154 of the Act to decide the issue allowing credit of MAT in accordance with law within two months.
So, ground no.3 of AY 2014-15 is determined in favour of the assessee for statistical purposes.
ADDITIONAL GROUND AYs 2013-14 & 2014-15 sought to allow Education Cess (EC) and Secondary & Higher Education Cess (SHEC) on income-tax being an allowable expenditure for computing the total income by relying upon the decision rendered by Hon’ble Bombay High Court in case of Sesa Goa Limited vs. JCIT 117 taxmann.com 96 (Bombay HC).
Now, it is settled principle of law that Education Cess and Secondary & Higher Education Cess paid on income-tax is an allowable deduction for computing the total income being not hit by the provisions contained u/s 40A(ii) of the Act, as has been held by Hon’ble Bombay High Court in case of Sesa Goa Ltd. (supra).
Hon’ble High Court in Sesa Goa Ltd. case (supra) held that education cess or any other cess is not included in clause (ii) of section 40(a) of the Act so there is no prohibition in claiming deduction of such amounts while computing the income of the assessee under the head ‘profits & gains of business or profession’.
Operative part of the aforesaid decision rendered by Hon’ble Bombay High Court is extracted for ready perusal as under :-
“27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of ./2018 ITA No.5205/Del./2018 interpretation of taxing statute. This, according to us, is an additional reason as to why the expression "cess" ought not to be read or included in the expression "any rate or tax levied" as appearing in section 40(a)(ii) of the IT Act.
28. In the Income-tax Act, 1922, section 10(4) had banned allowance of any sum paid on account of 'any cess, rate or tax levied on the profits or gains of any business or profession'. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression "cess" is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income-tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression "cess" and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, "cess" and consequently, "cess" whenever paid in relation to business, is allowable as deductable expenditure.”
Coordinate Bench of the Tribunal in case of Sicpa India Private Ltd. vs. Addl.CIT in 1586/Kol/2016 & 7048/Kol/2017 also decided the identical issue by holding that education cess on income-tax, dividend distribution tax and fringe benefit tax is not a disallowable expenditure under section 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act.
So, following the decision rendered by Hon’ble Bombay High Court in case of Sesa Goa Ltd. (supra) and order passed by the coordinate Bench of the Tribunal in case of Sicpa India Pvt. Ltd. (supra), we are of the considered view that education cess and secondary & higher education cess is an allowable deduction being not hit by the provisions of section 40(a)(ii) of the Act. We direct 2013-14 & 2014-15 is determined in favour of the assessee.
27. Resultantly, the appeal for Assessment Year 2013-14 being is allowed and appeal for AY 2014-15 being is allowed for statistical purposes. Order pronounced in open court on this 22nd day of October, 2021.