GRASIM INDUSTRIES LTD (SUCCESSOR TO ADITYA BIRLA NUVO LTD),MUMBAI vs. DY CIT CC 1 (4), MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1. On the facts and circumstances of the case and in law, the Hon‟ble CIT(A) erred in upholding the action of the Assistant Commissioner of Income Tax- LTU(1), Mumbai (“the AO”) in disallowing a sum of Rs.19,24,95,632/- u/s 14A of the Act being the disallowance computed as per Rule 8D of the Income Tax Rules. A.Y. 2008-09

2. The appellant prays that the AO be directed to delete the disallowance u/s 14A of the Act amounting to Rs.19,24,95,632/- or that the disallowance be appropriately reduced. GROUND NO.II: DISALLOWANCE OF EDUCATION CESS:

1. On the facts and the circumstances of the case and in law, the AO erred in treating Education Cess and Secondary and Higher Education Cess (collectively called as „Education Cess‟) as disallowable expenditure under Section 40(a)(ii) of the Act.

2. The appellant prays that the AO be directed to allow deduction of Education Cess while computing the total income of the appellant. GROUND NO.III: GENERAL The appellant craves leave to add, alter, amend or vary the above grounds of appeal either before or at the time of hearing.”

3. The brief facts of the case are that the AO has passed the order u/s 143(3) r.w.s. 254 of the Act to consider the additional ground u/s 148 of the Act to consider the Education Cess etc. The AO passed the order dated 16.05.2016 assessing the disallowance u/s 14A to the tune of Rs.83,85,78,993/-. The total income was assessed to the tune of Rs.115,80,55,501/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who dismissed the appeal of the assessee, therefore, the assessee has filed the present appeal before us.

ISSUE NO.1

2 A.Y. 2008-09 Rule 8D. The Ld. Representative of the assessee has argued that only those investment which yielded the dividend income is liable to be considered for the purpose of disallowance u/s 14A r.w. Rule 8D(2)(iii). In support of this contention, the Ld. Representative of the assessee has placed reliance upon the decision in the case of ACIT Vs. Vireet Investments (P.) Ltd. (2017) 58 ITR 313 (Delhi) and others. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. In the case of ACIT Vs. Vireet Investment (P.) Ltd. (supra) the Hon’ble Special Bench has held as under: - “We have considered the rival submissions of the parties and gone through the orders of the tax authorities below. As noted above the ld AR for the assessee have confined his submissions to the extent that only those investment which yielded exempt income during the year should be considered for computing the average value of investment which yielded exempt income during the year as held by Special bench of Delhi Tribunal in Vireet Investment P. Ltd. (supra). After considering the submission of ld. AR of the assessee, we find convincing force in his submission that only those investments which yielded exempt income during the year be considered for computing the average value of investment. Therefore, the assessing officer is directed to re-compute the disallowance under Rule 8D(2)(iii) by following the decision of Special Bench of Delhi Tribunal in Vireet Investment P. Ltd. (supra). Needless to order that before re-computing the disallowance under Rule 8D(2)(iii), the assessing officer shall grant opportunity of hearing to the assessee. The assessee is also directed to provide necessary details and information to the assessing officer.”

3 A.Y. 2008-09 5. Accordingly, we set aside the finding of the CIT(A) on this issue and direct the AO to assess the expenditure to earn the exempt income by considering those investments which yielded the dividend income for the purpose of disallowance u/s 14A r.w. Rule 8D(2)(iii) of the Act. Accordingly, this issue is being decided in favour of the assessee against the revenue.

ISSUE NO.2 6. Under this issue the assessee has challenged the disallowance of Education Cess. The assessee has taken the following additional ground of appeal:- “Additional Ground. I. On the facts and circumstances of the case and in law, the Assessing Officer/ CIT(A) ought to have allowed deduction of Education Cess amounting to Rs. 3,19,95,9981- in terms of law laid down by the Hon'ble Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. [ITA No. 52/Raj/2018 ruling dt. 31.7.2018] and further Hon'ble Kolkata Tribunal in case of ITC Ltd. [ ruling dt. 27.11.20 18 ]

4 A.Y. 2008-09 17. The Ld. Counsel for the assessee has submitted that „Cess‟ has not been specifically mentioned in the aforesaid provisions of section 40(a)(ii) and, therefore, Cess is an allowable expenditure. He in this respect has relied upon the “CBDT Circular No. 91/58/66-ITJ(19) dated 18-05-1967”, wherein it has been interpreted that the „Cess‟ shall not be disallowable. The said Circular for the sake of ready reference is reproduced as under:- "Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 - Clarification regarding.- "Recently a case has come to the notice of the Board where the Income Tax Officer has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.

2. The view of the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax Bill, 1961 as introduced in the Parliament stood as under:- "(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains". When the matter came up before the Select Committee, it was decided to 'omit the word 'cess' from the clause. The effect of the omission of the word 'cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards. – 3. The Board desire that the changed position may please be brought to the notice of all the Income Tax Officers so that further litigation on this account may be avoided.{Board's F . No.91/5B/66-ITJ(19), dated 18-5-1967.

6 A.Y. 2008-09 “In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income tax. The meaning of the word "surcharge" as given in the Webster's New International Dictionary includes among others "to charge (one) too much or in addition " also "additional tax". Thus the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to s. 2 of the Finance Act 1963 it would lead to the result that income tax and super tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (In part I of the First Schedule); (ii) Sur- charge; (iii) special surcharge and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way the additional charges form a part of the income tax and super tax”.

7. Subsequently, the Finance Bill, 2022 has been passed in which the preposition of Education Cess has been dealt with and accordingly the Education Cess is being treated as part and parcel of the tax and the claim of expenses in connection with the Education Cess is not liable to be allowed. Accordingly, we affirm the finding of the CIT(A) and decide this issue in favour of the revenue against the assessee.

8 A.Y. 2008-09