GUJARAT STATE FINANCIAL SERVICES LTD.,AHMEDABAD vs. THE DY. CIT, CIRCLE-2(1)(1), AHMEDABAD

Ground no.-1 is general in nature and was not pressed. Hence, the same is dismissed.

Ground no.-2 pertains to deduction under Section 80G of the Act. During the year the assessee had contributed Rs.3,57,42,548/- to Mukhyamantri Shree Swachchta Nidhi Gujarat as part of its CSR initiative. This amount was disallowed by the assessee under Section 37 of the Act and added to the income. However, as contribution to Mukhyamantri Shree Swachchta Nidhi Gujarat was eligible for deduction under Section 80G of the Act, the assessee had claimed deduction of 50% of the contribution amounting to Rs.1,78,71,274/- from its gross total income. The Assessing Officer had disallowed the deduction claim of this amount made under Section 80G of the Act for the reason that the same pertained to CSR expenditure and was not eligible for deduction.

Shri Vishal Kalra, Ld. AR of the assessee explained that the amount spent towards CSR contribution was suo moto disallowed by the assessee under Section 37 of the Act. However, as the contribution to Mukhyamantri Shree Swachchta Nidhi Gujarat for sanitation work was eligible for deduction under Section 80G of the Act, the assessee had rightly claimed the deduction. The Ld. AR has drawn our attention to the provisions of Section 80G(2)(a)(iiihk) and (iiihl) of the Act, as per which only deduction made to Swachh Bharat Kosh and Clean Ganga Fund, in pursuance to corporate social responsibility under Section 135(5) of the Company’s Act, was ineligible for deduction. According to the Ld. AR, apart from the donation to these two funds, the other donations were eligible for deduction under Section 80G of the Act. In this regard, Ld. AR placed reliance on the following decisions: -

We have considered the rival submissions. There is no dispute to the fact that the expenditure incurred by the assessee on CSR activities was suo moto disallowed while computing the income under the head business profit. The assessee had claimed deduction under Section 80G in respect of CSR contribution made to Mukhyamantri Shree Swachchta Nidhi Gujarat. On perusal of provisions of Section 80G of the Act, it is evident that the restriction on deductibility of donation made pursuant to CSR obligation is expressly provided under Section 80G(2)(a)(iiihk)/(iiihl) of the Act in respect of donation made to Swachh Bharat Kosh and Clean Ganga Fund, set up by the Central Government. Apart from the donation to these two funds, there is no restriction in respect of donation made to any other fund. The Co-ordinate Bench of this Tribunal in the case of PCIT vs. Gujarat State Fertilizers & Chemicals Limited (supra) has held that the donation under Section 80G, the CSR expenses and the business expenses under Section 37 of the Act operate under different arena and that there was no bar in claiming deduction under Section 80G of the Act in respect of CSR contribution, if the fund to which donation made was A.Y. 2020-21 Gujarat State Financial Services Ltd. vs. DCIT Page 5 of 10 eligible for deduction under Section 80G of the Act. Further, it has been held by the other Tribunals as well that the assessee was entitled to claim deduction towards amount spent on CSR under Section 80G of the Act. Considering the provision of section 80G of the Act as well the decisions of the co-ordinate Benches of the Tribunal on this issue, we hold that the assessee was eligible for claim of deduction under Section 80G of the Act in respect of donation made to Mukhyamantri Shree Swachchta Nidhi Gujarat, as donation to this fund in respect of CSR activities was not specifically debarred under the provisions of the Act. Accordingly, the ground taken by the assessee is allowed.

The next ground pertains to disallowance of Rs.14,31,36,774/- under Section 14A of the Act. During the year, the assessee has earned dividend income and Rs.78,65,24,427/- which was claimed exempt under Section 10(34) of the Act. The assessee had suo moto disallowed Rs.14,31,36,774/- as per provisions of Section 14A read with Rule 8D, in respect of expenditure pertaining to exempt income. In the course of assessment, the Assessing Officer had issued a show cause notice proposing additional disallowance of Rs.296.35 crores under Section 14A of the Act, in response to which the assessee had furnished a detailed explanation. The assessee had reworked the disallowance under Section 14A of the Act at Rs.98,872/- only and accordingly requested the Assessing Officer to restrict the disallowance to this amount. As an alternate plea, the assessee had submitted that the disallowance under Section 14A may be restricted to Rs.1,09,000/- applying the ratio of equity share investment to total asset, to the administrative cost of Rs.3.02 Crores. The Assessing Officer, however, rejected the alternate pleas of A.Y. 2020-21 Gujarat State Financial Services Ltd. vs. DCIT Page 6 of 10 the assessee and upheld the disallowance of Rs.14,31,36,774/- u/s 14A of the Act as made by the assessee in the return of income. The action of the Assessing Officer was upheld by the ld. CIT(A) as well.

Shri Vishal Kalra, Ld. AR of the assessee explained that the assessee had disallowed Rs.14,31,36,774/- under Section 14A of the Act in the computation of income out of abundant caution. He explained that in respect of the investments, no direct expenses were incurred by the assessee. The total administrative expense debited to Profit & Loss Account under the head other expenses was Rs.3.02 crores (excluding donation of Rs.8.50 crores). Therefore, by applying the ratio of equity share investment to total asset, to this administrative cost of Rs.3.02 crores, the disallowance under Section 14A worked out to Rs.1,09,000/- only. He submitted that the Assessing Officer had wrongly made the disallowance of Rs.14.31 lakhs under Section 14A of the Act without recording any satisfaction as to how the working of the assessee was incorrect. The Ld. AR further submitted that the Ld. CIT(A) had rejected the claim of the assessee on the ground that the claim for lower disallowance should have been made only by filing a revised return. According to the ld. AR, the decision of Hon’ble Supreme Court in the case of Goetze (India) Limited vs. CIT, 284 ITR 323 (SC) was binding only on the Assessing Authority and it did not impinge on the powers of the Appellate Authorities. He further submitted that the assessee’s own funds were more than the borrowed funds and, therefore, investment in respect of shares, on which exempt income was received, can be presumed to be made out of own funds.

Per contra, Shri A.P. Singh, Ld. CIT-DR submitted that no disallowance was made by the Assessing Officer under Section 14A of A.Y. 2020-21 Gujarat State Financial Services Ltd. vs. DCIT Page 7 of 10 the Act in the assessment order. He submitted that the assessee had suo moto disallowed Rs.14,31,36,774/- under Section 14A of the Act in its return of income. He further submitted that apart from administrative expenses, certain other expenses were also incurred which was not taken into account in the revised working as submitted by the assessee before the Assessing Officer. He, therefore, strongly supported the disallowance as initially made by the assessee itself under Section 14A of the Act following the provisions of Rule 8D of the Rules.

We have carefully considered the rival submissions. The undisputed fact of the case is that the assessee had suo moto made disallowance of Rs.14,31,36,774/- under Section 14A of the Act in its return of income. In the course of assessment, the Assessing Officer had issued a show cause notice to make disallowance of Rs.310,67,35,336/- u/s 14A, which was ultimately dropped by him after considering the explanation of the assessee. The Assessing Officer has categorically recorded in the assessment order that the working of disallowance under Section 14A read with Rule 8D suo moto made by the assessee was acceptable and no further disallowance was warranted on this issue. Considering these facts, the contention of the assessee that the Assessing Officer had made disallowance under Section 14A of the Act without recording his satisfaction, has no merit. The Assessing Officer did not make any disallowance under Section 14A of the Act but had merely accepted the disallowance as made by the assessee itself.

The assessee in his explanation filed before the Assessing Officer had contended that the expenditure attributable to earning of exempt dividend income was Rs.98,872/- only and had requested that the A.Y. 2020-21 Gujarat State Financial Services Ltd. vs. DCIT Page 8 of 10 disallowance be restricted to this amount only. A working of this amount was furnished by the assessee which is found to be as under: -

According to the assessee, only the expenses as mentioned above were attributable to earning of exempt income, out of which proportionate amount of 5% and 1% was allocated by the assessee. An alternate plea was also taken that the total administrative expenses under the head “other expenses” (excluding donation of Rs.8.50 Crores) was Rs.3.02 Crores only and by applying the ratio of equity share investment to total asset, the disallowance amount works out to Rs.1,09,000/- only. As another alternate plea, it was contended that the disallowance amount can’t exceed the total other expenses of Rs.3.02 Crores. In the explanation filed before the AO, the assessee had nowhere explained as to why finance cost of Rs.2982.39 Crores and employee benefit expense of Rs.3.28 Crores should not be proportionately allocated towards the expenditure incurred for earning of exempt income. Further the basis of allocating only 5% or 1% of the expenses was also not explained by the A.Y. 2020-21 Gujarat State Financial Services Ltd. vs. DCIT Page 9 of 10 assessee. From the accounts of the assessee, it is found that the assessee company had invested in equity shares as per the directives of Finance Department of Government of Gujarat during the Financial Year 2018-19 and the investment was strategic in nature. Such strategic investment could not have been made without the involvement of top management. Therefore, the Directors’ remunerations and fees along with employees’ cost was also required to be proportionately allocated towards earning of exempt income. The assessee had also not explained as to on what basis the disallowance in respect of earning of exempt income was made in the preceding year, in which the investment in shares was made for the first time.

The amount of deduction inadmissible under Section 14A of the Act in respect of expenditure incurred in relation to income which does not form part of total income was certified by the Auditor at Rs.14,31,36,774/- in Form No.3CA. The assessee did not furnish any revised certificate from the Auditor in Form No.3CA in respect of the revised claim as made in the course of assessment. In the absence of any such revised certificate from the Auditor, the claim of the assessee was rightly rejected by the Assessing Officer. The revised claim for disallowance under Section 14A of the Act as made by the assessee in the course of assessment is found to be neither based on any rationale nor supported by a revised audit report from the Auditor. Therefore, the action of the Assessing Officer in rejecting the revised claim for deduction u/s 14A of the Act and the decision of the Ld. CIT(A) on this issue, is upheld. The ground taken by the assessee is dismissed.