ASHOK KIRTANLAL SHAH,MUMBAI vs. ADD. CIT CC-22 (1), MUMBAI

Aggrieved, the assessee assailed the assessment order before the CIT(A). It was, inter alia, submitted by the assessee before the first appellate authority that the A.O had worked out the disallowance u/s 14A without recording his satisfaction that as to why the claim of the assessee that no disallowance u/s 14A could be attributed for earning of the exempt dividend income was not to be accepted. It was the claim of the assessee that as he had maintained separate books for his personal and business purpose and no nexus was shown by the A.O between the earning of the dividend income and the expenditure claimed in respect of his regular business, therefore, the disallowance u/s 14A was not warranted and was liable to be struck down. Alternatively, it was submitted by the assessee that salary of one of his employee viz. Mr. Henry D‘souza who used to spent 20% of his working hours may be attributed to the earning of the exempt dividend income, and thus, disallowance at best of Rs.1,38,820/- be made.

The assessee being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short ‗A.R‘) for the assessee at the very outset of the hearing of the appeal submitted, that, the A.O without recording his satisfaction as to why the assessee‘s claim that no expenses could be attributed to the earning of the exempt dividend income, had however, in a mechanical manner worked out the disallowance u/s 14A r.w Rule 8D(2)(iii) of Rs.11,13,567/-. It was submitted by the ld. A.R that as per the settled position of law it was obligatory on the part of the A.O to record his satisfaction that as to why the claim of the assessee qua the expenses incurred, if any, for earning of the exempt dividend income was not to be accepted. In support of his aforesaid contention the ld. A.R had drawn

Per contra, the ld. Departmental Representative (for short ‗D.R‘) relied on the orders of the lower authorities. It was submitted by the ld. D.R that the A.O had duly recorded his satisfaction as per the mandate of law before working out the disallowance u/s 14A r.w.Rule 8D(2)(iii).

We have heard the ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. A.R to drive home his aforesaid contention. Admittedly, it is a matter of fact borne from the record that though the assessee during the year in question was in receipt of exempt dividend income of Rs.1,12,54,736/-, however, he had not attributed and therein disallowed any part of the expenditure qua earning of the said exempt income. As is discernible from the records, it was the claim of the assessee that he had maintained separate books of accounts qua his regular business and the activity of making investments in shares and mutual funds. It was, thus, the claim of the assessee that as no expenditure was claimed by him with respect to the activity of making investments in shares and mutual funds, therefore, no disallowance was warranted u/s 14A of the Act. On the other hand, we find that the A.O after exhaustively discussing Sec. 14A of the Act a/w the mechanism for working out the disallowance as contemplated in Rule 8D of the Income Tax Act, Rules 1963, and the law pertaining to the said statutory provision as had developed over the time, therein, without recording his satisfaction as to why the assessee‘s claim that no expenditure could be 6 Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)

The Ground of appeal no. 2 being general is dismissed as not pressed.

We shall now deal with additional ground of the assessee, wherein he had claimed that the ‗education cess‘ on the tax payable by him should have been allowed while computing his income for the year under consideration. It was submitted by the ld. A.R that the aforesaid additional ground of appeal was being raised on the basis of the recent judgment of the Hon‘ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). The ld. A.R submitted that the Hon‟ble High Court in its said judgment, had observed, that if the legislature intended to prohibit the deduction of amounts paid by an assessee towards ―Education Cess‖ or any other ―Cess‖ and Higher and Secondary Education Cess, then, the legislature could have easily included reference to ―cess‖ in clause (ii) of Sec. 40(a). It was further submitted by the ld. A.R that the High Court had observed, that as the legislature had not included ―education cess‖ or any other ―cess‖ in clause (ii) of 9 Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)

We have heard the ld. authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also considered the judicial pronouncements relied upon by ld. A.R in context of additional ground of appeal raised before us. Insofar the claim of the Ld. A.R that unlike ―rates‖ and ―taxes‖ the amount paid by an assessee towards ―Education Cess‖ or any ―other cess‖ viz. the Secondary and Higher Education Cess is not a disallowable expenditure u/s 40(a)(ii) of the Income-tax Act, 1961, we find that the said issue is squarely covered by the recent order of the Hon‘ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). In the case before the Hon‘ble High Court the following substantial question of law was, inter alia, raised :

In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. Vs Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it.

Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT vs Motors & General Stores 66 ITR 692 (SC)].

In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT Vs Radhe Developers 341 ITR 403 ]. One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear Vs State of Haryana 188 ITR 402(SC)].

There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber Vs CIT 233 ITR 207].

Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that ―any rate or tax levied‖ on ―profits and gains of business or profession‖ shall not be deducted in computing the income chargeable under the head ―profits and gains of business or profession‖. There is no reference to any ―cess‖. Obviously

If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, ―education cess‖ or any other ―cess‖, then, the legislature could have easily included reference to ―cess‖ in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the ―cess‖, when it comes to computing income chargeable under the head ―profits and gains of business or profession‖.

The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows : ―(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‖ 25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word ―cess‖ from the aforesaid clause from the Income Tax Bill, 1961. The effect of the omission of the word ―cess‖ is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head ― profits and gains of business or profession‖. Since the deletion of expression ―cess‖ from the Income Tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute.

In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No.91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :- ―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.

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.

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.91/58/66-ITJ(19), dated 18-5-1967.]‖

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 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.

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. 29. In Kanga and Palkhivala's ―The Law and Practice of Income Tax‖ (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to the decision of Privy Council in CIT Vs Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government 15 TXA17&18-13 dt.28.02.2020 Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd Vs CIT [82 ITR 580] that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and 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. Vs CIT Range-2, Kota ), by reference to the aforesaid CBDT Circular dated 18th May, 1967 has held 16 TXA17&18-13 dt. 28.02.2020 that the ITAT 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 that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee. 31. Mr. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd.(supra) was followed and it was held that the amounts paid by the Assessee towards the 'education cess' were liable for deduction in computing the income chargeable under the head of ―profits and gains of business or profession‖. They are as follows :- (i) DCIT Vs Peerless

Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT.

The ITAT, in the impugned judgment and order, has reasoned that since ―cess‖ is collected as a part of the income tax and fringe benefit tax, therefore, such ―cess‖ is to be construed as ―tax‖. According to us, there is no scope for such implications, when construing a taxing statute. Even, though, ―cess‖ may be collected as a part of income tax, that does not render such ―cess‖, either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the IT Act. The mode of collection, is really not determinative in such matters.

Ms. Linhares, has relied upon M/s Unicorn Industries Vs Union of India and others, 2019 SCC Online SC 1567 in support of her contention that ―cess‖ is nothing but ―tax‖ and therefore, there is no question of deduction of amounts paid towards ―cess‖ when it comes to computation of income chargeable under the head profits or gains of any business or profession.

The issue involved in Unicorn Industries ( supra ) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue 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).

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 that we may observe is that the issue involved in Unicorn Industries (supra ) was not at all the issue involved in the present matters and therefore, the decision in Unicorn Industries ( supra ) can be of no assistance to the Respondent – Revenue in the present matters.

Ms. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant – Assessee, in its original return, had never claimed deduction towards the amounts paid by it as ―cess‖. She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze (India) Ltd. Vs Commissioner of Income Tax (2006) 284 ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying

Although, it is true that the Appellant – Assessee did not claim any deduction in respect of amounts paid by it towards ―cess‖ in their original return of income nor did the Appellant – Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant – Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant – Assessee, both before the Commissioner (Appeals) as well as the ITAT.

In CIT Vs Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336, one of the questions of law which came to be framed was whether on the facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra ) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze (supra) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd Vs 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.

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.

Besides, we note that in the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant – Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner ( Appeals ) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare's contention based upon the decision in Goetze (supra ).

For all the aforesaid reasons, we hold that the substantial question of law No.(iii) in Tax Appeal No.17 of 2013 and the sole substantial question of law in Tax Appeal No.18 of 2013 is also required to be answered in favour of the Appellant – Assessee and against the RespondentRevenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification.

Resultantly, the appeal of the assessee is allowed in terms of our aforesaid observations.