NORTHERN ARC CAPITAL LTD (FORMERLY KNOWN AS IFMR CAPITAL FINANCE PVT LTD),CHENNAI vs. DCIT, CORP CIR-4(2), CHENNAI

PER G.MANJUNATHA, AM:

This appeal filed by the assessee is directed against the

order passed by the learned CIT(A)-6, Chennai dated

31.10.2018 and pertains to assessment year 2014-15.

engaged in the business of non-banking finance company, filed

its return of income for the assessment year 2014-15 on

26.11.2014 declaring total income of Rs.6,95,10,790/-. The

assessment has been completed u/s.143(3) of the Act, on

26.12.2016 and determined total income at Rs.19,64,17,350/-

2 ITA No. 205/Chny/2019

by making additions towards disallowance of depreciation

claimed on improvement to leasehold building, disallowance of

interest on TDS and disallowance u/s.14A r.w. Rule 8D of

Income Tax Rules, 1962 . The assessee carried the matter in

appeal before the first appellate authority. The learned CIT(A)

for the reasons stated in his appellate order dated 31.10.2018

partly allowed appeal filed by the assessee, where he has

confirmed additions made by the Assessing Officer towards

disallowance of depreciation on improvements to leasehold

building, disallowance of expenditure in relation to exempt

income u/s.14A r.w. Rule 8D, however, restricted disallowances

to the extent of net disallowances after reducing suo motu

disallowances made by the assessee at Rs.5,52,12,116/-.

Aggrieved by the learned CIT(A) order, the assessee is in

appeal before us.

ground no.2 of assessee appeal is disallowances u/s.14A of the

Act r.w.r 8D of Income Tax Rules, 1962. The facts with regard

to impugned dispute are that during the course of assessment

proceedings, the Assessing Officer noticed that the assessee

has made huge investments in shares and securities which

3 ITA No. 205/Chny/2019

generate exempt income. Therefore, called upon the assessee

to furnish complete details of investments and bifurcation of

expenses including interest expenses relatable to exempt

income, as per provisions of section 14A of the Act. In

response, the assessee has furnished working of disallowance

u/s.14A, thereby arrived at disallowance of Rs.5,52,12,116/-

and claimed that it has made suo motu disallowance in the

statement of total income. The Assessing Officer, however, was

not convinced with working of disallowance filed by the assessee and according to him, although provisions of Rule 8D

of Income Tax Rules, 1962 is applicable for the impugned

assessment year, the assessee has made ad-hoc disallowance

of certain expenses, including interest expenses, which is not

in accordance with prescribed method provided for

disallowance of expenses and hence, opined that disallowance

of expenses computed by the assessee towards expenses

incurred in relation to exempt income is not in accordance with

law and hence, invoked provisions of Rue 8D of Income Tax

Rules, 1962, and determined total disallowance at Rs.12,60,92,495/-.

4 ITA No. 205/Chny/2019

CIT(A) has erred in upholding applicability of Rule 8D of Income

Tax Rules, 1962, while computing disallowance u/s.14A of the

Act, thereby confirmed disallowance to the extent of

Rs.7,08,80,379/-, without appreciating fact that the assessee

had already identified and disallowed an amount of

Rs.5,52,12,116/- incurred towards earning exempt income. The

AR for the assessee further submitted that the learned CIT(A)

ought to have appreciated that provisions of Rule 8D of Income

Tax Rules, 1962 is not mandatory while computing

disallowance u/s.14A, unless the Assessing Officer records

satisfaction as required u/s.14A(2) that having regard to books

of account of the assessee suo motu disallowances computed

by the assessee is not correct. In this regard, he relied upon

following judicial precedents:-

5 ITA No. 205/Chny/2019

the learned CIT(A), submitted that from assessment year 2008-

09 onwards disallowance u/s.14A shall be computed in

accordance with Rule 8D, as per which there is a prescribed

method for disallowance of direct expenses, interest expenses

and other expenses. Hence, there is no merit in the arguments

taken by the ld. AR for the assessee that Rule 8D is not

mandatory while computing disallowance u/s.14 of the Act.

available on record and gone through orders of the authorities

below. The AR for the assessee has made three fold

arguments towards disallowances u/s.14A of the Act read with

Rule 8D of the Income Tax Rules, 1962. The first and foremost

argument of the ld.AR for the assessee is that there is no

satisfaction from the Assessing Officer as required u/s.14A(2)

of the Act having regard to books of account of the assessee

that suo motu disallowance made is not correct. We have gone

through arguments advanced by the learned A.R. for the

assessee in light of reasons given by the Assessing Officer for

invoking Rule 8D to compute disallowance u/s.14A of the Act

6 ITA No. 205/Chny/2019

and various case laws cited by the learned A.R. for the

assessee. Admittedly, various High Courts, including the

Hon’ble Jurisdictional High Court in the case of M/s. Marg Ltd.

Vs.CIT reported in (2020) 114 Taxmann.com 84 (Mad) has

held that unless the Assessing Officer records satisfaction

having regard to books of account of the assessee that suo

motu disallowance computed by the assessee is not correct,

he cannot proceed to compute disallowances by invoking Rule

8D of the Income Tax Rules, 1962. This principle is further

strengthened by the decision of the Hon’ble Supreme Court in

the case of Maxopp Investment Ltd. vs.CIT (402 ITR 640),

where the Hon’ble Supreme Court made it very clear that when

the assessee has made suo motu disallowances, the Assessing

Officer shall record satisfaction u/s.14A(2) of the Act having

regard to books of account of the assessee that suo motu

disallowance computed by the assessee is not correct.

and the Hon’ble Madras High Court in the cases discussed

hereinabove, we have gone through reasons given by the

Assessing Officer to reject suo motu disallowance made by the

7 ITA No. 205/Chny/2019

assessee and we, ourselves do not subscribe to arguments

advanced by the learned A.R for the assessee regarding

satisfaction required to be recorded by the Assessing Officer

u/s.14A(2) of the Act, because satisfaction as required

u/s.14A(2) is subjective satisfaction, which can be arrived at by

the Assessing Officer having considered facts and

circumstances of each case. Further, the law does not provide

for recording satisfaction either in writing or in a particular

manner, but what the law requires is to record satisfaction having regard to the books of account of the assessee. In this

case, the Assessing Officer has recorded his finding in para 6.3

& 6.4 of the assessment order that despite the assessee was

called for details of expenditure incurred relating to exempt

income, the assessee has filed suo motu disallowance, which

was not in accordance with prescribed procedure provided

under Rule 8D of Income Tax Rules, 1962. The Assessing

Officer having regard to books of account of the assessee and

also considering suo motu disallowance computed by the

assessee, which is not on the basis of prescribed method, but on ad-hoc basis, came to the conclusion that suo motu

disallowance computed by the assessee for expenditure

8 ITA No. 205/Chny/2019

relatable to exempt income is not in accordance with law.

Therefore, in our considered view, said factual finding of the

Assessing Officer satisfies the provisions of section 14A(2) of

the Act, regarding satisfaction as required under law having

regard to books of account of the assessee, hence, arguments

taken by the assessee has been rejected. Insofar as case laws

relied upon by the assessee including the decision of Hon'ble

Jurisdictional High Court of Madras in the case of Marg Ltd. Vs.

CIT (supra), we find that there is no dispute with regard to ratio

laid down by various High Courts, including Hon'ble Supreme

Court, regarding satisfaction. But, as we have already stated

that satisfaction is subjective satisfaction, but not objective and

it varies from case to case. In this case, the Assessing Officer

has recorded satisfaction having regard to books of account of

the assessee and thus, we are of the considered view that case

laws relied upon by the assessee are not applicable to the facts

of the present case.

disallowance u/s.14A of the Act r.w.r 8D of Income Tax Rules,

1962. It is an admitted fact that from assessment year 2008-09

onwards disallowance u/s.14A shall be computed in

9 ITA No. 205/Chny/2019

accordance with Rule 8D of Income Tax Rules, 1962 . In this

case, the assessee has computed suo motu disallowance and

such disallowance is not in accordance with Rule 8D of

I.T.Rules, 1962. Further, the assessee has not filed any details

and basis for computation of disallowance of Rs.5,52,12,116/-.

On the other hand, the Assessing Officer has computed

disallowance by invoking Rule 8D. Therefore, we are of the

considered view that the Assessing Officer was right in

computation of disallowance u/s.14A of the Act by invoking

Rule 8D of I.T. Rules, 1962. However, the only error committed

by the Assessing Officer is not allowing deduction towards suo

motu disallowance computed by the assessee. However, the

learned CIT(A) has rectified said mistake and allowed deduction

towards suo motu disallowance computed by the assessee and

confirmed of net disallowance of Rs.7,08,80,379/-. Hence, we

are inclined to uphold findings of the learned CIT(A) and reject

ground taken by the assessee.

ground no.3 of assessee appeal is disallowance of depreciation

on leasehold improvements under normal provisions of the Act

and computation of book profit u/s.115JB of the Income Tax

10 ITA No. 205/Chny/2019

Act, 1961. The Assessing Officer has disallowed expenditure

incurred for improvements to leasehold building on the ground

that said expenditure is in the nature of capital expenditure

which cannot be allowed as deduction. However, he has

allowed depreciation @ 15% as applicable to furniture and

fittings and has made additions towards difference amount of

Rs.7,12,328/-. It was the contention of the assessee that any

improvements to leasehold building is entitled for 100%

depreciation as per entry 4 in Part A(1) to New Appendix-I of I.T. Rules, 1962.

record, we find that the assessee has incurred various

expenditure for improvements to leasehold building, including

interior works, air-conditioner work and air-conditioner

installation and architect fee. On going through nature of

expenditure incurred by the assessee, we find that all

expenditure is in the nature of furniture and fittings, which is

eligible for depreciation. It was claim of the assessee that

improvements to leasehold building is covered under entry 4 in Part A(1) to New Appendix-I of I.T. Rules, 1962, and as per

said entry depreciation is allowable at 100% on temporary

11 ITA No. 205/Chny/2019

structures. We have gone through arguments of the assessee

in light of Appendix-I of I.T. Rules, 1962, and we do not

ourselves subscribe to arguments advanced by learned A.R for

the assessee for the simple reason that said entry covers to an

amount incurred for temporary structures in the nature of

building, wooden structure etc. In this case, the assessee has

spent amount for interior works, air-conditioner work, air-

conditioner installation and architect fee. The interior work

carried out by the assessee is for improvement to structure of

the building or for creation of furniture and fittings is not clear.

Similarly, amounts spent for purchase of air-conditioner and a/c

installation cannot be at any stretch of imagination be

considered as temporary structure which comes under entry 4

in Part A(1) to New Appendix-I of I.T. Rules, 1962. The facts

are not clear. Therefore, we are of the considered view that the

issue needs to go back to the file of Assessing Officer to

reconsider the issue in light of claim of the assessee that it has

spent for improvements to leasehold building, which is in the

nature of temporary structures. Therefore, we set aside the

issue and direct the Assessing Officer to re-examine the issue

and decide in accordance with law. Similarly, ground taken by

12 ITA No. 205/Chny/2019

the assessee challenging adjustments made by the Assessing

Officer towards disallowance of depreciation on leasehold

improvements to book profit computed u/s.115JB of the Act is

also set aside to file of the Assessing Officer and direct him to

reconsider the issue in light of our observations given

hereinabove.

ground no.5 of assessee appeal is disallowance of interest on TDS u/s.40(a)(ii) under MAT provisions of the Income Tax Act,

1961. The assessee has challenged disallowance of

computation made by the assessee towards interest on TDS

under normal provisions of the Act as well as book profit

computed u/s.115JB of the Income Tax Act, 1961. The learned

CIT(A) has set aside the issue to the file of Assessing Officer

towards disallowance made in accordance with normal

provisions of the I.T. Act, 1961 on the ground that it is not clear

from the assessment order as to whether the assessee had

claimed said interest on TDS in the profit & loss account /

books of account or not. However, has not given any finding on said disallowance made under MAT provisions of the Act.

13 ITA No. 205/Chny/2019

record, we find that the learned CIT(A) has set aside issue of

disallowance of interest on TDS under normal provisions of the

Act to the file of Assessing Officer to ascertain fact whether

the assessee has debited said expenditure into profit & loss

account or not in light of various evidences filed by the

assessee, including copy of tax audit report as well as financial

statements, where no such expenditure was debited into profit

& loss account. Since the issue has been set aside to the file of

Assessing Officer, additions made towards said expenditure

under MAT provisions also needs to go back to the file of the

Assessing Officer, because additions if any, needs to be made

to MAT provisions is fully depends upon additions made

towards said expenditure under normal provisions of the Act.

Hence, we set aside this issue also to the file of the Assessing

Officer and direct him to reconsider the issue along with

disallowances made under normal provisions of the I.T.

Act,1961.

additional grounds of appeal filed by the assessee is deduction

14 ITA No. 205/Chny/2019

towards education cess & secondary and higher education

cess u/s.37(1) of the Act. The assessee has filed a petition for admission of additional grounds vide its letter dated 11th March, 2021 and claimed that issue of deduction towards education

cess & secondary and higher education cess is purely legal issue for which the Assessing Officer is not required to investigate any additional facts. Therefore, he argued that

additional grounds filed by the assessee may be admitted. The learned DR, on the other hand, strongly opposed additional grounds filed by the assessee.

cess & secondary and higher education cess u/s. 37(1) of the Act, is purely legal issue for which no requirement of investigation of any additional facts. It is also an admitted fact

that when the assessee has taken legal issue which can be admitted at any stage including at second appellate stage as held by various High Courts including the Hon'ble Supreme

Court in the case of National Thermal Power Co.Ltd. reported

15 ITA No. 205/Chny/2019

in 229 ITR 383 (SC). Therefore, we deem it appropriate to

admit additional grounds filed by the assessee to decide the

issue in accordance with law.

issue of deduction towards education cess & secondary and

higher education cess is fully covered in favour of the assessee

by the decision of Hon’ble Bombay High Court in the case of

Sesa Goa Ltd. Vs JCIT (2020) 423 ITR 426, where it was held that cess is allowable as business expenditure u/s.37(1) of the

Act.

issue is covered in favour of the assessee by the decision of

the Hon’ble Bombay High Court in the case of Sesa Goa

Ltd.(supra).

available on record and gone through orders of the authorities

below. We find that the Hon’ble Bombay High Court has

considered an identical issue in the case of sesa Goa Ltd.(supra) and held that education cess & secondary and

higher education cess are liable for deduction in computing

16 ITA No. 205/Chny/2019

income chargeable under head of ‘profits and gains of business

or profession’. The Hon’ble Rajasthan High Court in the case of

Chambal Fertilizers & Chemicals Ltd. Vs. JCIT 107

Taxmann.com 484 has taken a similar view and held that

education cess is not disallowable expenditure under the

provisions of section 40(a)(ii) of the Act. Therefore, we are of

the considered view that there is merit in the additional grounds

filed by the assessee requesting deduction for education cess &

secondary and higher education cess, as business expenditure

deductible u/s.37(1) of the Act. But, fact remains that assessee

has taken up this issue for the first time by filing additional

grounds and the Assessing Officer did not have any occasion

to examine claim of the assessee. Therefore, we are of the

considered view that issue needs to go back to file of the

Assessing Officer and hence, we set aside this issue to file of

the Assessing Officer and direct him to re-examine claim of the

assessee in light of our discussions given herein above and

also by considering ratio laid down by the Hon’ble Bombay High

Court and Hon’ble Rajasthan High Court in the cases cited

above.

17 ITA No. 205/Chny/2019

allowed for statistical purposes. Order pronounced in the open court on 18th August, 2021

Sd/- Sd/- (वी.दुगा� राव) (जी.मंजुनाथ) (V.Durga Rao) (G.Manjunatha) $या�यक सद&य /Judicial Member लेखा सद&य / Accountant Member

चे$नई/Chennai, )दनांक/Dated 18th August, 2021 DS आदेश क� ��त+ल,प अ-े,षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु.त (अपील)/CIT(A) 4. आयकर आयु.त/CIT 5. ,वभागीय ��त�न2ध/DR 6. गाड� फाईल/GF.