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

Brief facts of the case are that the assessee company is 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/- 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/-.

The first issue that came up for our consideration from 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 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/-.

The ld. AR for the assessee submitted that the learned 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:-

The learned DR, on the other hand, supporting order of 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.

We have heard both the parties, perused materials 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 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.

Keeping in view the decision of Hon’ble Supreme Court 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 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 relatable to exempt income is not in accordance with law.

Having said so, let us examine computation of 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 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/-.

The next issue that came up for our consideration from 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 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.

Having heard both sides and considered material on 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 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.

The next issue that came up for our consideration from 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.

Having heard both sides and considered materials on 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.

The next issue that came up for our consideration from additional grounds of appeal filed by the assessee is deduction 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.

We have heard both the parties, perused material available on record and gone through orders of the authorities below. Admittedly, the issue of deduction towards education 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 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.

The learned A.R for the assessee submitted that the 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.

The learned DR, on the other hand, fairly agreed that the 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).

We have heard both the parties, perused material 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 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.