Only those investments which had actually yielded exempt income should be considered for the purpose of working out the disallowance under third limb of Rule 8D(2) of the Rules.

This appeal in ITA No.2547/Mum/2019 for A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai in appeal No.CIT(A)-9/Cir-3/Tr.149/2015-16 dated 22/03/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 09/03/2015 by the ld. Dy. Commissioner of Income Tax, Circle- 3(1)(1), Mumbai (hereinafter referred to as ld. AO).

2. The first issue to be decided in this appeal is with regard to disallowance u/s.14A of the Act r.w.r.14A of the Act r.w.r. 8D of the Rules.

3. We have heard the rival submissions and perused the materials available on record. We find that assessee is a Non-Banking Finance Company (NBFC) duly registered with Reserve Bank of India (RBI) and is engaged in the business of financing of bill discounting. The return of income for the A.Y.2012-13 was filed on 19/09/2012 declaring total income of Rs.2,16,21,270/-. We find that assessee had earned dividend income of Rs.9,84,75,987/- and claimed the same as exempt in the return of income. Against this exempt income, the assessee had voluntarily disallowed Rs.5,40,000/- towards expenses incurred for earning dividend income u/s.14A of the Act. The assessee when confronted by the ld. AO as to why the disallowance of expenses u/s.14A of the Act should not be made in accordance with computation mechanism provided in Rule 8D of the Rules, replied vide letter dated 19/12/2014 that, it, being an investment company, had made investments in various shares from time to time out of its own funds and internal accruals and that no borrowings were utilised for the same, accordingly, it was pleaded that no interest could be attributed for the purpose of disallowance u/s.14A of the Act. It was also pleaded that assessee had earned interest income of Rs.17,63,68,890/- which is far in excess of interest expenditure of Rs.15,45,38,936/-. The assessee also furnished the workings of disallowance made by it voluntarily in the sum of Rs.5,40,000/- as under:-

3.1. We find that ultimately the disallowance was made by the ld. AO by applying third limb of Rule 8D(2) of the Rules by considering all the investments. The disallowance accordingly, worked out to Rs.12,35,073/-. The ld. AO after reducing the amount already voluntarily disallowed by the assessee made a final disallowance of Rs.6,95,073/- (Rs.12,35,073/- - Rs.5,40,000/-) in the assessment. This action of the ld. AO was upheld by the ld. CIT(A).

3.2. We find that the ld. AO had duly recorded his satisfaction as to why the computation mechanism provided by the assessee is incorrect and also had applied the computation mechanism provided in Rule 8D(2)(iii) of the Rules by considering all the investments. We find that the special Bench of Delhi Tribunal in the case of Vireet Investments vs. ACIT reported in 165 ITD 27 categorically held that only those investments which had actually yielded exempt income should be considered for the purpose of working out the disallowance under third limb of Rule 8D(2) of the Rules. We find that the assessee had furnished the workings for the same on without prejudice basis in page 7 of the paper book. The ld. AO is directed to go through the same and re-compute the disallowance u/s.14A by considering only those investments which had actually yielded exempt income under Rule 8D(2)(iii) of the Rules. On such re- computation, the ld. AO is also directed to reduce the sum of Rs.5,40,000/- being the amount already disallowed voluntarily by the assessee.

3.3. The ground Nos.1 – 1.3 raised by the assessee are allowed for statistical purposes.

4. We find that assessee had raised an additional ground on 20/11/2020 claiming deduction of education cess u/s.37(1) of the Act while computing business income of the assessee. We find that this additional ground is a legal issue and does not involve verification of fresh facts and in the light of the decision of the Hon’ble Supreme Court in the case of NTPC Ltd., reported in 229 ITR 383, the additional ground raised by the assessee is admitted and taken up for adjudication. We find that the issue raised in additional ground is squarely covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court, Goa Bench in the case of Sesa Goa Ltd., vs. JCIT reported in 117 Taxmann.com 96 vide order dated 28/02/2020 wherein it was categorically held that the expression “cess” ought not to be read or included in the expression “any rate of tax levied” as appeared in Section 40a(ii) of the Act. The relevant operative portion of the said judgement is as under:-

“28. 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 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 subclause 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 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 ssessee 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 General Finance and Investment and Co. Ltd. (ITA No.1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta;

(ii) DCIT Vs Graphite India Ltd. (ITA No.472 and 474 Co. No.64 and 66/Kol/2018 decided on 22nd November, 2019 )by the ITAT, Calcutta;

(iii) DCIT Vs Bajaj Allianz General Insurance (ITA No.1111 and 1112/PUN/2017 decided on 25th July, 2019) by the ITAT, Pune.

32. 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.

33. 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.

34. 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.

35. 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 ).

36. 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.”

5.1. Respectfully following the same, the additional ground raised by the assessee is allowed.

6. In the result, appeal of the assessee is allowed for statistical purposes.

Order pronounced on 27/11/2020 by way of proper mentioning in the notice board.

Sd/-

(RAM LAL NEGI)

Sd/-

(M.BALAGANESH)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai; Dated 27/11/2020

KARUNA, sr.ps