Case Law Details
Peerless Hotels Limited Vs ACIT (ITAT Kolkata)
ITAT Kolkata held that education cess is not allowable expenditure under section 37(1) of the Income Tax Act.
Facts- The assessee has filed its return of income on 27.10.2017, which was revised on 16.07.20 18 disclosing total income of Rs.1,99,51,420/-. The case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) was issued and served upon the assessee. On scrutiny, AO found that the assessee has made investments, which are reflected in the Balance-sheet. The total investments as on 3 1.03.2017 worked out by AO are of Rs.325.64 lakhs plus Rs.7 lakhs. He found that the assessee has suo motu made disallowance of Rs.9, 134/- u/s. 14A. In the opinion of AO, this expenditure was not sufficient for looking after this huge investment. He proposed to disallow more amounts. AO observed that the assessee has earned income in the shape of dividend, which was reinvested. Thereafter AO has made a detailed analysis of Section 14A read with Rule 8D. AO made a disallowance on the basis of Rule 8D(2) and worked out such disallowance at 1% by taking note of annual average of the monthly averages of the opening and closing balances of the value of investment.
Further, assessee has pleased that CIT(A) has erred in not allowing Education Cess u/s. 37(1) of the Income Tax Act.
Conclusion- Held that, subsection (2) of section 14A contemplates that expenditures relatable to earning of tax-free income are required to be worked out for making disallowance. In the present case, there are expenditures, but the expenditures relatable to exempt income could not be demonstrable. Ld. Assessing Officer has to take help of the formula under Rule 8D and worked out the disallowance. Therefore, the assessee could not buttress its case on the strength of the above decisions. We do not find any merit in these grounds of appeal. They are rejected.
Held that hon’ble ITAT Kolkata in the case Kanoria Chemicals & Industries Ltd has held that the “education cess” can’t be allowed as an allowable expense of the assessee u/s 37(1).
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal is directed at the instance of assessee against the order of ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 06.04.2023 passed for A.Y. 2017-18.
2. The assessee has taken seven grounds of appeal, out of which Grounds No. 1 & 7 are general grounds, which do not call for recording of any specific finding. Hence both these grounds are rejected.
3. Grounds No. 2, 3 & 4:- Under these three grounds of appeal, grievance of the assessee is that ld. Assessing Officer has erred in disallowing a sum of Rs.2,68,2 16/- with the aid of section 14A read with Rule 8D(2)(ii). In other words, ld. Assessing Officer has disallowed the expenditure on account of expenditure incurred for earning tax-free income.
4. Brief facts of the case are that the assessee has filed its return of income on 27.10.2017, which was revised on 16.07.20 18 disclosing total income of Rs.1,99,51,420/-. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) was issued and served upon the assessee. On scrutiny of the accounts, ld. Assessing Officer found that the assessee has made investments, which are reflected in the Balance-sheet. The total investments as on 3 1.03.2017 worked out by the ld. Assessing Officer are of Rs.325.64 lakhs plus Rs.7 lakhs. He found that the assessee has suo motu made disallowance of Rs.9, 134/- under section 14A. In the opinion of the ld. Assessing Officer, this expenditure was not sufficient for looking after this huge investment. He proposed to disallow more amounts. In reply to the show-cause notice, the assessee has contended that disallowance cannot be made where no exempt income is earned. The ld. Assessing Officer has rejected this reply of the assessee by observing that the assessee has earned income in the shape of dividend, which was reinvested. Thereafter the ld. Assessing Officer has made a detailed analysis of Section 14A read with Rule 8D. The ld. Assessing Officer further made reference to the judgment of the Hon’ble Supreme Court in the case of Maxopp Investment Limited –vs.- CIT reported in (2018) 91 taxmann.com 154. He made a disallowance on the basis of Rule 8D(2) and worked out such disallowance at 1% by taking note of annual average of the monthly averages of the opening and closing balances of the value of investment.
5. This exercise led to him to work out a disallowance of 2,77,350/-. He added further disallowance made by the assessee itself at Rs.9, 134/- and worked out the total at Rs.2,68,2 16/-.
6. Appeal to the ld. CIT(Appeals) did not bring any relief to the assessee.
7. The ld. Counsel for the assessee while impugning the orders of the authorities below has contended that the assessee has made investment in the Mutual Funds and took a policy where reinvestment of the dividend received by the assessee was required to be made. He further submitted that the assessee has ITA No. 545/KOL/2023 Assessment Year: 2017-2018 Peerless Hotels Limited elaborately demonstrated before the ld. CIT(Appeals) as to how it worked out suo-motu disallowance of Rs.9, 134/-. The ld. Assessing Officer has not gone through the accounts of the assessee specifically and proceeded to make a disallowance. The submission made by the assessee has been reproduced by the ld. CIT(Appeals) on page 8 of the impugned order. Apart from the above, the assessee has relied upon host of decisions, which are further compiled in paper book and placed before us. Citations of all these decisions are being noticed by the ld. CIT(Appeals) in pages no. 9 & 10 of the impugned order. The list of the decisions referred by the ld. Counsel for the assessee is as under:-
(i) CIT vs. REI Agro Ltd. (ITAT 161 of 2013 Dated 23.12.2013) Calcutta High Court
(ii) DCIT vs. REI Agro Ltd. (ITA No. 181l/KOL/2012 for A.Y. 2009-10 Kolkata ITAT [ Dt. 14.05.20 13]
(iii) CIT vs. REI Agro Ltd. (ITAT 220 of 2013 [Dated 04.2014 ] Calcutta High Court;
(iv) REI Agro Ltd. vs. DCIT (ITA Nos. 1311 & 1423/KOL/2011 for A.Y. 2008-09), Kolkata ITAT Dt. 19.06.2013];
(v) M/s. Balarampur Chini Mills Ltd. vs. DCIT ITA No. 504/KOL/201 1 Kolkata ITAT dated 29.07.2011;
(vi) DCIT vs. Aksh Optifibre Ltd. (ITA No. 981/Del/2016 )Delhi ITAT Dated 23 11.2017;
(vii) DCIT vs. The Peerless General Finance & Investment Co. Ltd. (ITA Nos.1469 & 1470/KOL/2019- Kolkata ITA Dated 05.12.20 19];
(viii) The Peerless General Finance & Investment Co Ltd. vs. DCIT (ITA Nos.937 & 938/KOL/2018- Kolkata ITAT Dated 24.04.2019.
8. We have duly considered the rival contentions and gone through the record carefully. In the paper book on pages no. 1 & 2, assessee has placed the details of dividend income earned by it. On page 2, dividend from short-term funds has been shown at Rs.2,25,58,553/-. This dividend was reinvested. Similarly dividend from investment has been shown at Rs.9,62,726/-. The claim of the assessee is that since it has been reinvesting the dividend received on short-term funds and, therefore, it was not required to incur much expenditure. The attribution of time by the staff and the management towards reinvestment of these dividends was not required much otherwise their attribution is much more towards other business activities where taxable income is being earned. This plea has been raised with an idea that there was no fault in its accounts and no specific finding has been recorded by the ld. Assessing Officer. We have duly gone through the record carefully. We find that specific details were not produced before both the authorities and only general pleas were taken. There is no demonstrable evidence showing as to how expenditure of Rs.9, 134/- has been worked out for making a disallowance under section 14A. The assessee has raised only peripheral pleas that management had looked into all other incidental issues for the purpose of disallowing expenditure themselves under section 14A, but this objective is not discernable either in the accounts or otherwise. The assessee has been earning huge dividend income on short-term funds, which are required to be reinvested. It has not demonstrated that these were reinvested in the same Mutual Funds otherwise they will be converted to long-term investment. Faced with the above difficulties, the ld. Assessing Officer has thought it fit to apply the formula and worked out the disallowances. After going through the finding of the ld. Assessing Officer, we do not find any error in it except in the total quantification of disallowance. Once ld. Assessing Officer has worked out the disallowance with the help of Rule 8D(2), then, he was not required to add the amount suo motu disallowed by the assessee. The disallowance worked out by him will look all the considerations and there is no need to make separate addition of Rs.9, 134/- made by the assessee on its own estimate. As far as the case laws relied upon by the assessee are concerned, these are the judgments rendered on their own facts without looking down any specific proposition of law. The ld. Assessing Officer himself has considered the judgment of the Hon’ble Supreme Court. According to that, subsection (2) of section 14A contemplates that expenditures relatable to earning of tax-free income are required to be worked out for making disallowance. In the present case, there are expenditures, but the expenditures relatable to exempt income could not be demonstrable. Ld. Assessing Officer has to take help of the formula under Rule 8D and worked out the disallowance. Therefore, the assessee could not buttress its case on the strength of the above decisions. We do not find any merit in these grounds of appeal. They are rejected.
9. In Ground No. 5, the assessee has pleaded that when no income was brought to tax under sections 68, 69, 69A, 69B, 69C or 69D, then no computation of tax under section 1 15BBE was required to be made. It further pleaded that ld. CIT(Appeals) has erred in relegating this issue for re-verification and redetermination of the fact whether tax is required to be computed under section 115BBE of the Income Tax Act.
10. With the assistance of ld. Representatives, we have gone through the record carefully. We have perused the computation of income and we find that ld. Assessing Officer has not identified any income where tax is to be computed under section 115BBE. A specific reference is being made to serial nos. 10 and 25 of the computation sheet. If that be the situation, then ld. Assessing Officer could not compute the tax under section 115BBE out of the disallowance under section 14A of the Income Tax Act. The CIT(A) has no power to relegate any issue to the Assessing Officer. In other words, ld. CIT(A) has no power to remand an issue to the Assessing Officer. It has to decide the issue himself. A reference to this effect is being made to Section 251 of the Income Tax Act. Sub-clause (1)(a) has been amended by Finance Act, 2001 w.e.f. 1st June, 2001 and the power of the ld. CIT(Appeals) to set aside any issue has been omitted. Therefore, he cannot set aside any issue to the file of ld. Assessing Officer for redetermination. A perusal of the assessment order would suggest that there is no addition under these sections mentioned above and there could not be any computation of tax under section 115BBE. This ground of the assessee is allowed.
11. In Ground No. 6, the assessee has pleaded that ld. CIT(Appeals) has erred in not allowing Education Cess under section 37(1) of the Income Tax Act. The finding of the ld. CIT(Appeals) on this issue reads as under:-
“9.1. The above additional ground and submissions of the assessee are carefully considered, The appellant assessee in its above submission has stated that ‘cess’ being not covered within the ambit of section 40(a) (ii) of the Act, and is legally allowable as a deduction u/s 37(1) of the IT Act. The appellant assessee has also relied on the decision Hon’ble Rajasthan High Court in Chambal Fertilizers Ltd. reported in 107 taxmann.com 484 (Raj.) and decision of the Hon’ble Bombay High Court in Sesa Goa Ltd. [423 ITR 426 (Bom.)] in which both have concluded that it is not covered and hence is allowable as deduction u/s 37(1) of the Act.
9.2. With respect to the above decision, attention is also drawn to the latest decision of jurisdictional Hon’ble ITAT of Kolkata in the case of ‘Kanoria Chemicals & Industries Ltd’ ITA No, 2184/Kol/2018 (TS-1129- ITAT 2021 Kol) which has held that the “Cess” is not to be allowed as deduction. The relevant portion of the judgment is reproduced as below:
“19. However, with due respect to the decisions of the Hon’ble Bombay High Court and Hon’ble Rajasthan High Court and of co-ordinate Benches of this Tribunal, we find that the issue is squarely covered by the decision of the Hon’ble Apex Court of the country in the case of “CIT Vs. K. Srinivasan” (1972) 83 ITR 346; wherein the following questions came for adjudication before the Hon’ble Apex Court:- “ Whether the words Income tax” in the Finance Act of 1964 in subs (2) and sub-s. (2)(b) of s, 2 would include surcharge and additional surcharge. ”
20. The Hon’ble Supreme Court answered the question in favour of revenue observing as underpin our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income tax. The meaning of the word ’‘surcharge” as given in the Webster’s New international Dictionary includes among others “to charge (one) too much or in addition” also “additional tax”. Thus the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to s, 2 of the Finance Act 1963 it would lead to the result that income tax and super tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (in part I of the First Schedule); (ii) Sur- charge; (iii) special surcharge and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way the additional charges form a part of the income tax and super tax”.
21. The Hon’ble Supreme Court, therefore, has decided the issue in favour of the revenue and held that surcharge and additional surcharge are part of the income tax. At this stage, it is pertinent to mention here that ‘education cess’ was brought in for the first time by the Finance Act, 2004, wherein it was mentioned as under:-
An additional surcharge, to be called the Education Cess to finance the Government’s commitment to universalise quality basic education, is proposed to be levied at the rate of two per cent on the amount of tax deducted or advance tax paid, inclusive of surcharge. ’’
22. The provisions of the Finance Act 2011 relevant to the Assessment Year under consideration i.e. 2012-13 are also relevant. For the sake of ready reference, the same is reproduced hereunder:-
2(11) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be called the “Education Cess on income-tax”, calculated at the rate of two per cent, of such income-tax and surcharge, so as to fulfill the commitment of the Government to provide and finance universalised quality basic education.
23. A perusal of the aforesaid provisions of the Finance Act and Finance Act 2011 would show that it has been specifically provided that ‘education cess’ is an additional surcharge levied on the income-tax. Therefore, in the light of the decision of the Hon’ble Supreme Court in the case of “CIT Vs. K. Srinivasan” (supra) the additional surcharge is part of the income-tax. The aforesaid decision of the Hon’ble Apex Court and the provisions of Finance Act, 2004 and the relevant provisions of section 2(11) & (12) of the subsequent Finance Acts have not been brought into the knowledge of the Hon’ble High Courts in the cases of ”Sesa Goa Ltd” & “Chambal Fertilisers” (supra). Since the decision of the Hon’ble Supreme Court prevails over that of the Hon’ble High Courts, therefore, respectfully following the decision of the Hon’ble Supreme Court in the case of “CIT Vs. K Srinivasan” (supra), this issue is decided against the assessee. The additional ground of assessee’s appeal is accordingly dismissed.”
9.3. Moreover the explanation-3 to section 40(a) (ii) of the act has been amended by finance act 2022, with retrospective effect from 1st April, 2005 (applicable from AY 2005-06) that the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such “tax”. Thus in light of this amended section 40(a) (iii) and explanation-3, there on, and by relying on the judgment of Hon’ble ITAT Kolkata in the case Kanoria Chemicals & Industries Ltd’ ITA No. 2184/Kol/2018 (TS-1129- ITAT 2021 Kol), it is held that the “education cess” can’t be allowed as an allowable expense of the assessee u/s 3 7(1), and accordingly the additional grounds of assessee in this regard are hereby dismissed”.
12. With the assistance of ld. Representatives, we have gone through the record carefully and the finding of the ld. CIT(Appeals). A perusal of the above finding would indicate that he followed the decision of the ITAT, Kolkata rendered in ITA No. 2 184/KOL/2018. The ITAT, Kolkata has held that Education Cess is not an allowable expenditure. The ld. 1st Appellate Authority has mainly reproduced the decision of the Coordinate Bench in the above finding and we find that ITAT, Kolkata has based its finding on the basis of Hon’ble Supreme Court’s decision in the case of CIT –vs.- K. Srinivasan reported in 83 ITR 346 After going through the above, we do not find any merit in it. Hence this ground of appeal is rejected.
13. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 07/11/2023.
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