Education cess paid by assessee is not allowable as expense u/s. 37

DCIT Vs Aarti Drugs Ltd (ITAT Mumbai)

Held that education cess paid by the respondent-assessee is not allowable as an expenditure under Section 37 read with 40(a)(ii) of the Income Tax Act.

Facts- The assessee has made investments on which it has earned exempt income. Accordingly, the assessee was asked to show cause as to why disallowance u/s14A r.w.r.8D should not be made. After considering the submission of the assessee, the AO computed the disallowance of Rs.31,65,557/- u/s 14A r.w.r. 8D(2)(ii) and disallowance of Rs.6,69,375/- u/s 14A r.w.r. 8D(2)(iii), aggregating to total disallowance of Rs.37,91,582/-. CIT(A) after considering the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in preceding assessment years deleted the disallowance towards interest expenditure u/s 14A r.w.r. 8D(2)(ii) on the basis that assessee’s own funds are adequate to cover the investments. As regard the disallowance made u/s 14A r.w.r. 8D(2)(iii), the learned CIT(A) restricted the disallowance to the dividend income earned by the assessee. Being aggrieved, the Revenue is in appeal before us.
Another issue raised by revenue is with regard to claim of education cess as allowable expenditure.

Conclusion- Held that we find that the Hon’ble Jurisdictional High Court in CIT Vs. Reliance Utilities & Power Ltd., [2009] 313 ITR 340 (Bom.), held that if funds are available with the assessee, which are sufficient to meet the investment, then the presumption would arise that the investment is made out of funds so available with the assessee. We further find that the Co-ordinate Bench of the Tribunal in assesee’s own case in Aarti Drugs Limited Vs. Addl. CIT, in ITA No. 6783-84/MUM/2014, vide order dated 10/02/2017, for the assessment years 2010-11 and 2011-12, following the principle laid down by the Hon’ble Jurisdictional High Court in aforesaid decision directed the deletion of addition made u/s 14A r.w.r. 8D(2)(ii). We find that the Hon’ble Jurisdictional High Court in Nirved Traders (P.) Ltd. Vs. Dy. CIT, I.T. Appeal No.149 of 2017, vide judgement dated 23.04.2019, has held that disallowance under section 14A of the Act cannot be more than exempt income. Thus, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue.

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