Chambal Fertilisers And Chemicals Ltd v. Jcit, Range-2 , Kota

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 52/2018 Chambal Fertilisers And Chemicals Ltd. , Having Its RegisteredOffice At Gadepan, Dist. Kota, Rajasthan Through Its AssistantVice President - Legal And Secretary Shri Rajveer Singh S/o LateSh. Pabudan Singh, Aged About 49 Years. ----Petitioner Versus JCIT, Range-2 , Kota. ----Respondent Connected With D.B. Income Tax Appeal No. 68/2018 Pr. Commissioner Of Income Tax , Kota. ----Appellant Versus M/s. Chambal Fertilizers And Chemicals Ltd. , Gadepan, Distt.Kota. ----Respondent For Appellant(s) : Mr. Sanjay Jhanwar in Appeal No.52/2018 and for respondent in Appeal No.68/2018For Respondent(s): Ms. Parinitoo Jain for respondent in Appeal No.52/2018 and for appellant in Appeal No. 68/2018 HON'BLE MR. JUSTICE KALPESH SATYENDRA JHAVERI HON'BLE MR. JUSTICE ASHOK KUMAR GAURJudgment 31/07/2018 1.In both these appeals common question of law and facts areinvolved hence they are decided by this common judgment. 2.By way of these appeals, the assessee as well as thedepartment have assailed the judgment and order of the tribunalwhereby tribunal has disposed of the appeals deciding the issueraised before it. substantial questions of law:- In D.B. ITA No.52/2018:- 1. Whether under the facts and circumstances ofthe case and in law the Ld. ITAT has notcommitted grave legal error in not appreciatingthat the investment made in the 100% subsidiarycompanies was out of commercial expediencywarranting no interest disallowance? 2. Whether under the facts and circumstances ofthe case the Ld. ITAT has not legally erred inupholding disallowance on account of interestexpenses holding the investments in subsidiarycompanies and mutual funds to be out ofborrowed funds? 3. Whether under the facts and circumstances ofthe case the Ld. ITAT has not erred in holdingthat the education cess is a disallowableexpenditure u/s 40(a)(ii) of the Act? 4. Whether under the facts and circumstances ofthe case the Ld. ITAT was justified in not allowingdeduction on account of Capital expenses claimedagainst the sale of mining rights and not reducingthe short-term capital gains as directed by Ld.ITAT in Appellant’s own case for A.Y.2004-05? In D.B. ITA No.68/2018:- 1. Whether the Tribunal was legally justified inallowing the deduction of Rs.86,08,460/- to theassessee against the sale proceeds of miningrights, without affording any opportunity ofhearing to the Assessing Officer as per Rule 46?2. Whether the Tribunal was legally justified inrestricting the disallowance of interest paid onborrowed funds to Rs.37,65,316/- as againstRs.78,47,330/- made by the Assessing Officerspecifically when there was no commercialexpediency to make investment in subsidiarycompanies of the assessee company? 3. Whether the Tribunal was legally justified indeleting the addition of Rs.11,10,98,825/- out ofdisallowance of interest of Rs.12,90,03,457/-being the interest in relation to dividend incomeof Rs.4,89,31,413/- claimed as exemptu/s10(35) and further directing the AssessingOfficer for computing the interest for the periodof NCD borrowing? 4. Whether the Tribunal was legally justified indeleting the disallowance of Rs.25,00,816/-made on account of prior period expensesspecifically when the assessee failed tosubstantiate its claim that the liability of account of such expenses had been settled/crystallizedduring the year under consideration? In D.B. ITA No.52/2018:- 4.Counsel for the appellant Mr. Jhanwar does not want to pressquestion no.1 & 2 subject to liberty of raising the same inappropriate case, if the occasion arises for subsequent year. Thus,ground no.1 and 2 are decided as not pressed. 4.1Regarding question no.3, Mr. Jhanwar has taken us to theorder of CIT(A) and tribunal and strongly relied upon the circular dt.18.5.1967 which reads as under:- 4. Whether the Tribunal was legally justified indeleting the disallowance of Rs.25,00,816/-made on account of prior period expensesspecifically when the assessee failed tosubstantiate its claim that the liability of account of such expenses had been settled/crystallizedduring the year under consideration? In D.B. ITA No.52/2018:- 4.Counsel for the appellant Mr. Jhanwar does not want to pressquestion no.1 & 2 subject to liberty of raising the same inappropriate case, if the occasion arises for subsequent year. Thus,ground no.1 and 2 are decided as not pressed. 4.1Regarding question no.3, Mr. Jhanwar has taken us to theorder of CIT(A) and tribunal and strongly relied upon the circular dt.18.5.1967 which reads as under:- CTR ENCYCLOPAEDIA ON INDIAN TAX LAWSCIRCULAR F. NO. 91/58/66-ITJ(19) DT. 18THMAY, 1967Interpretation of provision of s.40(a)(ii) of IT Act,1961-Clarification regarding18/05/1967 BUSINESS EXPENDITURESECTION 40(a)(ii), Recently a case has come to the notice of theBoard where the ITO has disallowed the ‘cess’paid by the assessee on the ground that therehas been no material change in the provisions ofs.10(4) of the old Act and s.40(a)(ii) of the newAct. 2. The view of the ITO is not correct. Clause40(a)(ii) of the IT Bill, 1961 as introduced in theParliament stood as under: “(ii) any sum paid on account of any cess, rate ortax levied on the profits or gains of any businessor profession or assessed at a proportion of, orotherwise on the basis of, any such profits orgains”. When the matter came up before the SelectCommittee, it was decided to omit the word‘cess’ from the clause. The effect of the omissionof the word ‘cess’ is that only taxes paid are tobe disallowed in the assessments for the year1962-63 and onwards. 3. The Board desire that the changed positionmay please be brought to the notice of all theITOs so that further litigation on this accountmay be avoided. (i) In Municipal Corporation of City of Thane vs. Vidyut Metallics Ltd. & ors. (2007) 8 SCC 688, it has been held as under:- 14. So far as the proposition of law is concerned,it is well-settled and needs no further discussion.In taxation-matters, the strict rule of res judicataas envisaged by Section11of the Code of CivilProcedure, 1908 has no application. As a generalrule, each year's assessment is final only for thatyear and does not govern later years, because itdetermines the tax for a particular period. It is,therefore, open to the Revenue/Taxing Authorityto consider the position of the assessee everyyear for the purpose of determining andcomputing the liability to pay tax or octroi on thatbasis in subsequent years. A decision taken bythe authorities in the previous year would notestop or operate as res judicatafor subsequentyear. [vide Maharana Mills (P) Ltd. v. ITO:[1959]36ITR350(SC) ; Visheshwar Singh v. CIT:[1961]41ITR685(SC) ; Installment Supp (P) Ltd.v. Union of India: [1962]2SCR644 ; New JehangirVakil Mills v. CIT : [1963]49ITR137(SC) ;Amalgamated Coalfields Ltd. v. Janapada Sabha1963 Supp (1) SCR 172; Devilal v. STO :[1965]1SCR686 ; Udayan Chinubhai v. CIT:[1967]63ITR416(SC) ; M.M. Ipoh v. CIT :[1968]67ITR106(SC) ; Kapur Chand v. TaxRecovery Officer (1969) 1 SCR 691; CIT, W.B. v.DurgaPrasad:[1971]82ITR540(SC);RadhasoamiSatsangv.CIT:[1992]193ITR321(SC) ; Society of MedicalOfficers v. Hope 1960 AC 55; Broken HillProprietary Co. Ltd. v. Municipal Council 1925 AllER 675: 1926 AC 94 : 95 LJPC 33; Turner onRes Judicata, 2ndEdn., para 219, p. 193]. (ii) In Jaipuria Samla Amalgamated Collieries Ltd. vs. Commissioner of Income Tax (1971) 82 ITR 580 (SC), it has beenheld as under:- (ii) In Jaipuria Samla Amalgamated Collieries Ltd. vs. Commissioner of Income Tax (1971) 82 ITR 580 (SC), it has beenheld as under:- 5. Now it is quite clear that the aforesaid cesseswould be allowable deductions either under Clause(ix) or Clause (xv) of Sub-section (2) ofSection 10 unlesstheyfellwithinSection 10(4). We have already referred to theprovisions of both Acts under which the cesses arelevied which show that their assessment is notmade at a proportion of the profits of theassessee's business. What has to be determined iswhether the assessment of the cesses is made onthe basis of any such profits. The words "profits and gains of any business, profession or vocation"which are employed in Section 10(4) can, in thecontext, have reference only to profits or gains asdetermined under Section 10 and cannot cover thenet profits or gains arrived at or determined in amanner other than that provided bySection 10. The whole purpose of enacting Sub-section (4) of Section 10 appears to be to excludefrom the permissible deductions under Clauses (ix)and (xv) of Sub-section (2) such cess, rate or taxwhich is levied on the profits or gains of anybusiness, profession or vocation or is assessed ata proportion of or on the basis of such profits orgains. In other words Sub-section (4) was meantto exclude a tax or a cess or rate the assessmentof which would follow the determination orassessment of profits or gains of any business,profession "or vocation in accordance with theprovisions of Section 10 of the Act. 6. The road cess and public works cess are to beassessed on the annual net profits underSections 72 to 76 of the Cess Act 1880. The netannual profits have to be calculated on theaverage of the net profits for the last three yearsof the mine or the quarry and if the annual netprofits of the property cannot be ascertained in theaforesaid manner then it is left to the Collector todetermine the value of the property first in suchmanner as he considers expedient and determine6 per cent on that value which would be deemedto be the annual net profits. The Cess Act of 1930Mows the same pattern so far as theascertainment of annual net profits is concerned.These profits arrived at according to the provisionsof the two Cess Acts can by no stretch ofreasoning be equated to the profits which aredetermined under Section 10 of the Act. It is notpossible to see, therefore, how Section 10(4) couldbe applicable at all in the present case. Thus onthe language of the provisions both of the Act andthe two Cess Acts the applicability ofSection 10(4) cannot be attracted. But evenaccording to the decided cases such, cessescannot fall within Section 10(4). The Privy Councilin Commissioner of Income tax, Bengal v.Gurupada Dutta and Ors. 14 I.T.R. 100 had toconsider whether the rate imposed under theprovisions of the Bengal Village Self GovernmentAct 1919 on a person occupying a building andusing the same for the purpose of business was anallowable deduction in computing the profits of thebusiness under Section 10 of the Act. TheirLordships laid down the law in the following words: It will be noted that, in the absence of thenecessary powers and machinery, which are notprovided by the Act, the estimate of the annualincome from business can only proceed on a roughguess, which is in no way comparable with theascertainment of profits and gains under theIncome-tax Act, and, in the opinion of theirLordships, the inclusion of this element of businessincome as part of the "circumstances" of theassessee with a view to the imposition of the unionrate does not fall within Sub-section (4) ofSection 10 of the Income tax Act. It is concededthat the union rate is not "levied on the profits orgains", which clearly implies an ascertainment ofsuch profits and gains, and the words"assessed...on the basis of any such profits orgains" in the later part of the sub-section mustalso be so limited, No such ascertainment of theprofits and gains of the business can beundertaken for the purposes of the union rate. Themain argument for the Crown, therefore fails. In our judgment this decision is quite apposite andfully covers the points under consideration. It hasbeen followed by the Allahabad High Court inSimbholi Sugar Mills Ltd. v. Commissioner ofIncome tax, U.P. & V.P. MANU/UP/0222/1961 :[1962]45ITR125(All) in which the question relatedto the deducibility of tax payable under the U.P.District Boards Act 1922 which was imposed onpersons assessed according to their circumstancesand property. Similarly in Commissioner of Incometax, Delhi and Rajas than v. Banarsi Dass &SonsMANU/PH/0408/1965, the Punjab High Courtheld that a tax imposed under the U.P. DistrictBoards Act on circumstances and property could belegitimately claimed is an allowance and the abovedecision of the Privy Council was followed. In theIncome tax Act 1961, Section 28relates to theincome which shall be chargeable to income taxunder the head "profits and gains of business orprofession". Section30(b)(ii)is equivalent toClause (ix) of Section 10(2) of the Act. Section40(a)(ii) corresponds to Section 10(4) of the Act.It is significant that in spite of the decision of thePrivy Council in Gurupada Dutta's case(1) theParliament did not make any change in thelanguage of the provisions corresponding toSection 10(4). It can, therefore, legitimately besaid that the view of the Privy Council with regardto the true scope and ambit of Section 10(4) of theAct was accepted. We are unable to concur in thereasoning or the conclusion of the Calcutta HighCourt in Commissioner of Income tax, WestBengal, v. West Bengal Mining Co. (2) in which it was held that the two cesses being related toprofits would attracts. 10(4) of the Act. (iii)In Installment Supply (P) Ltd. & ors. vs. The Union of India (UOI) & ors. (1962) 2 SCR 644, it has been held as under:- 19. There is another answer to the point of resjudicata raised on behalf of the petitioners, relyingupon the decision of the Punjab High Court inInstallment Supply Ltd., New Delhi v. State ofDelhiMANU/PH/0068/1956. It is well settled thatin matters of taxation there is no question of resjudicata because each year's assessment is finalonly for that year and does not govern later years,because it determines only the tax for a particularperiod. (See the decision in the House of Lords inSociety of Medical Officers of Health v. Hope(Valuation Officer) [1960] A.C. 551 approvingand following the decision of the Privy Council inBroken Hill Proprietary Company Limited v.Municipal Council of Broken Hill [1925] A.C. 94. (iv) In Godrej & Boyce Manufacturing Company Ltd. vs. Dy.Commissioner of Income Tax & ors. (2017) 247 Taxman 361 (SC), it has been held as under:- (iv) In Godrej & Boyce Manufacturing Company Ltd. vs. Dy.Commissioner of Income Tax & ors. (2017) 247 Taxman 361 (SC), it has been held as under:- 33. While answering the said question this Courtconsidered the object of insertion of Section 14Ain the Income Tax Act by Finance Act, 2001,details of which have already been noticed.Noticing the objects and reasons behindintroduction of Section 14A of the Act this Courtheld that: Expenses allowed can only be in respect ofearningoftaxableincome.In paragraph 17, this Court went on to observethat: Therefore, one needs to read the words"expenditure incurred" in Section 14A in thecontext of the scheme of the Act and, if so read,it is clear that it disallows certain expenditureincurred to earn exempt income from beingdeducted from other income which is includible inthe "total income" for the purpose ofchargeabilitytotax. The views expressed in Walfort Share and StockBrokers P. Ltd. (supra), in our considered opinion, yet again militate against the plea urged onbehalfoftheAssessee. 34. For the aforesaid reasons, the first questionformulated in the appeal has to be answeredagainst the Appellant-Assessee by holding thatSection 14A of the Act would apply to dividendincome on which tax is payable Under Section115-O of the Act. 5.Therefore, he contended that the view taken by the tribunal is required to be reversed on issue no.3 6.Regarding issue no.4, he has taken us to the order of thetribunal and contended that for assessment year 2004-05 whileconsidering the expenses the tribunal has observed as under:- Assessee received a sum of Rs.5,26,67,000/-from sale of mining rights and vide letter dated10.10.2011 and 21.11.2011 [ITAT order wasdated 28.7.2001] asked the AO to allowexpenses of Rs.1,73,53,860/- against sale ofmining rights. However there is no finding givenby AO. As the order of ITAT was dated28.07.2011 [after expiry of time for file revisedWritten] the Assessing Officer should haveconsidered the issue, which he failed to dotherefor the same is being considered by me.The Hon’ble ITAT has directed that in case the AOcomes to conclusion that the capital expensesamounting to Rs.1,73,53,860/- included in thecost of mining rights i.e. non-tangible assets thensuch cost may be considered to be deductedagainst the sale of mining rights in theassessment year 2009-10. Therefore the assessee was asked to furnisheddetails of these expenses which were included inthe mining rights. The assessee submitted that amount ofRs.87,45,400/- were paid to M/s ANSconstruction for dismantling of existing structure,fencing of boundary, construction of temp. siteoffice and security in plant area. Firstly from the above nothing could beconcluded [no details were produced], secondlyit’s connection to mining was not proved. From the details already in the order of ITAT itcan be concluded that of Rs.8608460/- related todeep excavation and road work were related tomining operation and treated as included in saleof mining rights. Whereas misc. Capital expenses of 87,45,400/-[in absence of details] cannot sale proceeds ofmining rights. Therefore the AO is directed to allowed deductionof Rs.86,08,460/- from sale proceeds of miningrights. 7.He contended that once the details are given and payment is reflected in the books of accounts, the tribunal has committedserious committed an error in disallowing the expenses. In appeal no. 68/2018 8.Counsel for the appellant has taken us to the paper booksubmitted by her wherein she has pointed out the followingobservation of the tribunal which reads as under:- From the details already in the order of ITAT itcan be concluded that of Rs.8608460/- related todeep excavation and road work were related tomining operation and treated as included in saleof mining rights. Whereas misc. Capital expenses of 87,45,400/-[in absence of details] cannot sale proceeds ofmining rights. Therefore the AO is directed to allowed deductionof Rs.86,08,460/- from sale proceeds of miningrights. 7.He contended that once the details are given and payment is reflected in the books of accounts, the tribunal has committedserious committed an error in disallowing the expenses. In appeal no. 68/2018 8.Counsel for the appellant has taken us to the paper booksubmitted by her wherein she has pointed out the followingobservation of the tribunal which reads as under:- 58. Ground No. 3 of the assessee’s appeal isagainst not allowing the expenditure of educationcess of Rs. 2,41,59,485/- from income claimedby the appellant and the Ld. CIT(Appeals) erredin confirming the same. The education cess wasactually paid on income tax and is not a part ofincome tax as per the provisions of section 40(a)(ii) of the Act. The facts and the submissions ofthe assessee before the ld. CIT(A) is as under:- “That the assessee has debited the Profit andLoss Account for the year ended on 31.03.2008by an amount of Rs. 9490.53 lac under the head“Income Tax”, the break-up of which is as under:- The assessee is of the considered opinion thatthe education cess and secondary & highereducation cess (collectively called as educationcess) are not a “tax” and hence not disallowableu/s 40(a)(ii) of the Act on the basis of followingsubmission:- (1) That on a plain reading of the above provisionof section 40(a) (ii), it is evident that a sum paidof any rate or tax is expressly disallowed by thissub-clause in two cases : (i) where the rate is levied on the profit or gains of any businessorprofession, and (ii) where the rate or tax isassessed at a proportion of or otherwise on thebasis of any such profits or gains. It is evidentthat nowhere in the said section it has beenmentioned that education cess is not allowable.Education cess is neither levied on the profits orgains of any business or profession nor assessedat a proportion of, or otherwise on the basis of,any such profits or gains. (2) That in CBDT Circular No. 91/58/66 ITJ (19),dated May 18, 1967 it has been clarified that theeffect of the omission of the word “cess” fromsection 40(a)(ii) is that only taxes paid are to bedisallowed in the assessment for the years 1962-63 onwards. Thus, as per the said circular,Education cess cannot be disallowed; therecannot be a contradiction as the circulars bindthe tax authorities. (3) That education cess cannot be treated at parwith any “rate” or “tax” within the meaning ofsection 40(a)(ii) especially when the same is onlya “cess” as may also be seen from the speech ofthe hon’ble Finance Minister while placing beforethe Parliament the budget for the year 2004-05([2004] 268 ITR (ST.) 1,6). “Education. 22. In my scheme of things, no issue enjoys ahigher priority than providing basic education toall children. The NCMP mandates Government tolevy an education cess. I propose to levy a cessof 2 per cent. The new cess will yield about Rs.4000- 5000 crore in a full year. The whole of theamount collected as cess will be earmarked foreducation, which will naturally include providing anutritious cooked midday meal. If primaryeducation and the nutritious cooked mealsscheme can work hand-in-hand, I believe therewill be a new dawn for the poor children of India” 61. At the outset, the ld. CIT DR has submittedas under:- “1. Regarding the assessee's ground that theamount of education cess is deductible, it ishumbly stated that the background relating tointroduction of the said cess needs to beexamined. The said cess was introduced byFinance Bill, 2004-05, the relevant portion ofwhich is as follows: CHAPTER VI EDUCATION CESS 61. At the outset, the ld. CIT DR has submittedas under:- “1. Regarding the assessee's ground that theamount of education cess is deductible, it ishumbly stated that the background relating tointroduction of the said cess needs to beexamined. The said cess was introduced byFinance Bill, 2004-05, the relevant portion ofwhich is as follows: CHAPTER VI EDUCATION CESS "81.1 Without prejudice to the provisions of sub-section (11) of section!, there shall be levied andcollected, in accordance with the provisions ofthis chapter as surcharge for purposes of the Union, a cess to be called the Education Cess, tofulfill the commitment of the Government toprovide and finance universalized quality basiceducation." It is clear that the said cess is introduced as aSURCHARGE, which is admittedly not deductible.Copy of relevant portion of the Finance Bill isenclosed as Annexure-A. 2. The provisions of sec 40a(ii) are as under: “any sum paid on account of any rate or taxlevied on the profits or gains of any businessprofession or assessed at a proportion of, orotherwise on the basis of any such profits orgains." The definition is wide enough to cover any sumpaid on account of any rate or tax on the profitsor assessed at a proportion of such profits.Education cess being calculated at a proportion(2% or 1%) to Income Tax, which in turn, is inproportion to profits of business, would certainlyqualify as a sum assessed at a proportion to suchprofits. In short, if education cess is considereddeductible, then by the same logic Income-Tax orany surcharge would also become deductible,which would be an absurd proportion. 3. Further, if Education cess were to bedeductible, then it would not be possible tocompute it, e.g. If profit is Rs. 100, Income Taxis Rs. 30 and Education Cess is Rs. 0.90 and ifeducation cess were to be deductible from profit,such profit (after such deduction) would becomeRs. 99.1 (100-0.9) which would again necessitaterecomputation of Income-Tax which would nowbe 30% of Rs. 99.1 i.e. Rs. 29.73 and alsorecomputation of Education cess which would beRs. 0.89. The vicious circle of such recomputationwould continue, which is why legislature in itswisdom has not allowed deductibility of amountscalculated at a proportion of profits. 4. Mechanism of recovery of unpaid Educationcess: In case of unpaid education cess, AssessingOfficer will raise demand of Income Tax andconvey the same to 'assessee' vide notice ofdemand u/s 156. In case, the said demand is notpaid during the notice period of 30 days ofservice of notice u/s 156, interest on suchdemand is chargeable u/s 220(2). In addition,the assessee is also liable for imposition ofpenalty u/ s 221. The wordings of sec 221(1) areas follows: "When an assessee is in default or is deemed tobe in default in making a payment of tax, heshall, in addition to the amount of the arrearsand the amount of interest payable under subsection (2) of section 220,be liable, by way ofpenalty, to pay such amount as the AssessingOfficer may direct and in the case of a continuingdefault, such further amount or amounts as theAssessing Officer may, from time to time, direct,or, however, that the total amount of penaltydoes not exceed the amount of tax in arrears." "When an assessee is in default or is deemed tobe in default in making a payment of tax, heshall, in addition to the amount of the arrearsand the amount of interest payable under subsection (2) of section 220,be liable, by way ofpenalty, to pay such amount as the AssessingOfficer may direct and in the case of a continuingdefault, such further amount or amounts as theAssessing Officer may, from time to time, direct,or, however, that the total amount of penaltydoes not exceed the amount of tax in arrears." The above said provision makes it clear thatpenalty is leviable in case of default in paymentof "tax". Such tax includes any demand relatingto unpaid cess also, indicating that unpaid cess istreated as unpaid tax and is visited with allconsequences of non-payment of demand. Thereis no separate machinery in the Act for recoveryof unpaid cess and imposition of interest andpenalty in case of default in payment of unpaidcess. This indicates that cess is a part of tax andall recovery mechanisms & consequencespertaining to recovery of tax apply to recovery ofcess also without explicit mention of the word"cess" in the foregoing provisions. Hence,drawing a parallel, no explicit mention of "cess" isrequired in sec. 40a(ii) for making disallowancethereof. 5. In view of the above submissions, it is humblyrequested not to allow the appellant's plea fordeduction of the amount of Education cess.” 9.She has also invited our attention to the following finding of AO which reads as under:- -6. Investments in subsidiary companies: The assessee has made investment of Rs.523.94lakh and Rs.120.00 lakh in unquoted shares of itssubsidiary companies M/s CFCL Overseas Ltd.and M/s Chambal Infrastructure Ventures Ltd.during the year. The assessee has furnished thefollowing details in this regard vide para 3 ofreply No.6 dated 10.10.2011:-“As desired by your goodself, we wish to submitbefore your goodself that the assessee hadfurther increased its investment in unquotedshares of CFCL Overseas Limited (a ForeignCompany) and in the equity shares of ChambalInfrastructure Ventures Limited (an IndianCompany); during the year under consideration-as under: Limited The CFCL Overseas Limited was incorporated as aSpecial Purpose Vehicle for consolidation of entiresoftware business of assessee. It is a shollyowned subsidiary of the assessee. It would bepertinent to note here that the dividend from thiscompany would not be exempt u/s 10(34).The Chambal Infrastructure Ventures Limited asa Special Purpose Vehicle and wholly ownedsubsidiary of the assessee i.e. a 100%subsidiary. This subsidiary is engaged indevelopment and setting up of power projects.As desired by your goodself, please find enclosedherewith copy of relevant bank accountsreflecting above investment (Page no.3 to 12).Further, this is to submit that the investmenthave been made out of the internal of theCompany.” Limited The CFCL Overseas Limited was incorporated as aSpecial Purpose Vehicle for consolidation of entiresoftware business of assessee. It is a shollyowned subsidiary of the assessee. It would bepertinent to note here that the dividend from thiscompany would not be exempt u/s 10(34).The Chambal Infrastructure Ventures Limited asa Special Purpose Vehicle and wholly ownedsubsidiary of the assessee i.e. a 100%subsidiary. This subsidiary is engaged indevelopment and setting up of power projects.As desired by your goodself, please find enclosedherewith copy of relevant bank accountsreflecting above investment (Page no.3 to 12).Further, this is to submit that the investmenthave been made out of the internal of theCompany.” Reliance is also placed on the judgment of theHon’ble Supreme Court in the case of S.A.Builders Vs. CIT 288 ITR 1 (S.C.) observing thatassessee is required to prove commercialexpediency to make interest free advancesinvestments in order to justify its claim forinterest on borrowed funds. There is clear cut,direct and proximate nexus between interestbearing borrowed funds and nil income earninginvestments made by assessee. Further, theassessee has failed to prove that there was anycommercial expediency to make investments inabove said subsidiary companies. The assessee ispaying interest @ 13.25%/12.75% per annum onthe above said cash credit accounts. The interestpayable on investments in above saidsubsidiaries is determined at Rs.78,47,330/- asper calculations below:-(i) Interest @ 13.25% per annumon Rs. 5,23,94,115/- from 3.4.2008 to 31.3.2009Rs.69,04,180/-(ii) Interest @ 12.75% perannum on Rs.1.20 crore -from 19.8.2008 to 31.3.2009Rs.9,43,150/-TotalRs.78,47,330/Therefore, disallowance of Rs.78,47,330/- will bemade out of interest paid by assessee onborrowed funds. 10.Thereafter, she has taken us to the finding of the CIT (A) which reads as under:- 4.8 Ground # 8 “That the l’d Joint Commissioner erred indisallowing interest of Rs.78,47,330/- in respectof proportionate interest paid by assessee onborrowed funds on account of investment madein subsidiary companies without proving anynexus between investments and interest bearingloans. Hence the addition made on this accountdeserves to be deleted.” 4.82 Discussion and the Appellate Decisions I have gone through the details and it was seethat the payment to it’s wholly ownedsubsidiaries were made from cash credit accountand same was therefore out of interest bearingfunds. However it was seen that when paymentof Rs.5.24 crores was made the assessee hadcredit balance in the account ad only Rs.2.13crores were over draft. Thus out of Rs.5.24 croreonly an amount of Rs.2.13 crore was related tointerest bearing founds. The other payment ofRs.1.20 crore was directly related to over draft(interest bearing funds).As the assessee diverted interest bearing fund toit’s subsidiaries the disallowance was justified.The quantum is computed below:On Rs.2.13 croreRs.2822515/--On Rs.1.20 croreRs.942801/Rs.37,65,316/- Therefore disallowance of Rs.37,65,316/- isconfirmed the Assessing Officer is directed todelete the balance disallowance. 10.1She contended that the view taken by the tribunal iscontrary to law and relied on the judgment in Godrej & BoyceManufacturing Company Ltd. vs. Dy. Commissioner of Income Tax & ors. (2017) 247 Taxman 361 (SC) wherein ithas been held as under:- Therefore disallowance of Rs.37,65,316/- isconfirmed the Assessing Officer is directed todelete the balance disallowance. 10.1She contended that the view taken by the tribunal iscontrary to law and relied on the judgment in Godrej & BoyceManufacturing Company Ltd. vs. Dy. Commissioner of Income Tax & ors. (2017) 247 Taxman 361 (SC) wherein ithas been held as under:- 24. The object behind the introduction of Section14A of the Act by the Finance Act of 2001 is clearand unambiguous. The legislature intended tocheck the claim of allowance of expenditureincurred towards earning exempted income in asituation where an Assessee has both exemptedand non-exempted income or includible or non-includible income. While there can be no scintillaof doubt that if the income in question is taxableand, therefore, includible in the total income, thededuction of expenses incurred in relation tosuch an income must be allowed, such deductionwould not be permissible merely on the ground that the tax on the dividend received by theAssessee has been paid by the dividend payingcompany and not by the recipient Assessee,when Under Section 10(33) of the Act suchincome by way of dividend is not a part of thetotal income of the recipient Assessee. A plainreading of Section 14A would go to show that theincome must not be includible in the total incomeof the Assessee. Once the said condition issatisfied, the expenditure incurred in earning thesaid income cannot be allowed to be deducted.The Section does not contemplate a situationwhere even though the income is taxable in thehands of the dividend paying company the sameto be treated as not includible in the total incomeof the recipient Assessee, yet, the expenditureincurred to earn that income must be allowed onthe basis that no tax on such income has beenpaid by the Assessee. Such a meaning, ifascribed to Section 14A, would be plainly beyondwhat the language of Section 14A can be understood to reasonably convey.” 10.2 For 25,00,816/-, she has relied upon the finding of CIT(A)which reads as under:- 4.12 Assessee’s submissions The assessee vide letter dated 21.08.2012, 17.09.2012 & 15.10.2012 submitted as under:-“The details of major prior period expenses areas under:- 1. Rs. 9,43,693.00:- By oversight, the Income ofCo-marketer arrangement was wrongly booked inexcess vide document no. 100247242 dt.31.03.2008 in the financial year 2007-08 and theerror was noticed by us in next financial year,hence the same was corrected by us throughdocument no.100105008 dt. 30.09.2008. Thisbeing a routine error is not actually an “expense”but a reversal of excess income booked in aprevious year. 2. Rs. 11,50,279.00:- Due to some quality issuethe appellant did not lift the material from thewarehouse of NAITONAL AGRICULTURALCOOPERATIVE MARKETING FEDERATION OFINDIA LTD (NAFED) and sent a request to NAFEDto waive the panal Godown rent for such period.But NAFED did not accept the request and thesame was known to the appellant after closure ofthe financial year, hence the appellant bookedthe expenses in 2008-09 through documentno.100107966 dt. 15.10.2008. 3. Rs.267,780.00:- During the financial year2007-08 the appellant arranged a tour for its business associates through M/s Lionel Holidays.Initially and gave an advance of Rs.8,71,600/- toM/s Lionel Holidays and the balance amount wasto be settled after receipt of the final bill.However, the final bill was misplaced at theappellant’s office and was finally traced inDecember 2008 and the same was processed byus through document no.100135535 dt.31.12.2008. As the above are routine revenue expenses beingan exceptionally small portion of the totalexpenses of the appellant company, and someexpenses crystallized only during the year hencethe addition made on this account deserves to bedeleted. 3. Rs.267,780.00:- During the financial year2007-08 the appellant arranged a tour for its business associates through M/s Lionel Holidays.Initially and gave an advance of Rs.8,71,600/- toM/s Lionel Holidays and the balance amount wasto be settled after receipt of the final bill.However, the final bill was misplaced at theappellant’s office and was finally traced inDecember 2008 and the same was processed byus through document no.100135535 dt.31.12.2008. As the above are routine revenue expenses beingan exceptionally small portion of the totalexpenses of the appellant company, and someexpenses crystallized only during the year hencethe addition made on this account deserves to bedeleted. It is humbly submitted that an amount ofRs.4,89,31,413/- being dividend income wasearned on mutual funds, which has been claimedas exempt income u/s 10(35) of the Act. Theinvestments in the Mutual Funds were made out of the surplus short term funds available withinthe business during that period. There were nospecific/direct borrowings for the investment. Thecopy of the bank statements reflecting entriesrelating to investment in the Mutual Funds wereduly submitted during the course of assessmentproceedings. A copy of the same is also annexedherewith at Annexure 5. As surplus fund wereinvested in the Mutual Funds, the appellant didnot incur any interest expenditure relatingthereto. The investment in Mutual Funds wasbased on the availability of surplus fund. Theassessee would never borrow at prohibitiveinterest rates and invest to earn a meager 9%odd. It is further submitted that the major investmentin the Mutual Funds were made during December2008 to March 2009 from the HDFC BankAccount and the bank has charged cash creditinterest of only Rs.3,87,800/- during the periodfrom December 2008 to March 2009. However,the L’d Assessing Officer calculated notionalinterest based on the period of holding of thesecurity without considering the actual interestpaid during the relevant peirod. When the totalinterest of only Rs.3,87,800 was paid in respectof HDFC, it is inconceivable that an interest ofabout Rs.12.77 crores has been calculated by theL’d Assessing Officer without any basis.Further there is a mistake in the calculations ofthe L’d Assessing Officer are taken intoconsideration and there is a calculation mistakeof Rs.9,598,087 as is evident from thestatements given at Annexure 6 and 7. Considering the above, it is humbly submittedthat the addition made on this account deservesto be deleted. 10.3She has also relied on the observations of the tribunal which reads as under:- 18. We have heard the rival contentions andperused the material available on record. Firstly,regarding amount of Rs.9,43,693, it relates toincome under the co-marketer arrangementwhich was booked in excess in the previousfinancial year and now been reversed during thecurrent financial year. It is thus not an expensebut a reversal of income excess booked earlierand now been rectified during the year underconsideration. There is thus no question ofdisallowance of the same. 11.In support of her contentions, counsel for the appellant has relied on the following decisions:- 1. Travancore Titanium Products Ltd. vs.Commissioner of Income Tax, Kerala[1966 ]3SCR 321 9. The position may therefore be summarisedthus : the nature of the expenditure or outgoing mustbe adjudged in the light of accepted commercialpractice and trading principles. 11.In support of her contentions, counsel for the appellant has relied on the following decisions:- 1. Travancore Titanium Products Ltd. vs.Commissioner of Income Tax, Kerala[1966 ]3SCR 321 9. The position may therefore be summarisedthus : the nature of the expenditure or outgoing mustbe adjudged in the light of accepted commercialpractice and trading principles. The expenditure must be incidental to thebusiness and must be necessitated or justified bycommercial expediency. It must be directly andintimately connected with the business and belaid out by the taxpayer in his character as atrader. To be a permissible deduction, there mustbe a direct and intimate connection between theexpenditure and the business i.e., between theexpenditure and the character of the assessee asa trader, and not as a owner of assets, even ifthey are assets of the business. 2. M/s. Radhasoami Satsang Saomi Bagh,Agra vs. Commissioner of Income Tax [1992]193ITR 321 (SC ) 11. In that case Anand Marg was held to be a'religious denomination' within the Hindu religion.It is not necessary for us to decide whetherRadhasoami Satsang is a denomination of theHindu religion or not as it is sufficient for ourpurposes that the institution has been held to be religious and that aspect is no more in dispute inview of the frame of the question. 3. Smith Kline amp; French (India) Ltd. andOrs. vs. Commissioner of Income Tax[1996 ]219ITR 581 (SC ) 7. We are unable to see as to how theseobservations help and assessee herein. Firstly, itmay be mentioned, Section 10(4) of the 1922 Actor Section 40(a)(ii)of the present Act do notcontain any words indicating that the profits andgains spoken of by them should be determined inaccordance with the provisions of the Income TaxAct. All they say is that it must be a rate or taxlevied in the profits and gains of business orprofession. The observations relied upon must beread in the said context and not literally or as theprovisions in a statute. But so far as the issueherein is concerned, even this literal reading ofthe said observations does not help the assessee.As we have pointed out hereinabove the surtax isessentially levied on the business profits of thecompany computed in accordance with theprovisions of the Income-tax Act. Merely becausecertain further deductions (adjustments) areprovided by the Surtax Act from the said profits,it cannot be said that the surtax is not leviedupon the profits determined or computed inaccordance with the provisions of the Income-taxAct. Section 4 of the Surtax Act read with thedefinition of "chargeable profits" and the FirstSchedule made the position abundantly clear. 8. We may mention that all the High Courts inthe country except the Gauhati High Court havetaken the view which we have taken herein. Onlythe Gauhati High Court has taken a contrary viewin the decisions in Makum Tea Co. (India) Limitedand Anr. v. Commissioner of IncomeTaxMANU/GH/0040/1989and Doom Dooma TeaCo. Limited v. Commissioner of IncomeTaxMANU/GH/0033/1989. The decision of theGauhati High Court in Makum Tea Co. (India)Limited, is under appeal before us in Civil AppealNos. 3976-77 of 1995. Similarly Civil Appeal No3246 of 1995 is preferred against the decision ofthe Gauhati High Court following the decision inDoom Domma Tea Co. Limited. (On enquiry, theoffice has informed that no Special LeavePetition/Civil Appeal has been filed against thedecision in Doom Dooma Tea Co. Limited.) Forthe aforesaid reasons, we can not agree with theview taken by the Gauhati High Court in theaforesaid decisions. 9. We agree with the view taken by the HighCourts of (Calcutta) Molins (India) Limited v.Commissioner of Income Tax, West Bengal-III:[1983]144ITR317(Cal) and Brooke Bond (India)Limited v. Commissioner of Income Tax:[1992]193ITR390(Cal) , (Bombay) Lubrizol(India) Limited v. Commissioner of Income Tax:187 I.T.R 25 followed in several other decisions ofthat Court, (Karnataka) Commissioner of IncomeTax, Kamataka v. International InstallmentsPrivate Limited: [1983]144ITR936(KAR) ,(Madras) Sundaram Industries Limited v.CommissionerofIncomeTax:[1986]159ITR646(Mad) , (Andhra Pradesh) VazirSultan Tobacco Co. Limited v. Commissioner ofIncome Tax: [1988]169ITR35(AP) , (Rajasthan)Association Stone Industries Co. Limited v.Commissioner of Income Tax (Gujarat) S.M.Maniklal Industries Limited v. Commissioner ofIncome Tax: [1988]172ITR176(Guj) followed inseveral cases thereafter (Allahabad) HimulyanDrug Co. Private Limited v. Commissioner ofIncome Tax: [1996]218ITR346(All) and (PunjabHaryana High Court) Highway Cycle IndustriesLimited v. Commissioner of Income Tax 4. SRD Nutrients Private Limited vs.Commissioner of Central Excise, GuwahatiAIR 2017 SC 5299 21. Even otherwise, we are of the opinion that itis more rational to accept the aforesaid positionas clarified by the Ministry of Finance in theaforesaid circulars. Education Cess is on exciseduty. It means that those Assessees who arerequired to pay excise duty have to shell outEducation Cess as well. This Education Cess isintroduced by Sections91 to 93of the Finance(No. 2) Act, 2004. As per Section 91the