Clarification regarding treatment of cess and surcharge
Section 40 of the Act specifies the amounts which shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-clause (ii) of clause (a) of section 40 of the Act provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’.
2. However, certain taxpayers are claiming deduction on account of ‘cess’ or ‘surcharge’ under section 40 of the Act claiming that ‘cess’ has not been specifically mentioned in the aforesaid provisions of section 40(a)(ii) and, therefore, cess is an allowable expenditure. This view has been upheld by Courts in a few judgments. Further, Courts are also relying upon the CBDT Circular No. 91/58/66-ITJ(19) dated 18-05-1967.
3. The assessees rely upon the decision of the Hon’ble Bombay High Court in the case of “Sesa Goa Limited Vs. JCIT” (2020) 117 taxmann,com and further on the decision of the Hon’ble Rajasthan High Court in the case of “Chambal Fertilizers & Chemicals Ltd Vs. JCIT”: D.B Income-tax Appeal No. 52/2018 decided on 31-07-2018, wherein, the Hon’ble High Courts relied upon the aforesaid CBDT Circular Dt. 18-051967 and in view of the interpretation made by the CBDT have held that ‘education cess’ can be claimed as an allowable deduction while computing the income chargeable under the heads “profits and gains of business or profession”. Based on these decisions ITAT in various judgments have followed the same reasoning and have allowed deduction on account of payment of “Cess”.
4. However, one of the latest judgments of ITAT Kolkata has discussed the two High Court judgments as well as other judgments vide order dated 26-10-2021 in the case of M/s. Kanoria Chemicals & Industries Ltd ITA No. 2184/Kol/2018 (TS-1129-ITAT2021 Kol) and has held that the “Cess” is not to be allowed as deduction. The relevant portion of the judgment is produced 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 sub-s (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 under:- “In 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 fulfil the commitment of the Government to provide and finance universalised quality basic education.
23. A perusal of the aforesaid provisions of the Finance Act 2004 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.”
5. Rajasthan High Court has also relied upon the circular dated 18.05.1967 issued by CBDT, which is being reproduced as under:
“Interpretation of provision of s.40(a)(ii) of IT Act, 1961-Clarification regarding 18/05/1967 BUSINESS EXPENDITURE SECTION 40(a)(ii),
Recently a case has come to the notice of the Board where the ITO has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of s.10(4) of the old Act and s.40(a)(ii) of the new Act.
2. The view of the ITO is not correct. Clause 40(a)(ii) of the IT Bill, 1961 as introduced in the Parliament stood as under:
“(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains”.
When the matter came up before the Select Committee, it was decided to omit the word ‘cess’ from the clause. The effect of the omission of the word ‘cess’ is that only taxes paid are to be disallowed in the assessments for the year 196263 and onwards.
3. The Board desire that the changed position may please be brought to the notice of all the ITOs so that further litigation on this account may be avoided.”
6. In the above referred Circular issued by CBDT, ‘Cess’ is to be allowed under sub-clause (ii) of clause (a) of section 40 of the Act. However, it is to be noted that ‘Cess’ is imposed not only by the Central Government through Finance Act for a financial year, but also by various State Governments. It is pertinent to mention that in the above referred Circular of CBDT, there is no reference to the ‘Cess’ imposed by the Central Government through Finance Act for a particular year. This CBDT circular needs to be seen from the perspective that “Education Cess” imposed by Finance Act 2004 and subsequent Acts and then designated as “Education and Health Cess” are actually tax in the form of additional surcharge, as stated clearly in each of the relevant Finance Act imposing such “Cess”. It is only called “Cess” since they were imposed for a particular purpose of fulfilling the commitment of the Government to provide and finance quality health services and universalized quality basic education and secondary and higher education.
7. This circular was in reference to “Cess” imposed by State Government which is actually of the nature of “Cess” and not of the nature of “Additional Surcharge” being termed as “Cess” in the relevant Finance Act. When an additional surcharge is imposed by the Central Government and it is named as “Cess”, then its allowability needs to be examined whether an additional surcharge is allowed to be a deduction or not. Hon’ble Supreme Court in the case of K Srinivasan has held that “surcharge” and “additional surcharge” are tax. Hence, the additional surcharge named as “Cess”and imposed by the Central Government through the Finance Act is nothing but a tax and hence, needs to be disallowed under sub-clause (ii) of clause (a) of section 40 of the Act. The relevant part of Hon’ble Supreme Court judgment is as under:
7. The above legislative history of the Finance Acts, as also the practice, would appear to indicate that the term “Income tax” as employed in Section 2 includes surcharge as also the special and the additional surcharge whenever provided which are also surcharges within the meaning of Article 271 of the Constitution. The phraseology employed in the Finance Acts of 1940 and 1941 showed that only the rates of income tax and supertax were to be increased by a surcharge for the purpose of the Central Government. In the Finance Act of 1958 the language used showed that income tax which was to be charged was to be increased by a surcharge for the purpose of the Union. The word “surcharge” has thus been used to either increase the rates of income tax and super tax or to increase these taxes. The scheme of the Finance Act of 1971 appears to leave no room for doubt that the term Income tax” as used in Section 2 includes surcharge.”
8. Since the judgments of Rajasthan High Court and Bombay High Court did not consider the judgment of Hon’ble Supreme Court discussed above, the judgments of these two High Courts appear to be per incuriam. It may be mentioned that in paragraph 578 at page 297 of Halsbury’s Laws of England, Fourth Edition, the rule of per incuriam is stated as follows:
“A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of co-ordinate jurisdiction which covered the case before it, in which case it must be decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.”
9. From the above discussion it may be seen that the interpretations of two High courts and various ITATs are against the intention of legislature and not in line with the judgment of Hon’ble Supreme Court. Hence, in order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to include an Explanation retrospectively in the Act itself to clarify that for the purposes of this sub-clause, the term “tax” includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Amendment is made retrospectively to make clear the position irrespective of the circular of the CBDT.
10. This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.
Note on Clause 13 of Finance Bill 2022
Clause 13 seeks to amend section 40 of the Income-tax Act relating to amounts not deductible.
Sub-clause (ii) of clause (a) of the said section provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”.
It is proposed to insert a new Explanation 3 to sub-clause (ii) of clause (a) of the said section to clarify that for the purposes of sub-clause (ii), the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.
This amendment will take effect retrospectively from 1st April, 2005 and will, accordingly, apply in relation to the assessment year 2005-2006 and subsequent assessment years.
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Extract of Clause 13 of Finance Bill 2022
13. Amendment of section 40.
In section 40 of the Income-tax Act, in clause (a), in sub-section 40. clause (ii), after Explanation 2, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2005, namely:––
‘Explanation 3.–– For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.’.
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