Whether ‘Cess’, is an allowable expenditure as word ‘cess’ is absent under section 40(a)(ii) of the Income-tax Act,1961?
It is a well settled principle that ‘Income-tax’ of a taxpayer is a not an allowable business expenditure. However, whether the ‘Income-tax’ payable by the taxpayer also includes ‘Cess’ or does not include such ‘Cess’ is a matter of debate.
In this connection, reference is invited to section 40(a)(ii) of the Act which read as under:
“Notwithstanding anything to the contrary in sections 30 to 41, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession
(ii) 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.
[Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91]
[Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A]
As per the Act, ‘any rate or tax levied’ on ‘profits and gains of business or profession’ shall not be deducted in computing the income chargeable under the head ‘profits and gains of business or profession’. The word ‘Cess’ is not mentioned in the section. It is relevant to note that the word ‘Cess’ was originally included in the Finance Bill, but was omitted from the final bill passed by the Legislature on recommendation of Committee of the Parliament.
There is no reference to any ‘Cess’. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, ‘Education Cess’ or any other ‘Cess’, then, the legislature could have easily included reference to ‘Cess’ in clause (ii) of Section 40(a) of the Act.
In this connection, reference is invited to Circular No. 91/58/66-ITJ(19) dated 18.05.1967 wherein it has been clearly instructed that the ‘Cess’ shall not be disallowable. Further, it states that the effect of the omission of the word ‘cess’ from section 40(a)(ii) is that only taxes paid are to be disallowed in the assessments for the years 1962-63 onwards.
Reference is also invited to the recent judgement of the Hon’ble Bombay High Court in case of Sesa Goa Limited v. Joint Commissioner of Income-tax  117 taxmann.com 96 wherein it was held that the Education cess and Higher and Secondary Education cess can be claimed as an allowable deduction while computing income chargeable under head of ‘Profits and Gains of Business orProfession’.
Let us take an instance from Income-tax act itself. Section 40(a)(ii) talks only about tax whereas section 115JB says that for computing book profit, tax includes cess as levied by the Central Act. If we summarize above mentioned provisions, it can be very well argued that there is a difference in cess and tax. Wherever legislators wanted to include cess, it is specifically mentioned in law. In this connection, reference is invited to Para 18 of the judgement of the Hon’ble Bombay High Court in case of Sesa Goa Limited v. Joint Commissioner of Income-tax  117 taxmann.com 96 which read as follows:
“In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. v. Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise: Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it.”
Similar view has been taken by Rajasthan High Court in case of Chambal Fertilsers and Chemical Ltd. v. CIT-Range (2), Kota by its order dated 31.07.2018 wherein it was held that Education Cess is not a tax; therefore, the same is not required to be disallowed under section 40(a)(ii), in computing profits and gains from business as part of total income of the taxpayer. The Hon’ble Rajasthan High Court held that Education Cess cannot be treated at par with tax and, hence, is an allowable expenditure.
On the contrary, the Hon’ble Supreme Court in the case of Commissioner of Income-tax v. K. Srinivasan  83 ITR 346 held that
“……The meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to section 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 way or at four different rates which may be described as: (i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge; (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 incometax and super-tax. According to the revenue, the word ‘surcharge’ has been used in Article 271 for the purpose of separating it from the basic charge of a tax or duty of the purposes of distributing the proceeds of the same between the Union and the States….”
Keeping in view the judgement of the Hon’ble Supreme Court in the case of K. Srinivasan, reference is invited to memorandum of Finance Bill of 2004 wherein it was mentioned as: “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.” A logical conclusion can be reached on the combined reading of the memorandum to Finance Bill, 2004 and the judgement of Hon’ble Supreme Court that education cess will ultimately form a part of the income-tax and, hence is to be disallowed.
The said ruling of the Apex court and Memorandum to Finance Bill, 2004 was not taken into consideration by the Hon’ble Bombay High Court at the time of pronouncement of judgement of Sesa Goa Limited.
Apart from judicial precedents, some additional factors which should be borne in mind in relation to cess and whether it forms part of taxes in this context is that no separate mode of collection or recovery of cess has been prescribed under the Act, and the provisions applicable to tax apply mutatis mutandis to collection and recovery of cess.
Although, the Revenue has not contested the decision of Hon’ble Rajasthan High Court in case of Chambal Fertilisers & Chemicals Limited (Supra) before Supreme Court, this decision is a binding precedent which is further strengthened by Bombay High Court’s decision in Sesa Goa Limited (Supra). This proposition that the ‘Cess’ is not in nature of Tax and hence deductible as expenditure in the year of payment can be tricky and risky to conclude. Still, the assessee may consider asking for this deduction in open assessment(s) considering the fact this claim is backed by judicial precedent. In simple words, though the view of allowability of ‘Cess’ as a business expenditure is backed by the judgments of two high courts but the risk of litigation in this case cannot be ruled out completely.
If the legal claim regarding allowability of ‘Cess’ as a business expenditure is not upheld by the judiciary, it may lead to initiation of penalty proceedings.
If ‘Cess’ is allowed as an eligible expenditure, this will have substantial impact on the tax collection by the Government. It is expected a a suitable clarity would be provided by the CBDT by notifying their future course of action against this judgment at the earliest or one can expect a retrospective amendment in the law by way of insertion of an explanation in section 40(a)(ii) of the Act explaining the term ‘taxes’ used in such section!
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