Case Law Details

Case Name : Cypress Semiconductor Technology India Private Limited Vs DCIT (ITAT Bangalore)
Appeal Number : IT(TP)A No. 630/Bang/2021
Date of Judgement/Order : 27/07/2022
Related Assessment Year : 2016-2017

Cypress Semiconductor Technology India Private Limited Vs DCIT (ITAT Bangalore)

Held that cess forms part of the tax and the same cannot be allowed as deduction by virtue of provisions of section 40(a)(ii) of the I.T.Act

Facts- The assessee alleges that cess was not levied on the profits and gains of business, and does not satisfy the second limb of section 40(a)(ii) of the Income Tax Act which stated that cess is not levied on the profits.

On the other hand, department alleges that insertion of explanation 3 to section 40(a)(ii) of the I.T. Act by Finance Act, 2022 with effect from 01.04.2005 makes it clear that cess is part of the tax and the same cannot be allowed as a deduction while computing the profits and gains of business of the assessee.

Conclusion- Held that Explanation 3 to section 40(a)(ii) of the I.T.Act was inserted by Finance Act, 2022 with effect from 01.04.2005, wherein it is clearly stated that any surcharge or cess by whatever name called shall be included in the term “tax”.

Held that cess forms part of the tax and the same cannot be allowed as deduction by virtue of provisions of section 40(a)(ii) of the I.T.Act. Even prior to the insertion of Explanation 3 to section 40(a)(ii) of the I.T.Act, the Kolkata Bench of the Tribunal in the case of M/s.Kanoria Chemicals & Industries Ltd. v. Addl.CIT in ITA No.2184 & 2439/Kol/2018 (order dated 26.10.2021) by following the judgment of the Hon’ble Apex Court in the case of CIT v. K.Srinivasan reported in (1972) 83 ITR 346 (SC) held that education cess is an additional surcharge levied on Income-tax and partakes the character of Income-tax.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

The Income Tax Appellate Tribunal (ITAT) Bangalore bench has held that the cess forms part of tax and cannot be allowable as a deduction under section 40(a)(ii) of the Income Tax Act,1961.

The Appellant was represented by Sri. Sumit Khurana and the Respondent were represented by Dr Manjunath Karkihalli.

The assessee, M/s. Cypress Semiconductor challenged the final assessment order dated 25.09.2021 passed u/s 143(3) r.w.s. 144C(13) of the I.T. Act.

It was contended by the assessee that cess was not levied on the profits and gains of business, and does not satisfy the second limb of section 40(a)(ii) of the Income Tax Act which stated that cess is not levied on the profits.

The learned Departmental, on the other hand, submitted that insertion of explanation 3 to section 40(a)(ii) of the I.T. Act by Finance Act, 2022 with effect from 01.04.2005 makes it clear that cess is part of the tax and the same cannot be allowed as a deduction while computing the profits and gains of business of the assessee.

The Tribunal observed that the assessee’s contention was not acceptable and even though cess was calculated as % of Income-tax, effectively, it was a levy on the profits and gains of the assessee. Further observed that the words `any tax’ in section 40(a)(ii) include cess.

The Coram comprising Shri George George K, JM &Ms Padmavathy S, AM observed that since the cess is not an allowable deduction u/s 40(a)(ii) of the Act, then no deduction u/s 37 of the I.T. Act is permissible.

As the assessee itself stated that it was not granted a credit of self-assessment tax paid u/s 140A of the Act amounting to Rs.5,14,63,960, the Tribunal restore this issue to the files of the A.O to examine the matter. The appeal filed by the assessee was partly allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against final assessment order dated 25.09.2021 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2016-2017.

2. The assessee has raised five grounds before the Tribunal. However, during the course of hearing the learned AR had argued only two grounds, namely, ground 2 and ground 3. Ground 2 and 3 argued by the learned AR reads as follows:-

“2. Allowability of education cess:

2.1 That on the facts and in the circumstances of the case and in law, the learned DRP erred in disallowing the claim of Education Cess and Secondary and Higher Education Cess (collectively referred to as `Cess’) made by the appellant by way of additional objection during the year amounting to Rs. INR 42,92,153.

2.2 That on the facts and in the circumstances of the case and in law, the learned AO and the learned DRP ought to grant deduction under section 37(1) of the Act for Cess paid by the appellant during the year.

3. On the facts and in the circumstances the learned AO erred in not granting credit of self-assessment tax paid u/s 140A of the Act amounting to INR 5,14,63,960.”

The above grounds shall be adjudicated as under:

Education Cess (Ground 2, 2.1 & 2.2)

3. The learned AR submitted that cess is not levied on the profits and gains of business, and therefore, does not satisfy the second limb of section 40(a)(ii) of the I.T.Act. It was stated that based on the plain reading of section 40(a)(ii) of the I.T.Act, cess is not levied on the profits. The learned AR had illustrated various situations, wherein the cess is levied not based on the profits and gains of the business or profession.

4. The learned Departmental Representative, on the other hand, submitted that insertion of explanation 3 to section 40(a)(ii) of the I.T.Act by Finance Act, 2022 with effect from 01.04.2005 makes it clear that cess is part of the tax and the same cannot be allowed as a deduction while computing the profits and gains of business of the assessee. Further, the learned DR relied on the order of the Bangalore Bench of the Tribunal in the case of M/s.Infinera India Pvt. Ltd. v. JCIT in IT(TP)A No.2589/Bang/2019 (order dated 23.02.2022).

5. We have heard rival submissions and perused the material on record. Explanation 3 to section 40(a)(ii) of the I.T.Act was inserted by Finance Act, 2022 with effect from 01.04.2005, wherein it is clearly stated that any surcharge or cess by whatever name called shall be included in the term “tax”. The Explanation reads as follows:-

“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.”

6. In view of the amendment, it is clear that cess forms part of the tax and the same cannot be allowed as deduction by virtue of provisions of section 40(a)(ii) of the I.T.Act. Even prior to the insertion of Explanation 3 to section 40(a)(ii) of the I.T.Act, the Kolkata Bench of the Tribunal in the case of M/s.Kanoria Chemicals & Industries Ltd. v. Addl.CIT in ITA No.2184 & 2439/Kol/2018 (order dated 26.10.2021) by following the judgment of the Hon’ble Apex Court in the case of CIT v. K.Srinivasan reported in (1972) 83 ITR 346 (SC) held that education cess is an additional surcharge levied on Income-tax and partakes the character of Income-tax. The relevant finding of the Kolkata Bench of the Tribunal, reads as follows:-

“15. The assessee has taken the following additional ground of appeal:-

Additional Ground.

1. On the facts and circumstances of the case and in law, the Assessing Officer/ CIT(A) ought to have allowed deduction of Education Cess amounting to Rs. 3,19,95,9981- in terms of law laid down by the Hon’ble Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. [ITA o. 52/Raj/2018 ruling dt. 31.7.2018] and further Hon’ble Kolkata Tribunal in case of ITC Ltd. [ ITA No. 685/Koll20 14 ruling dt. 27.11.20 18]

16. As per the provisions of section 40(a)(ii) of the Income-tax Act, 1961 ( in short, 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, business or profession.

17. The Ld. Counsel for the assessee has submitted that ‘Cess’ has not been specifically mentioned in the aforesaid provisions of section 40(a)(ii) and, therefore, Cess is an allowable expenditure. He in this respect has relied upon the “CBDT Circular No. 91/58/66-ITJ(19) dated 18-05­1967”, wherein it has been interpreted that the ‘Cess’ shall not be disallowable. The said Circular for the sake of ready reference is reproduced as under:-

“Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 – Clarification regarding.- “Recently a case has come to the notice of the Board where the Income Tax Officer has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.

2. The view of the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax 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 years 1962-63 and onwards.

3. The Board desire that the changed position may please be brought to the notice of all the Income Tax Officers so that further litigation on this account may be avoided.{Board’s F . No.91/5B/66-ITJ(19), dated 18-5-1967.

18. The Learned Counsel for the assessee in this respect has further relied upon the decision of the Hon’ble Bombay High Court in the case of “Sesa Goa Limited Vs. JCIT“ (2020) 117 taxmann.com 96 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 Court/s relied upon the aforesaid CBDT Circular Dt. 18-05-1967(supra) 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 of profits and gains of business or profession. The Learned Counsel has further relied upon the following decisions of the Co-ordinate Benches of this Tribunal, who have followed the aforesaid judgments of the Hon’ble High Courts:

a. Decision of Kolkata Bench of the Tribunal in the case of DCIT Vs. ITC Infotech India Ltd, ITA No. 67/Kol/2015 dt. 23-10-2019

b. Decision of Kolkata Bench of the Tribunal in the case of Tega Industries Ltd Vs. ACIT, ITA No. 404/Kol/2017 dt. 23-8-2019

c. Decision of Kolkata Bench of the Tribunal in the case of SREI Infrastructure Finance Ltd Vs. Addl. CIT, R-9, ITA No. 1318/Del/2012 dt. 31-12-2019.

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 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 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. In view of our above discussion, the appeal of the department (ITA No. 2439/Kol/2018 for the A.Y 2012-13 is partly allowed and appeal of the assessee (ITA No. 2184/Kol/2018 for the A.Y 2012-13 is dismissed.”

Cess being part of the tax is not allowable as deduction us 40(a)(ii)

7. As regards the assessee’s specific contention that the cess is not levied on the profits and gains of any business or profession, we find the same is not acceptable. Though cess is calculated as % of Income-tax, effectively, it is a levy on the profits and gains of the assessee. The cess of 3% calculated on the Income-tax can be represented as % tax on the taxable income also. In the illustration submitted by the learned AR dated 03.05.2022, in page 2, the cess as a percentage of taxable income works out 1%, which demonstrates that, it is the mode of calculation of cess, that is represented as a levy on Income-tax, but effectively, it is a levy on the profits of the assessee, and therefore, will satisfy the second condition of section 40(a)(ii) of the I.T.Act. Further, it is significant to note that the word `tax’ is used, in section 40(a)(ii), in conjunction with the words `any rate or tax’. The word `any’ goes both with the rate and tax. The expression is further qualified as a rate of 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. If the word `tax’ is to be given the meaning assigned to it by section 2(43), the word `any’ used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word `tax’ as defined in section 2(43) is subject to `unless the context otherwise requires’. In that view of the matter, the words `any tax’ in section 40(a)(ii) includes cess. For the aforesaid reasons, the submission of the learned AR is rejected. Since the cess is not an allowable deduction u/s 40(a)(ii) of the I.T.Act, the deductibility u/s 37 of the I.T.Act is not permissible. It is ordered accordingly. Therefore, ground 2, 2.1 and 2.2 are dismissed.

Ground 3

8. In the above ground, the assessee states that it was not granted credit of self-assessment tax paid u/s 140A of the I.T.Act amounting to Rs.5,14,63,960. After perusing the material on record, we deem it appropriate to restore this issue to the files of the A.O. The A.O. shall examine the matter and shall give due credit for the self-assessment tax paid u/s 140A of the I.T.Act. Therefore, ground 3 is allowed for statistical purposes.

9. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced on this 27th day of July, 2022.

Download Judgment/Order

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