355. Professional tax – Whether deductible as revenue expenditure

It has been represented to the Board that the professional tax is not being allowed as a revenue expenditure under section 37(1), as its deduction is not covered by the specific provisions of section 40(a )(ii).

Section 40(a)(ii) authorises disallowance of 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 and gains.

The professional tax levied by local authorities cannot normally be considered to fall within section 40(a)( ii).  In order to fall in this category, it would be necessary that the rate of tax is levied on the profits or gains of the business, profession or vocation and it should be assessed at a proportion or otherwise, on the basis of such profits or gains.  In other words, what the section essentially seeks to convey is to prohibit the deduction of taxes on income.

Profession taxes are levied under entry 60 of List II of the Constitution of India which speaks of taxes on professions, rates, callings and employments.  Article 276 of the Constitution makes it clear that such taxes shall not be invalid on the ground that they relate to a tax on income, though the quantum of tax might to some extent depend upon the amount of income earned.  Strictly speaking, a professional tax is leviable whether or not any profits or gains accrue or arise in a particular year.  The payment of such tax is a necessary condition for the carrying on of business within the area of a local authority.

It would, accordingly, appear that the professional tax paid by a person carrying on a business or trade can be allowed to him as a deduction under section 37(1).

Circular : No. 16 [F. No. 9/38/69-IT(A-II)], dated 18-9-1969.

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