Deductibility of Cess paid on Income Tax

In this article, an effort has been made to contend that the cesses payable are a deductible expense under section 37(1) r.w. section 40(a)(ii) of the Income tax Act, 1961 (hereinafter referred to as the ‘Act’). It is well settled that the cess levied on indirect taxes is an allowable expenses and thereby the sole focus of the article lies on cess payable under the Income tax Act.

All of the Readers may be aware of the cess like Krishi Kalyan cess, Swachh Bharat cess, Infrastructure cess, Health & Education cess, Education cess, Secondary Higher Education cess etc. and might have already felt the clinch while paying them. In this article, an effort has been made to contend that the cesses payable are a deductible expense under section 37(1) r.w. section 40(a)(ii) of the Income tax Act, 1961 (hereinafter referred to as the ‘Act’). It is well settled that the cess levied on indirect taxes is an allowable expenses and thereby the sole focus of the article lies on cess payable under the Income tax Act.

At the outset, I would like to mention that the cess on income tax is an allowable expense as it does not fall under the purview of sec. 40(a)(ii). In this regard, reference is made to Sec. 40(a)(ii) which states as under:

“40. Amounts not deductible.

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-

(a) in the case of any assessee –

….

(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…”

[Emphasis Added]

On a plain reading of the above provision, it is can be seen that the sum paid on account of any rate or tax is expressly disallowed in two cases:

(i) Where the rate is levied on the profits or gains of any business or profession, and;

(ii) Where the rate or tax is assessed at a proportion of or otherwise on the basis of such profits or gains.

It may be noted that as per the above provision of the Act only rates or taxes, which are 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 are hit by the said provisions. The cess levied upon on income tax is in the nature of fees, as discussed in the later part and hence the cess on income tax is not covered by sec. 40(a)(ii) of the Act. Reference is further drawn towards section 10(4) of the Income-Tax Act, 1922 (corresponding to section 40(a)(ii) of the Income-Tax Act, 1961) which, interalia, reads as under:

“10. Business.

(1) The tax shall be payable by an assessee under the head “Profits and gains of business, profession or vocation” in respect of the profits or gains of any business, profession or vocation carried on by him.

…..

4) Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains; and nothing in clause (xv) of sub-section (2) shall be deemed to authorise….”

[Emphasis Added]

On the perusal of the same, it can be seen that section 10(4) of the Income Tax Act, 1922 corresponding to section 40(a)(ii) of the Act, provided for disallowance of cess, rate or tax. It is to be noted that the word “cess” was present in the Section 10(4) of the Income Tax Act, 1922 but the said word was omitted from provisions of Section 40(a)(ii) of the Act. The omission of word “cess” from section 40(a)(ii) of the Act being a specific omission on the part of the legislature, it should be construed as the intention of the legislature to allow cess in computing profits and gains from business and profession. It may be acknowledged that none is entitled to read into an Act of Parliament words which are not there. It is unjustified to interpret from words into an Act of Parliament unless those words are found in the Act. It is not to be dealt with merely because there seems to good reason why it should have been omitted. Each and every omission in the statute has to be found intentional. The said contentions has been further accepted the department vide CBDT Circular No. 91/58/66 – ITJ(19) dated 18-05-1967 in following words,

“(2)(ix) Any sums paid on account of land revenue, local rates or municipal taxes in respect of such part of the premises as is used for the purposes of the business, profession or vocation.

(xv) Any expenditure [not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee] laid out or expended wholly and exclusively for the purposes of such business, profession or vocation.

(4) Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorize the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains….”

[Emphasis added]

The Board has thereby clarified that the omission of the word “cess” from section 40(a)(ii) has resulted that only taxes payable are to be disallowed in the assessments for the years 1962-63 onwards and not the cess. Thereby there cannot be any contradiction as the CBDT circular bind the tax authorities.

I. Binding Board Circular

It is well settled principle that the Circular issued by the CBDT is binding to the Revenue. Further, the circular cannot impose on the taxpayer a burden higher than what is imposed by the Act itself. However, the Board has the statutory power under section 119 of the Act to tone down the rigour of the law for the benefit of the assessee. It is well settled that the Courts cannot take away the benefits which are granted by the circulars even if the circular might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law.

Reference in this regard is placed upon the decision of the learned three-judges bench of the Hon’ble Apex Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC) wherein it was held that the circulars issued by the Board in exercise of its powers under Section 119 of the Act would be binding on the income tax authorities even if they deviate from the provisions of the Act, so long as they seek to mitigate the rigor of a particular section for the benefit of the assessee. Therefore, their Lordships declined to take exception to the reasoning and conclusion reached by the authorities under the Act.

The proposition that the Circular is binding on all officers and persons employed in the execution of the Income Tax Act finds support from the decisions in the case of learned three-judges bench of the Hon’ble Supreme Court in the case of Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1(SC) and in the case of K.P. Varghese vs. ITO (1981) 131 ITR 597 (SC) which has been approved by the five-judges constitutional bench in the case of C.B. Gautam vs. UOI (1993) 199 ITR 530 (SC) at page 546.

It is now well settled that even if the contents of a circular may amount to a deviation on a point of law, a circular of the CBDT which confers some benefit on the assessee is binding on all officers concerned with the execution of the Act and they must carry out their duties in the light of the circular. In the present case, therefore, it was, in the first place, the duty of the AO to grant a liberal view and allow the cess as deduction as taken by the Board in its circular. It can be thereby summed up that the claim of cess as a business expense under section 37(1) of the Act cannot be denied by the AO, appellate authorities and even the Courts even if the same is not permissible under the Act.

II. Applying the settled doctrines of Interpretation

As stated earlier, the word “cess” was present in the Section 10(4) of the Income Tax Act, 1922 but the said word was omitted from provisions of Section 40(a)(ii) of the Act. The omission of the word ‘cess’ being a specific omission on the part of the legislature, it should be construed as the intention of the legislature to allow cess in computing profits and gains from business and profession. In the matter of interpretation of the taxing statutes the law courts would not be justified in introducing some other expressions which the Legislature thought fit to omit. A fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The court is to ascribe the natural and ordinary meaning to the words used by the Legislature and the court ought not, under any circumstances, to substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions. Reference in this regard is attention towards the judgement in the case of ACIT vs. Velliappa Textiles Ltd. 263 ITR 550 (SC) wherein the Hon’ble Supreme Court held,

“If the Legislature has left a lacuna, it is not open to the Court to paper it over on some presumed intention of the Legislature. The doctrine of casus omissus, expressed in felicitous language in CST v. Parson Tools & Plants [1975] 4 SCC 22, is : “If the legislature wilfully omits to incorporate something of an analogous law in a subsequent statute, or even if there is a casus omissus in a statute, the language of which is otherwise plain and unambiguous, the court is not competent to supply the omission by engrafting on it or introducing in it, under the guise of interpretation, by analogy or implication, something what it thinks to be a general principle of justice and equity. To do so “would be entrenching upon the preserves of legislature”.The primary function of a court of law being jus dicere and not jus dare.”…The maxim “Judicisest jus dicere, non dare” pithily expounds the duty of the Court. It is to decide what the law is and apply it; not to make it.”

[Emphasis Added]

The said view also finds support from the decision of the Apex Court in the following cases:

• Orissa State Warehousing Corporation vs. CIT (1999) 237 ITR 589 (SC)
• Vodafone International Holdings B.V vs. UOI (2012) 341 ITR 1 (SC)
• Prakash Nath Khanna and Another vs. CIT (2004) 266 ITR 1 (SC)
• Tarulata Shyam vs. CIT (1977) 108 ITR 345 (SC)
• CIT vs. Madurai Mills Co. Ltd. (1973) 89 ITR 45 (SC)
• Mohammad Ali Khan vs. CWT (1997) 224 ITR 672 (SC)

III. The levy is not an Additional Surcharge

Reference in this regard is drawn towards Article 270 and 271 of the constitution of India which, inter alia reads as under:

“270. Taxes levied and distributed between the Union and the States.

(1) All taxes and duties referred to in the Union List, except the duties and taxes referred to in articles 268, 269 and 269A, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2)

…..

271. Surcharge on certain duties and taxes for purposes of the Union.

Notwithstanding anything in articles 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles 1except the goods and services tax under article 246A, by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India”

[Emphasis Added]

On the perusal of the above, it can be said that the Constitution of India draws a clear distinction between cess and surcharge. The proceeds from cess, described in the Article 270 of the Constitution are not credited to Consolidated Fund of India but to a specific non-lapsable fund and are utilized for a specific purpose. In other words, cess is an earmarked fund set apart for a well-defined purpose. On the other hand, surcharge is a tax on tax and it is not imposed/used for a specific purpose. A surcharge is dealt with under Article 271 of the Constitution and the proceeds received from surcharge are credited to Consolidated Fund of India and are not be used exclusively for the earmarked purpose, but may be used for any general public purpose as well.

Reference in this regard is invited to section 2 of the Finance Act, 2018 which, inter alia, reads as under:

“Income-tax.

2. (1) Subject to the provisions of sub-sections (2) and (3), for the assessment year commencing on the 1st day of April, 2018, income-tax shall be charged at the rates specified in Part I of the First Schedule and such tax shall be increased by a surcharge, for the purposes of the Union, calculated in each case in the manner provided therein.

…

(11) The amount of income-tax as specified in sub-sections (1) to (3) and as increased by the applicable surcharge, for the purposes of the Union, calculated in the manner provided therein, shall be further increased by an additional surcharge, for the 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.

(12) The amount of income-tax as specified in sub-sections (1) to (3) and as increased by the applicable surcharge, for the purposes of the Union, calculated in the manner provided therein, shall also be increased by an additional surcharge, for the purposes of the Union, to be called the “Secondary and Higher Education Cess on income-tax”, calculated at the rate of one per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance secondary and higher education.

(13) The amount of income-tax as specified in sub-sections (4) to (10) and as increased by the applicable surcharge, for the purposes of the Union, calculated in the manner provided therein, shall be further increased by an additional surcharge, for the purposes of the Union, to be called the “Health and Education Cess on income-tax”, calculated at the rate of four per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance quality health services and universalised quality basic education and secondary and higher education”

[Emphasis Added]

On the perusal of the above, it can be said that the Finance Act, 2018 levies an additional surcharge in the form of cess on income-tax which will be used by the Union so as to fulfil the commitment of the Govt. to provide and finance a specific purpose like basic education, secondary and higher education, health services etc. On the similar lines are the other annual Finance Acts levying Cess as an additional surcharge.

It may be contended that the Finance Act imposes cess as an additional surcharge thereby the same is a tax chargeable under the Act and thus the same is not a deductible expense. On the same time, it has to be noted that the Finance Act uses word ‘cess’ and ‘surcharge’ for a single levy that too in the same sentence without realizing that there exists a difference between the two categories of levies under the Constitution. Thereby, it can be said that the levy can be either a surcharge or can be a cess but a single levy cannot be deemed to be both as a surcharge as well as a cess especially when the Constitution draws a clear demarcation between the two.

The nomenclature used by the law-makers may be ‘cess’ but it is introduced as a surcharge. It therefore becomes indeed necessity that one not be guided simply by the words used in the statute but one needs to seek the real nature of the levy. Just because the word ‘cess’ is suffixed after the levy, the same cannot indicate its nature to be cess and similarly, the other way round, just  because a cess is introduced as a surcharge, the same doesn’t assumes the nature of surcharge. The levy must be interpreted using the rule of harmonious construction. This would avoid absurdity and not render the constitutional distinction between cess and surcharge redundant. The real test would be to find the actual nature of levy. One needs to interpret the real character of the levy by going into its essential purpose.

The cess levied under the income tax act are not used by the Govt. for general purposes and running of the state of affairs of the country but the proceeds of the cess are collected and utilized separately with a specific purpose. The proceeds are not credited to Consolidated Fund but to some non-lapsable funds like “Prarambhik Shiksha Kosh” or “Madhyamik and Uchchtar Shiksha Kosh“. The annual Finance Acts, the memorandums to the finance bills and the Budget Speeches of the Finance minister supports the same. For instance, the Hon’ble Minister of Finance in its Budget Speech for FY 2004-05 stated the intention to levy education cess, the proceeds of which will be earmarked for education, including providing nutritious cooked midday meal. In his budget speech, the Hon’ble Finance minister inter alia, said,

“VI. EDUCATION AND HEALTH

Education

22. In my scheme of things, no issue enjoys a higher priority than providing basic education to all children. The NCMP mandates Government to levy an education cess. I propose to levy a cess of 2 per cent. The new cess will yield about Rs.4000 – 5000 crore in a full year. The whole of the amount collected as cess will be earmarked for education, which will naturally include providing a nutritious cooked midday meal. If primary education and the nutritious cooked meal scheme can work hand in hand, I believe there will be a new dawn for the poor children of India.”

[Emphasis Added]

The Govt. has thereafter created many non-lapsable funds for the purpose of utilization of the cess proceeds towards various projects. In the press release dated 06-10-2005 by the Govt. of India, it was clearly stated that the proceeds of the education cess would be utilized to fulfill the commitment of the Govt. to provide & finance universal quality basic education. In the said press note, it was further clarified that the education cess was credited to A non-lapsable fund called ‘Prarambhik Shiksha Kosh’ would be created and maintained by the Ministry of Human Resource Development (HRD), Department of Elementary Education & Literacy (EE&L), on the lines of the Non-Lapsable Central pool of Resources (NLCPR) for the North-Eastern Region (NER). The fund will be non-lapsable and receipts from the education cess will be available on a roll-over basis for purposes of financing elementary education and the mid-day meal scheme.

Similarly, in the press release dated 16-08-2017, it was clarified that non-lapsable pool in the Public Account for secondary and higher, education known as “Madhyamik and Uchchtar Shiksha Kosh” (MUSK) administered and maintained by Ministry of HRD into which all proceeds of “Secondary and Higher Education Cess” will be credited. Further, the MUSK would be maintained as a Reserve Fund in the non-interest bearing section of the Public Accounts of India It was clarified that the funds arising from the MUSK would be utilized for schemes in the education sector for programs like National Means-Cum-Merit Scholarship Scheme, National Scheme for Incentives to Girls for Secondary Education, ongoing Schemes of Interest Subsidy and contribution for guarantee funds, Scholarship for College & University Students, Rashtriya Uchchtar Shiksha Abhiyaan and so on.

Further, in the press release dated 09-05-2016, the Govt. of India has shared information given by the Union HRD Minister, Smt. Smriti Zubin Irani in a written reply to a Lok Sabha question. The press note shows the allocation of funds towards Sarva Shiksha Abhiyan and Mid Day Meal schemes.

Therefore, it is amply clear that the although the said levy was imposed by the Finance Act has imposed cess as an additional surcharge but the looking on the true nature of the levy, it is ample clear that the fund is set apart and appropriated specifically for the performance of specified purpose and it is not merged in the public revenues for the benefit of the general public and as such the nexus between the levy and the purpose for which it is levied gets established. In the view of the clear demarcation between the surcharge and cess, as discussed above, the levy cannot be said to be an additional surcharge.

IV. Cess is in the nature of “Fees” and not “Tax”

Further, to claim cess as a deduction, the cess must be a fee and not a tax. Thus, the core issue arising for consideration is whether the cess levied is a ‘fee’ or a ‘tax’. Before embarking on an evaluation based on the deductibility, it would be apposite to briefly examine the concept of ‘tax’ and ‘fee’.

Reliance in this regard is placed on the decision of the case of Hingir Rampur Coal Co. Ltd. vs. State of Orissa 1961 (2) SCR 537(SC) wherein the Five judges Bench of the Hon’ble Apex Court while deciding the constitutional validity of the Orissa Mining Areas Development Fund Act, 1952, explained different features of a ‘tax’, a ‘fee’ and ‘cess’ in the following words,

“The neat and terse definition of Tax which has been given by Latham, C.J., in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 is often cited as a classic on this subject. “A Tax”, said Latham, C.J., “is a compulsory exaction of money by public authority for public purposes enforceable by law, and is not payment for services rendered”. In bringing out the essential features of a tax this definition also assists in distinguishing a tax from a Fee. It is true that between a tax and a fee there is no generic difference. Both are compulsory exactions of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it. If specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area, and as a condition precedent for the said services or in return for them cess is levied against the said area or the said class of persons or trade or business the cess is distinguishable from a tax and is described as a fee. Tax recovered by public authority invariably goes into the consolidated fund which ultimately is utilised for all public purposes, whereas a cess levied by way of Fee is not intended to be, and does not become, a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied.

.…

It is true that when the Legislature levies a fee for rendering specific services to a specified area or to a specified class of persons or trade or business, in the last analysis such services may indirectly form part of services to the public in general. If the special service rendered is distinctly and primarily meant for the benefit of a specified class or area the fact that in benefiting the specified class or area the State as a whole may ultimately and indirectly be benefited would not detract from the character of the levy as a fee. Where, however, the specific service is indistinguishable from public service, and in essence is directly a part of it, different considerations may arise. In such a case it is necessary to enquire, what, is the primary object of the levy and the essential purpose which it is intended to achieve. Its primary object and the essential purpose must be distinguished from its ultimate or incidental results or consequences. That is the true test in determining the character of the levy.”

[Emphasis Added]

On the basis of the above considerations, the Ld. five judges constitutional bench of the Hon’ble Supreme Court after a depth examination of the scheme of the Act opined that the primary and the principal object of the Orissa Mining Act was to develop the mineral areas in the State and to assist in providing more efficient and extended exploitation of its mineral wealth. The Cess levied did not become a part of the consolidated fund and was not subject to an appropriation in that behalf. It went into a special fund earmarked for carrying out the purpose of the Act and thus, its existence established a correlation between the cess and the purpose for which it was levied, satisfying the element of quid pro quo in the scheme. These features of the Act impressed upon the levy the character of a ‘fee’ as distinct from a ‘tax’.

Further, in the case of State of West Bengal vs. Kesoram Industries Ltd. & Ors.(2004) 10 SCC 201(SC) the Five judges bench of the Hon’ble Apex Court, while deciding the Constitutional validity of the levy of cess on coal-bearing lands, tea plantation lands and on removal of bricks earth relied upon the decision in Hingir Rampur Coal(supra.) and explained the distinction between the terms ‘tax’ and ‘fee’ in the following words:

“The term cess is commonly employed to connote a Tax with a purpose or a tax allocated to a particular thing. However, it also means an assessment or levy. Depending on the context and purpose of levy, cess may not be a tax; it may be a fee or fee as well. It is not necessary that the services rendered from out of the Fee collected should be directly in proportion with the amount of Fee collected. It is equally not necessary that the services rendered by the Fee collected should remain confined to the person from whom the fee has been collected. Availability of indirect benefit and a general nexus between the persons bearing the burden of levy of fee and the services rendered out of the fee collected is enough to uphold the validity of the fee charged.”

(Emphasis added)

In the light of the ratio laid down in Hingir Rampur(supra.) and Kesoram Industries(supra.), it is manifest that the true test to determine the character of a levy, delineating ‘tax’ from ‘fee’ is the primary object of the levy and the essential purpose intended to be achieved.

In the case of the cess levied on the Income tax, there is no doubt that the essential purpose the legislatures seeks to achieve by the enactment of specific levy known as cess is to augment the fund towards a specific purpose like education, heath etc. The fund, so collected is directed towards specific ends. Therefore, applying the above principle laid down by the Hon’ble Apex Court, it is clear that the said levy is a ‘fee’ and not ‘tax’. The said fund is set apart and appropriated specifically for the performance of specified purpose; it is not merged in the public revenues for the benefit of the general public and as such the nexus between the cess and the purpose for which it is levied gets established, satisfying the element of quid pro quo in the scheme with these features of the cess, the subject levy has to be construed as ‘fee’ and not a ‘tax’ and thereby a deductible expense under section 37(1) of the Act.

V. Cess qualifies to be an expense u/s 37(1)

One may contended that the cess is not an expenditure laid out for the purposes of the business but a charge on profit. It is an application of the profits after they have been earned and is paid out of the profits. The cess is not an expenditure incurred for the purpose of carrying on the business. The liability to pay cess depends upon whether profits are made or not. The liability to pay cess arises on the determination of the profits. The cess is the surcharge which the assessee is to pay and is to be levied and calculated on the aggregate of all taxes under the provisions of the Act. Further, it can be contended that the assessee is not getting any benefit or services in return by making the fee payment towards the cess.

On the other hand, one has to keep in mind that it is well settled that the cess cannot have the same treatment as tax. In other words, if the assessee is getting any benefit or services in return by making the payment towards the cess i.e. there exists ‘quid pro quo’ then the same would be allowable under section 37(1) of the Act because it will amount to an expenditure incurred wholly and exclusively for the purpose of the business. While it is true that ‘quid pro quo’ is one of the determining factors that sets apart a ‘tax’ from a ‘fee’ but the concept of quid pro quo requires to be understood in its proper perspective.

Reference in this regard is placed on the decision of the case of Kewal Krishan Puri and Anr. vs. State of Punjab and Anr. 1980 (1) SCC 416(SC), while dealing with the provisions of the Punjab Agricultural Produce Markets Act, 1961, a Bench of five learned Judges of the Hon’ble Supreme Court held that the element of quid pro quo must exist between the payer of the Fee and the special services rendered. Taking note of the well-recognized distinct connotations between ‘tax’ and ‘fee’, the Bench observed that a ‘fee’ is a charge for special service rendered to individuals by the Govt. agency and therefore, for levy of fee an element of quid pro quo for the services rendered was necessary; service rendered does not mean any personal or domestic service and it meant service in relation to the transaction, property or the institution in respect of which the fee is paid. A significant principle deduced in the said judgment was that the element of quid pro quo may not be possible, or even necessary, to be established with arithmetical exactitude but even broadly and reasonably it must be established, with some amount of certainty, reasonableness or preponderance of probability that quite a substantial portion of the amount of fee realized is spent for the special benefit of its payers. Each case has to be judged from a reasonable and practical point of view for finding an element of quid pro quo.

Reliance is further placed on the decision in the case of Sreenivasa General Traders and Ors. vs. State of Andhra Pradesh and Ors. (1983) 4 SCC 353 (SC), a Bench of three learned Judges of the Hon’ble Apex Court analyzed, in great detail, the principles culled out in Kewal Krishan Puri (supra). Opining that the observation made in the said decision, seeking to quantify the extent of correlation between the amount of fee collected and the cost of rendition of “At least a good and substantial portion of the amount collected on account of fees, may be in neighborhood of two-thirds or three-fourths, must be shown with reasonable certainty as being spent for rendering services in the market to the payer of fee” appeared to be an obiter, the Court in context of actual quid pro quo between the services rendered and payer of the fee echoed the following views,

“The traditional view that there must be actual quid pro quo for a fee has undergone a sea change in the subsequent decisions. The distinction between a tax and a fee lies primarily in the fact that a tax is levied as part of a common burden, while a fee is for payment of a specific benefit or privilege although the special advantage is secondary to the primary motive of regulation in public interest. If the element of revenue for general purpose of the State predominates, the levy becomes a tax. In regard to fees there is, and must always be, correlation between the fee collected and the service intended to be rendered. In determining whether a levy is a fee, the true test must be whether its primary and essential purpose is to render specific services to a specified area of class; it may be of no consequence that the State may ultimately and indirectly be benefited by it. The power of any legislature to levy a fee is conditioned by the fact that it must be “by and large” a quid pro quo for the services rendered. However, correlationship between the levy and the services rendered (sic or) expected is one of general character and not of mathematical exactitude. All that is necessary is that there should be a “reasonable relationship” between the levy of the Fee and the services rendered.”

(Emphasis added)

Viewed from the ratio laid in the case of Kewal Krishan Puri (supra.) and Sreenivasa General Traders (supra.), the inevitable conclusion is that in the instant case there does exist a reasonable nexus between the payer of the cess and the services rendered by the Govt. and therefore, the said levy can be claimed as a deduction under section 37(1) of the Act as there lies an reasonable relationship between the levy of the cess and the services rendered.

VI. Specific exclusion at Section 115JB

Further, in computing Book Profit under section 115JB of the Act, clause (a) of Explanation 1 to Section 115JB(2) requires a taxpayer to add income tax and provision thereof. The explanation 2 to the said section specifically states that for the aforesaid purpose, income tax shall include, inter alia, cess. Hence, it can be seen that where the legislature intends to disallow cess, it has provided for the same. However, in case of computation under regular provisions, the same has been omitted in provisions of Sec. 40(a)(ii) of the Act.

However, there are some dissenting views taken by the Tribunals in the case of

• Sesa Goa Ltd. vs. JCIT (2013) 38 taxmann.com 34 (Panaji – Tri.),
• Everest Industries Ltd. vs. JCIT (2018) 90 taxmann.com 330 (Mumbai – Tri.) and
• Kalimati Investments Co. Ltd. vs. ITO (ITA No. 4508/Mum/2010 order dated 09-05-2012)

However, in case of  Chambal Fertilisers and Chemicals Limited vs. JCIT (ITA No. 52/2018 order dated 31-07-2018) the Hon’ble Rajasthan High Court held that Education Cess is not a tax; therefore, the same is not required to be disallowed under section 40(a)(ii) of the Act as part of total income of the taxpayer. The Hon’ble High Court held that the cess cannot be treated at par with tax and, hence, is an allowable expenditure. While deciding the issue, the Hon’ble High Court specifically referred to the aforesaid CBDT Circular.

Based on the aforesaid discussions, a view may be that the cess levied under the income tax act is an allowable deduction in computing income under the head ‘Profits and Gains from Business or Profession’ as part of total income of the taxpayer. The claim, however, would not be litigation free and the claim needs to be lodged with full disclosure to avoid penal consequences.

I trust, I have been able to explain the matter to your satisfaction. In case you require any clarification please let me know, I would be highly obliged to furnish you with the same.

Limitation: The views expressed herein above are based on facts as indicated to me. No assurance is given that the revenue/judicial authorities will concur with the above views. The views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. No responsibility is assumed to update the views consequent to such changes. The views should not be considered as a legal opinion. Copying the same without consent is not permitted.