prpri Whether Education cess is allowable as a business expense Whether Education cess is allowable as a business expense


As per the provisions of sec 40a (ii) any payment on account of any rate or tax levied on the profits or gains of any business or profession are not allowable as a business expense. Hence, the amount of Income tax Paid by the assessee is disallowed u/s 40(a)(ii). However, along with Income Tax, the Finance Act every year also levies an Education Cess. Even though the education cess is levied on the amount of income earned by an assessee and is akin to Income Tax, there is a subtle difference between a tax and cess. The author tries to analyze the allowability of education cess having regards to the provisions of the act and recent judicial pronouncements.

Meaning of Cess

Cess is a form of tax charged/levied for a specific purpose. Cess is different from tax or duty and may be charged over and above the amount of tax. The Constitution Bench of the Supreme Court in the case of State of West Bengal vs. Kesoram Industries Ltd. (266 ITR 721) has held that the term “Cess” is commonly employed to connote tax with a purpose or a tax allocated for a particular thing. Depending on the context and purpose of levy, cess may not be tax; it may be collected even as a fee.

Hence, the essential difference between tax and cess is that tax can be allocated or utilized for any purpose while cess can be allocated only for the purpose which it is collected.

E.g Education Cess, GST Compensation cess, Swachh Bharat Cess etc.

Sec 37(1)

Sec 37(1) provides deduction in respect of revenue expenditure incurred wholly and exclusively for the purpose of business and which is not specifically covered elsewhere in sec 30 to 36. Sec 37(1) is reproduced as under

“Any expenditure not being expenditure of the nature described in sections 30 to 36 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 the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”

Education Cess is an expense which is incurred wholly and exclusively for the purpose of business. It is incurred every year on the amount of income earned and hence it is not a capital expenditure. It is also not a personal expenditure. Hence, the education cess satisfies the conditions as prescribed in sec 37(1) and hence is eligible business expense u/s 37.

Sec 40(a)(ii)

Sec 40(a)(ii) provides for disallowance of any expenditure in the nature of tax or rate levied on the business profits.  For the purpose of ready reference the provisions of Sec 40(a)(ii) have been reproduced as under

“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.”

On perusal of the above section, it is clearly evident that sec 40(a)(ii) refers to tax or rate but does not contain the term ‘Cess’.

It is also to be considered that originally as per the provisions of Income tax bill 1961, the word Cess was specifically Included in the provisions of Sec 40(a)(ii). However, the Select Committee of the Parliament at the time of enactment of the provisions had deleted the word Cess form Sec 40(a)(ii).

It is also beneficial to refer to the CBDT circular No. F. No. 91/58/66-ITJ(19), dated 18th May, 1967 which explicitly allowed the said deduction . The circular is reproduced as under

“Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 –

1. 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. 91/58/66-ITJ(19), dated 18-5-1967.] “

It is a settled position that the provisions of a taxing statute are to be strictly construed. Nothing is to be read into the law which is not in the statute. Hence, when the words cess have not been included in Sec 40(a)(ii) the same can be read into the section.

The issue is no longer a res Integra and has been decided by the judiciary in the following cases

1. Sesa Goa Ltd. v. Joint Commissioner of Income-tax. (Bom-HC) (2020) 423 ITR 426

2. Chambal Fertilisers and Chemicals Ltd. v. CIT Range-2, Kota Income-tax Appeal No. 52/2018 (Raj HC)

3. DCIT v. Peerless General Finance and Investment and Co. Ltd. (ITA No. 1469 and 1470/Kol/2019}

4. DCIT v. Graphite India Ltd. (ITA No. 472 and 474 Co. No. 64 and 66/Kol/2018}

5. DCIT v. Bajaj Allianz General Insurance (ITA No. 1111 and 1112/PUN/2017)

6. UHDE India (P.) Ltd. v. Additional Commissioner of Income Tax, 10(3), Mumbai IT APPEAL NOS. 3775 AND 4214 (MUM.) OF 2016


Time of claiming expense

Sec 43B provides that any amount of tax, duties or cess will be allowed as an expense when the payment is made. Accordingly, Allowance of Education Cess would be subject to the provisions of Sec 43B and is to be allowed on payment basis.


On the basis of the above analysis and consistent judicial view it can be safely inferred that education cess is an allowable business expenditure and hence can be claimed by the assessee.

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  1. Vijay Gupta says:

    While I admit the pronouncement of the case laws referred to in the article, however, would have been better if little deeper dive into the subject was made. As wisely noted by the Apex court in the ‘Kesoram’ case(noted by ld. Author), nature of cess would depend upon context in which it has been charged/levied. It may be an independent levy or an additional or top up collection. It is the Cess when levied as an independent levy which was the subject matter during early 1960s which reference has been somehow picked up in the matter without realising that at that time, this ‘Cess’ had been levied in the sphere of indirect taxes as an independent levy and in section 40(a)(ii), there has never been the intention to disallow the same much like Coal cess etc or any other indirect taxes which are levied on the amount of turnover etc. rather than as a % of profit earned in the business. The CBDT circular was brought out to clarify to its officer, who despite omission of such ‘Cess’ in the section continued to

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August 2021