Exordium

The issue that whether or not ‘Education Cess’ is allowable as deduction under the Income-tax Act, 1961 (‘the Act’) is debatable for a while now. Of late this issue has been decided in favour of the taxpayers by many Tribunals and High Courts. This article succinctly discusses this issue through provisions of the Act and judicial pronouncements.

On an analysis of relevant provisions of the Act it may be concluded that “Education Cess” is a deductible expense under section (‘u/s’) 37(1) of the Act and is not disallowable u/s 40(a)(ii) of the Act. Relevant provisions, CBDT Circular and judicial pronouncements are elucidated in the ensuing paragraphs.

Section 37(1)

To analyse whether the expense of ‘Education Cess’ pass through the test of section 37(1), the provisions of section 37(1) are reproduced below:

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

From perusal of provisions of section 37(1), it is notable that the following four conditions need to be satisfied for any expense to be deductible u/s 37(1) of the Act:

1. Expenditure should not be of the nature described in sections 30 to 36;

2. Expenditure should not be in the nature of capital expenditure;

3. Expenditure should not be in the nature of personal expenses of the assessee;

4. Expenditure should be laid out or expended wholly and exclusively for the purposes of the business or profession.

A satisfaction of aforesaid conditions vis-a-vis “Education Cess” is tabulated below:

S. No. Conditions prescribed u/s 37(1) of the Act Satisfaction of prescribed conditions vis-a-vis “Education Cess”
1 Expenditure should not be of the nature described in sections 30 to 36 Education Cess is not of the nature described in sections 30 to 36
2 Expenditure should not be in the nature of capital expenditure Education Cess is not in the nature of capital expenditure
3 Expenditure should not be in the nature of personal expenses of the assessee Education Cess is not personal expense of the Assessee
4 Expenditure should be laid out or expended wholly and exclusively for the purposes of the business or profession On the income earned by the Assessee, it is mandatory for it to pay Education Cess (on income tax plus surcharge) to the government and without incurring said expense the Assessee cannot run its business. Thus, the expense of Education Cess is mandatory to be paid as per law and is incurred wholly and exclusively for the purposes of the business.

In view of above, the ‘Education Cess’ is allowable as deduction u/s 37(1) of the Act unless it is specifically disallowed under any other provision of the Act. In support of this, reliance can be placed on the ruling of Kolkata ITAT in the case of DCIT vs. M/s. The Peerless General Finance & Investment & Co. Ltd. – ITA No. 1469 & 1470/Kol/2019, Order dated 5 December 2019

18. Ground No. 4 is against the allowance of deduction of education cess u/s 37(1) of the Act.

19. The ld. CIT(A) at para 35 & 36 of his order held as follows:

“35. I have gone through the Kolkata Tribunal in the case of M/s. ITC Limited vs. ACIT, Range-8, Kolkata in ITA No. 685/Kol/2014. In para 12, the following has been stated by the Tribunal –

“12. The assessee’s additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead Rs.423618317.0 u/s 37 of the Act. We not that hon’ble Rajasthan high court’s decision in DB Income Tax Appeal No. 52/ Kolkata/ 2018 M decided on 31.07.2018 takes into account CBDT circular dated 18. such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii)  applies only on taxes such than earn cess(es). We therefore reject the Revenue contentions supporting the impugned disallowance. The assessee’s instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 of the Act. The assessee’s appeal I.T.A. No. 685/ Kol/ 20 14 is partly accepted in above terms. “

36. The decision of the Tribunal is that of a higher judicial forum. Even though there may be divergent view, the decision of the higher judicial forum ought to be accepted. Assessee succeeds in this Ground of Appeal.”

20. We find not infirmity in this finding of the ld. CIT(A) and uphold the same. Hence Ground No. 4 of the revenue is dismissed.”

Section 40(a)(ii)

Whether “Education Cess” is covered by the disallowance u/s 40(a)(ii) of the Act. To analyse this, the provisions of section 40(a)(ii) are reproduced below:

40Amounts 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 supplied)

On perusal of above provisions, it is noteworthy that any sum paid on account of any rate or tax is disallowed u/s 40(a)(ii) of the Act. However, neither the word ‘Cess’ not the words ‘Education Cess’ (levied on income tax and surcharge) are covered by section 40(a)(ii) of the Act.

Reference is further drawn towards section 10(4) of the Income-Tax Act, 1922 (‘1922 Act’), corresponding to section 40(a)(ii) of the Income-Tax Act, 1961, which, inter-alia, provides 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 supplied)

On the perusal of erstwhile section 10(4) of the 1922 Act, it can be seen that said erstwhile section 10(4) [corresponding to section 40(a)(ii) of the Act], provided for disallowance of cess, rate or tax. However, section 40(a)(ii) of the Act provides only for disallowance of rate or tax.

On a comparative reading of erstwhile section 10(4) of 1922 Act and section 40(a)(ii) of the Act, it is clear that though the word “cess” was present in provisions of erstwhile Section 10(4) of 1922 Act but it is absent in the provisions of Section 40(a)(ii) of the Act.

The omission of word the “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 deduction of cess in computing profits and gains from business and profession.

If any word was present in erstwhile provisions, and the said word is specifically absent and consciously/intentionally not included by the Parliament in current provisions, it would not be appropriate to read that word in current provisions of the Act.

Thus, in view of above, it may be inferred that “Education Cess” is out of the purview of provisions of section 40(a)(ii) of the Act and therefore not disallowable under section 40(a)(ii).

Education cess cannot be treated at par with any “rate” or “tax”

Education cess cannot be treated at par with any “rate” or “tax” within the meaning of section 40(a)(ii) especially when the same is only a “cess”.

This may be understood from the budget speech of the hon’ble Finance Minister while presenting budget for the year 2004-05 before the Parliament. Relevant portion of said budget speech is reproduced below:

“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 crores 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 meals scheme can work hand-in-hand, I believe there will be a new dawn for the poor children of India”

Similarly, it is clear from the budget speech of the hon’ble Finance Minister while presenting budget for the year 2018-19 before the Parliament that “Health and Education Cess” to take care of the needs of education and health of BPL and rural families and thus was earmarked for specific use. Relevant portion of said speech is reproduced below:

Health and Education Cess

156. Madam Speaker, at present there is a three per cent cess on personal income tax and corporation tax consisting of two per cent cess for primary education and one per cent cess for secondary and higher education. In order to take care of the needs of education and health of BPL and rural families, I have announced programs in Part A of my speech. To fund this, I propose to increase the cess by one per cent. The existing three per cent education cess will be replaced by a four per cent “Health and Education Cess” to be levied on the tax payable. This will enable us to collect an estimated additional amount of Rs. 11,000 crores.

From perusal of aforesaid two budget speeches it is clear that Education Cess/ Health & Education Cess both were specified to be earmarked for specific purpose of education/ health & education only. Unlike Income Tax and Surcharge, Education Cess/ Health & Education Cess cannot be used for any generic purpose and it can be used only the specified purpose. Therefore, Education cess cannot be treated at par with any “rate” or “tax”.

CBDT Circular

The fact that the word “Cess” is absent in section 40(a)(ii) of the Act, came to the notice of CBDT and CBDT vide Circular No. 91/58/66 – ITJ(19) dated 18 May 1967, clarified that the income tax officer is not correct in disallowing “Cess” u/s 40(a)(ii) of the Act. The text of said circular is reproduced below for your ease of reference:

“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 1922 Act and section 40(a)(ii) of the 1961 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 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 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.”sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed 

 [Emphasis added]

The Board by aforesaid Circular clarified that the omission of the word “Cess” from section 40(a)(ii) has the effect that only taxes paid (and not “Cess”) are to be disallowed in the assessments for the years 1962-63 onwards.

CBDT Circular is binding on income tax officers

It is well settled proposition that a Circular issued by CBDT is binding on income tax officers. CBDT has power u/s 119 of the Act to tone down the rigour of the any provision of law for the benefit of the taxpayers.

It is well settled that the Courts cannot take away a benefit which is granted by the circular even if the circular might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law.

Reliance in this regard is placed on the ruling of Hon’ble Supreme 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 u/s 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 rigour of a particular section for the benefit of the assessee.

In support of the proposition that the Circular is binding on tax officers, reliance can be placed on the following judicial pronouncements of Hon’ble Supreme Court in the case of:

– Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1(SC)

– Hon’bleSupreme Court in the case of P. Varghese vs. ITO (1981) 131 ITR 597 (SC)

– Hon’bleSupreme Court in the case of  B. Gautam vs. UOI (1993) 199 ITR 530 (SC)

MAT vs. Normal provisions

While computing Book Profit u/s 115JB of the Act, clause (a) of Explanation 1 to Section 115JB(2) specifically requires a taxpayer to add income tax and provision thereof.

Clause(iv) & (v) of Explanation 2 to the said section specifically states that for the aforesaid purpose, income tax shall include, (iv) Education Cess on income-tax; (v) Secondary and Higher Education Cess on income-tax, as levied by the Central Acts from time to time.

Hence, it can be seen that where the legislature intends to disallow any cess like Education Cess, it has specifically provided for the same. However, in case of computation under normal provisions of the Act, the word “Cess” has NOT been stated in Sec. 40(a)(ii) of the Act which means that ‘Education Cess’ is not disallowable u/s 40(a)(ii) of the Act.

Judicial pronouncements on deduction of “Education Cess”

The issue of deduction of “Education Cess” travelled to various Tribunals and Courts and found favour before appellate authorities. In this regard, reliance can be placed on the following judicial pronouncements:

  • Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Limited vs. JCIT(ITA No. 52/2018, order dated 31 July 2018):

“13. On the third issue in appeal no.52/2018, in view of the circular of CBDT where word “Cess” is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee.”

  • Bombay High Court in the case of Sesa Goa Limited [2020] 117 taxmann.com 96 (Bombay), order dated 28 February 2020:

“23. 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 IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the “cess”, when it comes to computing income chargeable under the head “profits and gains of business or profession”.

24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows :

“(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”

25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word “cess” from the aforesaid clause from the Income-tax Bill, 1961. The effect of the omission of the word “cess” is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head “profits and gains of business or profession”. Since the deletion of expression “cess” from the Income-tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute.

27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression “cess” ought not to be read or included in the expression “any rate or tax levied” as appearing in Section 40(a)(ii) of the IT Act.

28. In the Income-tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of ‘any cess, rate or tax levied on the profits or gains of any business or profession’. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression “cess” is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income-tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression “cess” and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, “cess” and consequently, “cess” whenever paid in relation to business, is allowable as deductable expenditure.”

  • Kolkata ITAT in the case of DCIT, Circle-2(1), Kolkata vs. M/s. ITC Infotech India Ltd. (ITA No. I.T.A No.67/Kol /2015, order dated 23 October 2019):

“………. follow hon’ble Rajasthan high court’s decision (supra) to conclude that the both lower authorities have erred in disallowing educational cess amounting to Rs.8,60,379/- u/s 40(a)(ii) of the Act. ………”

  • Pune ITAT in the case of DCIT vs. M/s. Bajaj Allianz General Insurance Company Ltd. (ITA Nos.1111 & 1112/PUN/2017, order dated 25 July 2019):

“13. ………………………………………… education Cess, which is not disallowable item, on its payment, the cess is an allowable expenditure as per provision of section 40(a)(ii) of the Act. Considering the settled nature of the issue as per the ratio laid down in the above referred case by the Hon’ble High Court of Judicature for Rajasthan Bench at Jaipur, ground of Cross objection No.4 is allowed.

  • Mumbai ITAT in the case of Voltas Ltd. vs. ACIT (ITA No. ITA No. 6612/Mum/2018, order dated 30 June 2020), [2020] 117 taxmann.com 547 (Mumbai – Trib.):

“7……………………………………………………………………………………………….. we respectfully following the aforesaid judgment of the Hon’ble High Court of Bombay in the case of Sesa Gold Limited (supra), therein conclude that “Education Cess” and the Secondary and Higher Education Cess is not disallowable as a deduction u/s 40(a)(ii) of the Act. The additional ground of appeal raised by the assessee is allowed”

Where two possible views – the one favourable to the assessee shall be followed

It is a settled legal position that when two views are possible, one in favour of the assessee shall be followed. In support of this contention reliance can be placed on the following judicial precedents:-

– CIT v. Vegetable Products Ltd. [1973] 88 ITR 192(SC)

– CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC)

–  Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341 (SC)

Thus, the view as explained above and supported by various High Courts and Tribunal rulings, being the one favourable to the Assessee, should be followed.

Claim of Education Cess in AY 2019-20, 2018-19 and earlier years

AY 2019-20

The timeline for revision of return for AY 2019-20 is round the corner (30 September 2020). The taxpayers may file a revise return for AY 2019-20 to claim deduction of Education Cess.

AY 2018-19

With respect to AY 2018-19, the assessee may claim the deduction of Education Cess by way of submissions before the tax officer.

AY 2017-18 and earlier years

In the ongoing proceedings before appellate authorities, the assessee may file an application praying for admission of additional ground based on the decision of the Hon’ble Supreme Court of India in the case of NTPC Vs. CIT [229 ITR 383 (SC)] where it was held that the ITAT is empowered to admit additional ground. Additional ground may be drafted as under:

“Additional ground: On the facts and circumstances of the case and in law, the Appellant prays that the liability for ‘Education Cess’ paid for the year under appeal ought to be allowed as a deduction while computing the total income.”

In the case of Symantec Software India Private Limited vs. DCIT [ITA No.1824/PUN/2018], Pune ITAT not only admitted the additional ground of the assessee on the issue of education cess but also allowed the claim of deduction of Education Cess.

Ld. AO is duty bound to allow statutory deductions/claims 

In this regard, at the outset it is submitted that if Assessee is entitled to any statutory deduction then he is very much in his right to claim it before the Ld. AO and the Ld. AO is duty bound to grant it.

CBDT Circular No: 14 (XL-35) dated April 11, 1955

“Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should

(a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

In support of the contention that Assessing Officer AO is duty bound to assess the correct income and to allow the claims/ deductions as per law as are admissible to the assessee, reliance is placed on the following judicial pronouncements:

  • Supreme Court – CIT vs. Mahalaxmi Sugar Mills Co. Ltd. – [1986] 27 Taxman 267 (SC)

“11. ……………………………………………………………. there is a duty cast on the ITO to apply the relevant provisions of the Act for the purpose of determining the true figure of the assessee’s taxable income and the consequential tax liability. Merely because the assessee fails to claim the benefit of a set off cannot relieve the ITO of his duty ………….”

  • Delhi ITAT – Shyam Sunder Khemka, New Delhi vs Department Of Income Tax on 29 July, 2016 – ITA No. 5378/Del/2013

“……………………..Hon’ble ITAT, Mumbai held in the case of EMERSON NETWORK POWER INDIA (P) LTD. vs. ACIT 122 TTJ 67 (MUM) that AO was obliged to give due relief to assessee or entertain its claims if admissible as per law even though the assessee had not filed revised retum- Legitimate claim of assessee should not be rejected on technical grounds.

I have considered the various judgments relied upon by the Ld. AR, discussed in the written submissions filed, and reproduced supra, and also the circular issued by the Board, which directs that the AO is duty bound to assess the correct income and to allow the claims/ deductions as per law as are admissible to the assessee, even if omitted to be claimed by the assessee…………….”

Epilogue

In view of aforesaid discussion, the assessee may claim deduction of ‘Education Cess’ as business expenditure u/s 37(1) of the Act and it should not be disallowed u/s 40(a)(ii) of the Act. Further, in the light of various favourable rulings, even if the tax officer disputes its deductibility still the penalty should not be leviable as at the max it can be said to be a debatable issue and no penalty can be levied on debatable issue.

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