Case Law Details
ACIT Vs PC Jewellers Ltd. (ITAT Delhi)
Facts- AO disallowed the bank guarantee commission and credit card commission u/s 40(a)(ia) on the grounds that TDS is not deducted.
AO rejected the diamond purchase from commission agent and added income @12.5% on the purchase alleging purchase as inflation of purchase price on purchases from accommodation entry providers.
Assessee took up additional ground pertaining to deduction of education cess amounting to INR 2.37 Crores
Conclusion- Held as bank is not working for the assessee but working for its customers, there is no requirement of TDS on bank charges. Hence disallowance u/s 40(a)(ia) not sustainable.
Genuineness of the transaction of diamond purchase is proved by the assessee by submitted various documents.
With regard to claim of education cess as allowable deduction it was held that the same is clarified vide circular no. 91/58/66-ITJ(19) the word ‘cess’ was omitted from the clause. The effect of the omission is that only taxes paid are to be disallowed. Further in similar issue co-ordinate bench in ITA No. 685/Cal./2014 has held that the amount of cess paid has been held to be an allowable deduction.
It was also held that Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the Assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income ‘Tax’ is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeals have been filed by the Revenue and the Cross Objections of the assessee against the order of the ld. CIT(A)-7, New Delhi dated 31.08.2017.
2. In ITA No. 6649/Del/2017, following grounds have been raised by the Revenue:
“1. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs.1,82,53,095/- u/s 40(a)(ia) of IT Act ignoring the CBDT Instruction 56/2012 which was to be come to force from 1st day of January, 2013 and not prior to that.
2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs.7,56,620/- ignoring the fact that the assessee company has made actual purchases of diamonds from grey market without any purchase bill and accommodation purchase bills were arranged without any actual delivery of diamond of inflate the purchases.”
3. In ITA No. 6650/Del/2017, following grounds have been raised by the Revenue:
“1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 9,04,19,545/- ignoring the fact that the assessee company has made actual purchases of diamonds from grey market without any purchase bill and accommodation purchase bills were arranged without any actual delivery of diamond to inflate the purchases.”
2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 5,42,517/- ignoring the fact that commission paid on bogus purchases was also bogus.
3. On the facts and under the circumstances, the Ld. CIT(A) erred in law by deleting the addition/disallowance of Rs. 1,57,049/- made by the AO u/s 2(24)(X) r.w.s. 36(1)(va) on account of delayed payment of EPF and ESIC, ignoring the clarification issued by the binding Circular No. 22/2015 of CBDT.”
4. The assessee has filed its return of income on 30.11.2013 declaring total income of Rs.2,41,46,63,360/-. The assessee is a public limited company engaged in the business of manufacturing and trading of jewellery. During the previous year relevant to the A.Y. 2013-14 the assessee company filed its return of income on 30-11-2013 showing total income of Rs. 2,41,46,63,360/-. Case was selected for scrutiny and accordingly the, notice u/s 143(2) of the Act was issued dated 08-09-2014. The Ld. AO completed the assessment u/s. 143(3) on 28-03-2016 at income of Rs. 2,43,36,83,170/- as against returned income of Rs.2,41,46,63,360/-.
ITA No. 6649/Del/2017
Disallowance u/s 40(a)(ia) of Rs. 1,82,53,095/-:
5. The AO made disallowance u/s 40(a)(ia) on the grounds that no tax has been deducted on the bank guarantee commission and credit card commission paid to the banks. The ld. CIT(A) has deleted the addition holding that the provisions of Section 194H are not applicable to the transactions made by the assessee. The ld. CIT(A) relied on the order of the Hon’ble Jurisdictional High Court in the case of CIT Vs JDS Apparels Pvt. Ltd. 370 ITR 454. Aggrieved the revenue filed appeal before us.
6. The facts relevant to the adjudication to this issue are that the assessee having engaged in the business of trading and manufacturing of jewellery and it is the normal trade practice in this business to accept the payment through credit cards and debit cards. For facilitating the payment through credit cards and debit cards, the bank deducts some bank charges and these charges are deducted by the respective bank automatically upon receipt of payment. Only the net amount is actually received by the respondent. The assessee would not be in a position to deduct TDS on expenditure which was incurred on account of Credit Card and Debit Card Commission between Merchant Establishment and acquirer bank prior to 01.01.2013.
7. This issue is stands adjudicated in assessee’s own case by the Co-ordinate Bench of ITAT in ITA No. 4943/Del/2013 vide order dated 23.09.2017. For the sake of ready reference, the relevant portion of the order is reproduced which is as under:
“4. In respect of ground no. 1 the AO made disallowance on account of non deduction of TDS on bank charges deducted by the bank while making payment to the assessee for the goods purchased by the customers of the bank against the Debit and Credit cards issued by the bank to its customers. Ld. Counsel submitted that the bank was making the payments to the assessee after making the deduction of the charges to it, as such, there is no occasion for the assessee to deduct the TDS and further bank was not working for the assessee but on the other hand, it was working for its customers, as such, there is no requirement of TDS on bank charges. Ld. CIT (A) placed reliance on the binding decision of the Jurisdictional High Court in CIT vs. JDS Apparels (P) Ltd. (supra), wherein it was held as follows:
“17. Another reason why we feel Section 40(a)(ia) of the Act should not have been invoked in the present case is the principle of doubtful penalization which requires strict construction of penal provisions. The said principle applies not only to criminal statutes but also to provisions which create a deterrence and results in punitive penalty. Section 40(a)(ia) is a deterrent and a penal provision. It has the effect of penalizing the assessee, who has failed to deduct tax at source and acts to the detriment of the assesse’s property and other economic interests. It operates and inflicts hardship and deprivation, by disallowing expenditure actually incurred and treating it as disallowed. The Explanation, therefore, requires a strict construction and the principle against doubtful penalization would come into play. The detriment in the present case, as is noticeable, would include intimation of proceedings for imposition of penalty for concealment, as was directed by the Assessing Officer in the present case. The aforesaid principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. When the words are equally capable of more than one construction, the one not inflicting the penalty or deterrent may be preferred. In Maxwell’s The Interpretation of Statutes, 12th edition (1969) it has been observed:
“The strict construction of penal statutes to manifest itself in four ways: in the requirement of express language for the creation of an offence; in interpreting strictly words setting out the elements of an offence; in requiring the fulfillment to the letter of statutory conditions precedent to the infliction of punishment; and in insisting on the strict observance of technical provisions concerning criminal procedure and jurisdiction.
18. The aforesaid principles and interpretations can apply to taxing statutes. In the present case we further feel the said principle should be applied as HDFC would necessarily have acted as per law and it is not the case of the Revenue that the bank had not paid taxes on their income. It is not a case of loss of Revenue as such or a case where the recipient did not pay their taxes.
19. In these circumstances, we do not find any merit in the present appeal and the same is dismissed.”
5. Facts are similar, and the principle of the above decision is applicable to the facts of the case on hand. We, therefore, hold that the disallowance u/s 40(a)(ia) cannot be sustained and uphold the finding of the Ld.CIT (A). Ground no. 1 is dismissed.”
8. Since, the issue stands adjudicated as above, in the absence of any change in the provisions of the Act and the facts of the case, the appeal of the revenue on this ground is being dismissed.
In ITA Nos. 6649 & 6650/Del/2017
Disallowance on account of Bogus Purchase:
9. The assessee purchased the diamonds amounting to Rs.60,52,691/- through commission agent from various parties and paid the entire amount through proper banking channel.
Details and documentary evidences submitted vide letter dated 21-01-2016 including name of the commission agent from whom the diamonds were purchased, copy of bank statement of the respondent company, copy of bank statements of the sellers from the diamonds were purchased, copy of the sellers stock register and other documents. The retraction letter of Mr. Rajendra Jain the alleged entry operator with regard to the accommodation of purchase bills has also been filed before the AO. The Assessing officer rejected the submissions of the assessee and made addition @12.5% on purchases of Rs.60,51,691/- as the income of the assessee on account of inflation of purchase price of diamonds on purchases from accommodation entry providers.
10. The CIT(A) in its order has held that the disallowance made by the Ld. Assessing officer is not valid as the Assessing officer has accepted the value and quantitative record of purchases and sales duly recorded in the books. No discrepancy has been shown in the audited books. The AO has also not questioned the veracity of evidence by way of bank statements of the respondent. The AO has also accepted the average purchase price with respect to other purchase of diamonds, higher GP rate in the diamond trading account for the year. The AO has not brought on record any material or evidence except the information and statement of the suppliers.
11. During the arguments before us, the ld. DR argued that there has been information before the revenue authorities that the Sh. Rajendra Jain is involved in providing bills without actually supplying the goods. Hence, the addition has been rightly made by the Assessing Officer. It was argued that the AO has rejected books of accounts as per the provisions of Section 145(3) of the Act. Hence, the observation of the ld. CIT(A) is wrong on facts.
12. The ld. AR relied on the order of the ld. CIT(A) and placed reliance on the following decisions which dealt with the similar issue.
13. The Co-ordinate Bench of ITAT in the case of M/s Haryana Jewellers Private Limited vs. ITO in ITA No. 2315/Del/2018, dated 10.09.2018 wherein it was held “that the Ld. CIT(A) was not correct in sustaining the disallowance”.
14. Similarly, the Co-ordinate Bench of ITAT Kolkata in the case of M/s M.B. Jewellers & Sons vs. DCIT in ITA No. 1/Kol./2017 dated 28-03-2018 wherein it was held “that there is no case made out of the revenue for making an addition towards bogus purchases as Shri Rajendra Jain had subsequently retracted his statement by way of an affidavit, the assessee has clearly mentioned in its tax audit report that the assessee is maintaining regular books of accounts and the assessee had furnished the summary of diamonds movement indicating the quantity, and value in opening balance, purchases, sales and closing balance.”
15. We find that the ld. CIT(A) has considered the quantitative details, stock and the payment made by the assessee with regard to this purchases. The various details considered by the ld. CIT(A) are as under:
“1. Regarding transaction of purchase from M/s Arihant Exports:
i) Copy of relevant portion of Bank Statement of the assessee company in proof of the fact that payments of purchases have been made through proper banking channel.
ii) Copy of relevant portion of Bank Statement of M/s Arihant Exports (ING Vysya Bank Ltd., A/c No.510011037136) in proof of the fact that payment of the purchases made by the assessee company have been credited to account of M/s Arihant Exports.
iii) Confirmation of account by M/s Arihant Exports.
iv) Copy of PAN Card of M/s Arihant Exports.
v) Copy of proof of filing of Income Tax Return by M/s Arihant Exports.
vi) Copy of Registration Certificate under state VAT of M/s Arihant Exports.
vii) Copy of Certificate of Import Export Code (IEC) of M/s Arihant Exports issued by Ministry of Commerce, Govt. of India.
viii) Confirmed copy of stock register of M/s Arihant Exports wherein quantitative details of their sale to the assessee company are accounted for.
2. Regarding transactions of purchase from M/s AVI Exports:
(i) Copy of relevant portion of Bank Statement of the assessee company in proof of the fact that payments of purchases have been made through proper banking channel.
(ii) Copy of the relevant portion of Bank Statement of M/s AVI Exports (ING Vysya Bank Ltd., A/c No.550011028755) in proof of the Fact that Payments of Purchases made by the assessee company have been credited to account of M/s AVI Exports.
iii) Confirmation of account by M/s AVI Exports
iv) Copy of PAN Card of M/s Karnawat Impex (P) Ltd.
v) Copy of proof of filing of Income Tax Return by M/s AVI Exports
vi) Copy of Registration Certificate under state VAT of M/s AVI Exports
vii) Copy of Certificate of Impex Export (IEC) of M/s AVI Exports issued by Ministry of Commerce, Govt. of India.
viii) Copy of Registration Certificate of Establishment of M/s AVI Exports issued by Surat Municipal Corporation.
ix) Confirmed copy of stock register of M/s AVI Exports wherein quantitative details of their sale to the assessee company are accounted for.
3. Regarding genuineness of transactions of purchase from M/s Nayan Gems:
(i) Copy of relevant portion of Bank Statement of the assessee company in proof of the fact that payments of purchases have been made through proper banking channel.
(ii) Copy of relevant portion of Bank Statement of M/s Nayan Gems (IndusInd Bank, A/c No.200000045937) in proof of the fact that payments of purchases made by assessee company have been credited to account of M/s Nayan Gems.
(iii) Confirmation of account of M/s Nayan Gems.
(iv) Copy of PAN Card of M/s Nayan Gems.
(v) Copy of proof of filing of Income Tax Return by M/s Nayan Gems.
(vi) Copy of Registration Certificate under state VAT of M/s Na yam Gems.
(vii) Confirmed copy of stock register of M/s Nayan Gems wherein quantitative details of their sale to the assessee company are accounted for.
4. Regarding transactions of purchase from M/s Kriya Impex (P) Ltd.:
(i) Copy of relevant portion of Bank Statements of the assessee in proof of the fact that payments of purchases have been made through proper banking channel.
(ii) Copy of relevant portion of Bank Statement of M/s Kriya Impex (P) Ltd. (Kotak Mahhindra Bank Limited, A/c No. 550011028872) in proof of the fact that payments of purchases made by the assessee company have been credited to account of M/s Kriya Impex (P) Ltd.
(iii) Confirmation of account by M/s Kriya Impex (P) Ltd.
(iv) Copy of PAN Card of M/s Kriya Impex (P) Ltd.
(v) Copy of proof of filing of Income Tax Return by M/s Kriya Impex (P) Ltd.
(vi) Copy of Registration Certificate under state VAT of M/s Kriya Impex (P) Ltd.
(vii) Copy of Certificate of Import Export Code (IEC) of M/s Kriya Impex (P) Ltd. issued by Ministry of Commerce, Govt. of India.
(viii) Confirmed copy of stock register of M/s Kriya Impex (P) Ltd. wherein quantitative details of their sale to the assessee company are accounted for.”
16. Having considered the details filed above, reasoning of the ld. CIT(A) and the retraction statement of Sh. Rajendra Jain, we decline to interfere with the order of the ld. CIT(A) on this issue for the A.Y. 2013-14 and A.Y. 2014-15.
ITA No. 6650/Del/2017
Delayed Payment of EPF and ESIC:
17. In view of the decision of the ITAT in ITA No. 1312/Del/2020 for A.Y. 2018-19 in the case of Vedvan Consultants Pvt. Ltd. which are squarely applicable to the facts of the case, the appeal of the revenue on this ground is being allowed.
18. In COs, the assessee has raised the following additional grounds:
Additional Ground No. 1
2. On the facts and circumstances of the case, the expenditure incurred by the respondent in relation to Initial Public Offer (IPO) should be allowed u/s 35D in computing tax liability under the provision of the income tax Act.
Additional Ground No. 2
3. On the facts and circumstances of the case, the respondent wishes to claim revenue expenditure as allowable expenditure on initial public offer as the same is in relation to raising of fund for working capital in computing total income under the normal provisions of the Act.
Additional Ground No. 3
4. On the facts and circumstances of the case, the expenditure incurred by the respondent in relation to Initial Public Offer (IPO) should be allowed in computing book profit u/s 115JB of the Act.
Additional Ground No. 4
5. On the facts and circumstances of the case, the respondent wishes to lodge claim for deduction of Education Cess on income tax and dividend distribution tax in computing tax liability under the provision of the income tax Act.
19. Admission of the additional grounds has been opposed in principle by the ld. DR. Keeping in view, the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, the additional ground filed by the assessee is accepted. The relevant portion of the judgment is as under:
“5. Under Section 254 of the Income-tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.
6. In the case of Jute Corporation of India Ltd. v. C.I.T. . this Court, while dealing with the powers of the Appellate Assistant Commissioner observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The Appellate Assistant Commissioner must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also.
7. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal [vide, e.g., C.I.T, v. Anand Prasad (Delhi), C.I.T. v. KaramchandPremchand P. Ltd. and C.I.T. v. Cellulose Products of India Ltd. . Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.
8. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. We remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits.”
20. Respectfully following the above judgment of the Hon’ble Apex Court, the additional grounds taken up by the assessee are hereby admitted.
Ground Nos. 1 & 2
Working Capital:
21. Heard the arguments of both the parties and perused the material available on record.
22. The respondent has raised Rs. 601.28 Crores by issue of share capital to the public through Initial Public Offer (IPO). In connection with the issue of share capital the company incurred capital expenditure aggregating to Rs. 38 crores. The amount has been utilized as Rs. 41.02 Crores on account of setting up of new showrooms, Rs. 475.83 Crores for the procurement of inventory, Rs. 46.43 Crores for General corporate purposes and balance Rs. 38 Crores for the share issue expenses.
23. The assessee intends to claim the said expenditure as allowable as the assessee has not carried out any extension or setting up new unit and the provision of section 35D shall not be applicable except Rs. 41.02 crores on shown room expenditure.
24. As per section 37(1) of the Act, Any expenditure (not being expenditure of the nature described in section 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 purpose of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
25. The following judgments have been examined.
26. The Hon’ble Bombay High Court in the case of CIT vs. Mahindra Ugine & Steel C. Ltd. wherein it was held as under:
“We do not find any merit in the above contention. Section 35D deals with amortisation of certain preliminary expenses. Under Section 35D(1)(ii), it is laid down that after the commencement of the business any expenditure as described in Section 35D(2), which is incurred in connection with the extension of the industrial undertaking or with regard to setting up a new industrial unit then the assessee shall be allowed a deduction at an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or the previous year in which expansion of the industrial undertaking is completed, etc. In the present case, on the facts, the Tribunal has found that the object of the debenture issue was to meet the working capital requirement of the assessee and, therefore, the expenditure was considered to be a revenue expenditure. In view of the said finding of fact recorded by the Tribunal, the judgment of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52, would squarely apply. We do not see any reason to interfere with the impugned order. Accordingly, the above refrained question is answered in the affirmative, i.e., in favour of the assessee and against the Department.”
27. The Co-ordinate Bench of ITAT in M/s Haryana Jewellers Private Limited vs. ITO in ITA No. 2315/Del/2018, dated 10.09.2018 wherein it was held “that incremental Share capital was used for the purpose of working capital and the same is allowable expenditure.”
28. The Co-ordinate Bench of ITAT Mumbai in the case of Navi Mumbai SEZ (P.) Limited vs. ACIT 54 Taxmann.com 259 wherein it was held “that where the assessee incurred certain expenditure for increase in share capital & entire share capital was used for purchase of trading stock, expenditure incurred was to be allowed as revenue expenditure.”
29. The Co-ordinate Bench of ITAT Chennai in the case of Lakshmi Auto Components Limited vs. DCIT [TM [103 TTJ 315] wherein it was held “that the decision of Hon’ble Apex Court in the case of Brooke Bond (India) Limited could be applied only after examining the object of the capital enhancement. This decision would not be applicable if enhancement of capital was made for gearing up funds for working capital. If the expansion of capital is in order to meet the need for more working funds, in that eventuality the expenditure could partake the nature of revenue expenditure.”
30. The Co-ordinate Bench of ITAT Bangalore in the case of ACIT vs. Khoday India Limited 32 SOT 373 where it has been held “that as there is not extension of industrial undertaking and provision of section 35D shall not be applicable and all revenue expenditure is allowable.”
31. The Hon’ble Supreme Court in Brooke Bond India Limited vs. CIT 91 Taxman 26 (SC) held “that the expenses incurred in connection with the issue of shares to increase the share capital with the object of enhancement of capital to have more working funds would be treated as revenue expenditure. But the statement of the case sent by the tribunal does not indicate that a finding was recorded to the effect that the expansion of capital was undertaken to meet the need of more working funds. Therefore disallowed and treated as capital expenditure.”
32. The Hon’ble Supreme Court in the case of CIT vs. Swaraj Engines Limited [Civil appeal no. 3347 of 2008] where it was held “that on business expenditure on technical knowhow, for the applicability if section 35AB, the nature of expenditure is decided at the threshold. If the expenditure is found to be revenue in nature, then section 35AB will not apply. If the expenditure is found to be capital in nature, then section 35AB will apply.”
33. Hence, the claim of the assessee that the expenditure is in the nature of revenue expenses and hence allowable u/s 37(1) of the Act for the years in appeal in computing the total income under the normal provisions of the act as the fund raised is used as working capital by the company except an amount of Rs. 41.02 crores. As the assessee has utilised 92% of receipts on account of public issue on working capital and hence 92% of Rs.38 crores of share issue expenditure would be revenue expenditure and balance 8% of share issue expenditure which was spent on capital expenditure would not be treated as revenue expenditure. The proceeds utilized for capital expenditure, is allowable u/s 35D of the Act. Appeal of the assessee on this ground is allowed.
Book Profit u/s 115JB:
34. By way of additional ground of appeal, the assessee has submitted that the expenditure on IPO shall be allowable in computing Book profit u/s 115JB. The assessee has relied on eh decision of Honble Jurisdictional High court in the case of CIT-vs. Sain Processing & weaving Mills (176 Taxmann 448). As the issue is directly covered by the order of Hon’ble Jurisdictional High Court, the AO is directed to compute the book profit after considering the IPO expenditure amounting to Rs.38 Crores.
35. The AO is directed to consider the Explanation 1 to Section 115JB and also considered the book profits taking into the treatment given to the receipt of the share capital in finalization of the accounts. Appeal of the assessee on this ground is allowed for statistical purpose.
Education Cess:
36. The assessee has taken up additional grounds pertaining to deduction of Education Cess amounting to Rs.2.37 Crores before the ld. CIT (A). The ld. CIT (A) did not allow the grounds holding that it doesn’t emanate from the assessment order.
37. Reading the provisions of Section 40(a)(ii), the assessee argued that education cess paid on Income Tax doesn’t come under the purview of the definition as it is levied on the amount of Income Tax but not on profits of business. The ld. AR relied on the Circular No. 91/58/66-ITJ(19) by CBDT dated 18.05.1967, which states the effect of the omission of the words ‘cess’ from Section 40(a)(ii) is that only taxes paid are to be disallowed in the assessment for the assessment years 196263 onwards.
38. The ld. AR also relied on the judgment of Hon’ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd. Vs JCIT in ITA No. 52/2018 dated 31.07.2018 wherein the same issue has been decided in favour of the assessee and particularly held that education cess is an allowable expenditure.
39. Further, he argued that in the case of ITC Vs ACIT in ITA No. 685/Kol/2014 dated 27.11.2018 wherein it was held that the education cess is an allowable expenditure.
40. The ld. AR has also relied in the case of Peerless General Finance & Investment Co. Ltd. Vs DCIT in ITA No.937 & 938/Kol/2018 dated 24.03.2019 wherein it was held that education cess is not tax and is an allowable expenditure.
41. The ld. DR argued that it is not the appropriate forum to raise the issue at this juncture. Since, there is no dispute between the assessee and the Assessing Authorities, a non-dispute cannot be adjudicated. He argued that the education cess is a part of the Income Tax and is a charge on the assessee. Hence, it cannot be treated as expense eligible for deduction.
42. Heard the arguments of both the parties and perused the material available on record.
43. Regarding the claim of education cess as an allowable expenditure, we find that the CBDT vide Circular No. 91/58/66 – ITJ(19) clarified as under:
“Interpretation of provisions of Section 40(a)(ii) of the I.T Act – clarification regarding.
Section 40(a)(ii) – Recently a case has come to the notice of the Board where the ITO 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 ITO is not correct. Clause 40(a)(ii) of the IT Bill, 1961 as introduced in the Parliament stood as under:
“(a) 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 ITOs so that further litigation on this account may be avoided.”
44. The similar issue o f allowability of cess u/s 37 has been examined by the Co-ordinate Bench of ITAT in ITA No. 685/Cal./2014 wherein the amount of the cess paid has been held to be an allowable deduction.
45. Further, we find that the Hon’ble High Court of Judicature for Rajasthan at Jaipur in ITA No. 52/2018 in the case of Chambal Fertilizers and Chemicals Ltd. held that in view of the Circular of CBDT where the word ‘cess’ is deleted, the claim of the assessee for deduction is acceptable. In that case, the Hon’ble High Court held that there is difference between the cess and tax and cess cannot be equated with the cess.
46. We have also gone through the provisions of Sec. 115 of the Income Tax act 1961 which are as under:
“Explanation 2 to section 115JB (2) of the Act defines the term ‘Income-tax’ in an inclusive manner, which includes cess. Provision of the explanation 2 to section 115JB is as given below:-
For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include—
(i)any tax on distributed profits under section 115O or on distributed income under section 115R;
(ii) any interest charged under this Act;
(iii) surcharge, if any, as levied by the Central Acts from time to time;
(iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and
(v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.
47. Thus, wherever the legislature wanted to include this term specifically in the statue it has done so under the Act. The term ‘tax’ has been defined in section 2(43) of the Act to include only Income-tax, Super Tax and Fringe Benefit Tax (FBT). Provision of the section 2(43) is as given below:
“tax” in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA.”
48. Surcharge on income-tax finds place in the First Schedule, but that is not the case so far as Education Cess is concerned. Therefore, the education cess on this reasoning cannot be equated as tax or surcharge. Based on this, it can be said that since the word ‘Cess’ is not specifically included in the definition, it cannot be considered a part of tax, and accordingly, it should not be disallowed in u/s 40(a)(ii) of the Act.
49. Further, we are guided by the judgment of the Constitutional bench which was also referred in the case of Dewan Chand Builders & Contractors Vs Union of India & Others in Civil Appeal No. 1830 of 2008 dated 18.11.2011.
50. The Constitution Bench of this Court in Hingir Rampur Coal Co. Ltd. Vs. State of Orissa2 was faced with the challenge to the constitutional validity of the Orissa Mining Areas Development Fund Act, 1952, levying Cess on the petitioner’s colliery. The Bench explained different features of a `tax’, a `fee’ and `cess’ in the following passage:
“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 1 AIR 1954 SC 282 2 1961 (2) SCR 537 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.”
51. We also find that the proceeds from collection of “Education Cess” are not credited to Consolidated Fund but to a non-lapsable Fund for elementary education-“Prarambhik Shiksha Kosh”. Since the proceeds from collection of Education Cess are kept separate for a specified purpose, applying the principles in the aforesaid decision of Apex Court in the case of M/s Dewan Chand Builders (supra), it can be said that the same is not in the nature of tax. Hence, it is allowable as deduction.
52. Further, Provisions of Section 37 are perused which are as under:
“37. (1) 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”.
Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.”
53. From the above, we find that Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the Assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income ‘Tax’ is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction.
54. We have also gone through the various judgments of judicial authorities pan India wherein the fresh claim of the assessee is considered and the deduction u/s 37 of Education Cess has been allowed. The Hon’ble High Court of Bombay held that the appellate authorities may confirm, reduce, enhance or annul the assessment or remand the case to the AO, because the basic purpose of a tax appeal was to ascertain the correct tax liability in accordance with the law. To mention a few,
> DCIT Vs M/s. Agra wal Coal Corporation Pvt. Ltd ITA Nos. 801 to 803/Indore/2018.
> Atlas Copco India Ltd. Vs ACIT in ITA No. 736/Pune/201 1
> Tata Autocomp Hendrickson Vs DCIT in ITA No. 2486/Pune/201 7
> Symantec Software India Pvt. Ltd. Vs DCIT in ITA No. 1 824/Pune/201 8
> Sicpa India Pvt. Ltd. Vs ACIT in ITA No. 704/Kol/2015
> Philips India Ltd. Vs ACIT in ITA No. 2612/Kol/201 9
> ITC Limited Vs ACIT in ITA No. 685/Kol/2014
> DCIT Vs The Peerless General Finance & Investment & Co. Ltd. in ITA No. 1469/Kol/2019.
> ACIT Vs ITC Infotech in ITA No. 220/Kol/2017
> Reckitt Benckiser India Pvt. Ltd. Vs DCIT (2020) 117 taxmann.com 519 (Kol.)
> Crystal Crop. Protection Pvt. Ltd. Vs JCIT in ITA No. 1539/Del/2016
> Midland Credit Management India Vs ACIT in ITA No. 3892/Del/2017
> Voltas Ltd. Vs ACIT in ITA No. 6612/Mum/2018
> Sesa Goa Ltd. Vs JCIT (2020) 117 taxmann.com 96 (Bom.)
> Chambal Fertilisers and Chemicals Vs JCIT in ITA No. 52 of 2018 (Raj. HC)
55. Hence, keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66-ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon’ble High Court of Bombay and Hon’ble High Court of Rajasthan, we hereby hold that the assessee is eligible to claim the deduction of the ‘Education Cess’ as per the provisions of Section 37 of the Income Tax Act.
56. In the result, the appeal of the Revenue in ITA No. 6649/Del/2017 is dismissed and the appeal of the Revenue in ITA No. 6650/Del/2017 is partly allowed. Both the COs of the assessee are allowed.
Order Pronounced in the Open Court on 07/12/2021.
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