Till AY 2018-19, Education Cess & Secondary & Higher Education Cess was an additional levy charged @ 2% and 1% respectively on Income Tax as increased by applicable rate of surcharge. However, vide Finance Act 2018, w.e.f AY 2019-20 the aforesaid cess has been replaced with Health & Education Cess and the rate has been increased to 4%.
As per provision of Sec. 40(a)(ii) of the Income Tax Act, 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 shall not be allowed as deduction for the purpose of computation of Income from Business & Profession.
Accordingly, it was assumed that for the purpose of disallowance u/s 40(a)(ii), tax includes income tax, surcharge and education cess. However, CBDT vide Circular F. No. 91/58/66-ITJ(19) dated 18/05/1967 has omitted the word cess from Sec. 40(a)(ii) and further clarified that for the purpose of disallowance u/s 40(a)(ii), taxes paid shall not include cess. Hence, it led to various litigations that whether Education Cess shall be considered as tax eligible for disallowance u/s 40(a)(ii) of the Act or it can be allowed as business expenditure u/s 37(1).
Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd –vs.- JCIT [In ITA No. 52/2018 dated 31/07/2018] relying on the aforesaid circular has held that education cess and secondary & higher education cess is not a tax and therefore is an allowable business expenditure u/s 37 of the Act.
Relying on the aforesaid CBDT circular and decision of Rajasthan High Court, Kolkata tribunal in ACIT -vs.- ITC Infotech India Ltd. [ITA Nos. 220-222/Kol/2018 Dated 31/01/2020] have held that education cess is an allowable expenditure. Similar decisions have been rendered in other cases as well.
Also, recently Bombay High Court in the case of Sesa Goa Ltd –vs.- JCIT [TA No. 17 of 2013 dated 28/02/2020 has held that education cess is an allowable expenditure since it is not a tax as per CBDT circular. Reliance in this regard was also placed on the decision of Rajasthan High Court in the case of Chambal Fertilizer (supra).
Therefore, relying on the aforesaid decisions and circular it may be said that education cess is an allowable expenditure u/s 37(1) and not covered u/s 40(a)(ii) of the Act.
However, none of the judicial pronouncements has dealt with the issue of computation of education cess. Since, education cess is calculated on income tax, claiming it as deduction will reduce the taxable profit which will lead to reduction in income tax liability which in turn again lead to lower education cess. So it results in a circular referencing,
Further, while computing deduction of education cess the following questions may also arises:-
- Whether the amount of education cess included in Provision for tax which is debited in P&L A/c can be claimed as deduction
- Whether the amount of education cess included in tax liability as per return can be claimed.
- Whether the claim of differential education cess resulting due to increased tax liability as result of additions made during assessment may be claimed as deduction.
- In case the company falls under MAT than whether the amount of education cess included in MAT Liability can be claimed as deduction rather than education cess included in tax payable under normal provision.
All these questions remained unanswered. However, a view may be taken that the amount of education cess as per tax payable under normal provisions may be claimed as deduction. Further it is advisable to claim deduction of education cess included in Provision of Income Tax since it takes into effect adjustments/reversals pertaining to earlier years.
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