Cess is a levy charged as a
percentage on the tax amount. It is to be utilised by the government for
certain purposes such as Krishi Kalyan cess used for agricultural purposes,
health and education cess, etc. It is earmarked and set apart for the purpose
of services for which it is levied. As on today, Cess is levied under both
Direct Tax as well as Indirect Tax.
It is crystal clear that the cess
levied under Indirect Taxes is an allowable expenditure. Therefore, focus of
this article is on cess paid under Income Tax.
As per provisions of the Income
Tax Act, 1961, income-tax of a
taxpayer is a not an allowable
expenditure / deduction from taxable profits / income. In this regard,
reference is made to section 40(a)(ii) of the Income-tax Act, 1961 ('the Act')
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 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….”
Now the question arises, whether to include ‘cess’
under ‘any rate or tax’ or not?
In Sec. 10(4)
of Income Tax Act, 1922 (corresponding to section 40(a)(ii) of the Income-Tax
Act, 1961), the word “cess” was specifically mentioned, which read as under:
“10. Business
(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….”
Further, CBDT vide Circular
No. 91/58/66-ITJ(19) dt. 18.05.1967 clarified that the legislators had
consciously decided to omit the word 'cess' from section 40(a)(ii) of the Act.
The intention was to only disallow taxes
under the said section.
Accordingly, the CBDT had advised tax officers to not
disallow 'cess' and avoid litigation on this account.
Therefore, there cannot be any contradiction as the CBDT circular bind the tax
authorities.
v Some case laws and their judgements
are annexed for reference :
|
Case Laws |
Decision of the court |
|
Chambal Fertilisers and Chemicals [TS-6741-HC-2018
(Rajasthan)-O] |
The Honourable
Rajasthan HC has held that 'education cess' computed on income-tax is not to
be disallowed under section 40(a)(ii) of the Act relying upon the aforesaid CBDT
circular. In favour of
Assessee |
|
DCIT Vs M/s Bajaj Allianz General
Insurance Company Ltd. (ITA No. 1111 & 1112/PUN/2017) |
The Hon’ble
Income-tax Appellate Tribunal (“ITAT”), Pune bench, has upheld tax
deductibility of “education cess” from the taxable income of the taxpayer. The
ITAT relied on the decision of the Hon’ble
Rajasthan High Court (“HC”) in the case of Chambal Fertilisers And Chemicals
Ltd. [TS-489-HC-2018 (Raj HC)], wherein the HC had upheld deductibility
of education cess. The ITAT has
observed that in view of the settled nature of the issue as per the ratio
laid down by the Rajasthan HC, the taxpayer’s claim is allowed. In favour of
Assessee |
|
Jaipuria
Samla Amalgamated Collieries Ltd. [TS-5086-SC-1971-O] |
It was held that cess should not be
disallowed under section 10(4) of the Income-tax Act, 1922 [corresponding to
section 40(a)(ii) of the current Act] if the assessment of cess is not made
on basis of profits. In favour of Assessee |
|
Sesa
Goa Ltd. vs. JCIT [2020] 117 taxmann.com 96 (Bombay HC) |
It was held that Education
Cess and Higher and Secondary Education Cess are liable for deduction in
computing income chargeable under head of 'profits and gains of business or
profession. In favour of Assessee |
Conclusion:
Based on the aforesaid discussions, a view may be taken
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.
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