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February 24, 2021

Is Cess allowable as business expenses under Income Tax?

by CA Shivam Jaiswal in Income Tax

Is Cess allowable as business expenses under Income Tax?

Section 40(a)(ii) of the Income Tax Act provides that notwithstanding anything to the contrary in sections 30 to 38, 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 deducted in computing the income chargeable under the head “Profits and gains of business or profession. However, is cess included in the above taxes? Education cess consists of Primary Education and Secondary and Higher Education Cess making up 3% of the tax payable. It is used to fund salaries, mid-day meals, infrastructure, special schemes and premier educational institutions in the country.

Let us refer to the case of Sesa Goa Limited Vs JCIT (Bombay High Court), where the issue under consideration was whether Education Cess and Higher and Secondary Education Cess, collectively referred to as “cess” was allowable as a deduction in the year of its payment or not.

Facts of the Case:

  • The question which arose for determination was whether the expression “any rate or tax levied” as it appeared in Section 40(a)(ii) included “cess”.
  • The assessee contended that the expression does not include “cess” and therefore, the amounts paid towards “cess” were liable to be deducted in computing the income chargeable under the head “profits and gains of business or profession”.
  • However, Revenue contended that “cess” was also included in the scope and import of the expression “any rate or tax levied” and consequently, the amounts paid towards the “cess” were not liable for deduction in computing the income chargeable under the head “profits and gains of business or profession”.

Observations of the High Court (HC) on applicability of taxes

  • In relation to taxing statute, certain principles of interpretation were quite well settled.
  • In New Shorrock Spinning and Manufacturing Co. Ltd. Vs Raval, (Bom.), it was held that one safe and infallible principle, which was of guidance in these matters, was to read the words through and see if the rule was clearly stated.
  • If the language employed gave the rule in words of sufficient clarity and precision, nothing more was required to be done.
  • Also, when it came to interpretation of the IT Act, it was well established that no tax could be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him.
  • The subject could not be taxed unless he came within the purview of the law and the argument that he fell within the spirit of the law could not be availed of by the department.
  • In a taxing Act one had to look merely at what was clearly said. There was no room for any intendment. There was no presumption as to a tax.
  • No tax could be imposed by inference or analogy. It was also not permissible to construe a taxing statute by making assumptions and presumptions

Observations of High Court (HC) on whether cess was allowable as a deduction or not

  • Applying the aforesaid principles, HC found that the legislature, in Section 40(a)(ii) had provided that “any rate or tax levied” on “profits and gains of business or profession” shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”.
  • There was no reference to any “cess”. Therefore, there was no scope to accept the contention that “cess” being in the nature of a “Tax” was equally not deductible in computing the income chargeable under the head “profits and gains of business or profession”.
  • Acceptance of such a contention would amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act.
  • 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).
  • 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 came to computing income chargeable under the head “profits and gains of business or profession”.
  • According to the legislative history, when the Income Tax Bill, 1961, was introduced in the Parliament, Section 40(a)(ii) read as – “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”
  • 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” was that only any rate or tax levied on the profits or gains of any business or profession were 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 was 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.

Hence, HC held that the substantial question of law in favour of the Appellant – Assessee and against the Respondent-Revenue. In conclusion, Education Cess and Higher and Secondary Education Cess is allowable as business expenses.

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