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September 3, 2022

Cess, as part of the tax, is not deductible under Section 40(a) (ii)

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Cess, as part of the tax, is not deductible under Section 40(a) (ii)

Facts and Issue of the Case

The assessee has raised five grounds before the Tribunal. However, during the course of hearing the learned AR had argued only two grounds, namely, ground 2 and ground 3. Allowability of education cess. On the facts and in the circumstances the learned AO erred in not granting credit of self-assessment tax paid u/s 140A of the Act amounting to INR 5,14,63,960.”

The learned AR submitted that cess is not levied on the profits and gains of business, and therefore, does not satisfy the second limb of section 40(a)(ii) of the I.T.Act. It was stated that based on the plain reading of section 40(a)(ii) of the I.T.Act, cess is not levied on the profits. The learned AR had illustrated various situations, wherein the cess is levied not based on the profits and gains of the business or profession. The learned Departmental Representative, on the other hand, submitted that insertion of explanation 3 to section 40(a)(ii) of the I.T.Act by Finance Act, 2022 with effect from 01.04.2005 makes it clear that cess is part of the tax and the same cannot be allowed as a deduction while computing the profits and gains of business of the assessee. On the facts and circumstances of the case and in law, the Assessing Officer/ CIT(A) ought to have allowed deduction of Education Cess amounting to Rs. 3,19,95,9981- in terms of law laid down by the Hon’ble Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd.

Observation by the court

The court had heard rival submissions and perused the material on record. Explanation 3 to section 40(a)(ii) of the I.T.Act was inserted by Finance Act, 2022 with effect from 01.04.2005, wherein it is clearly stated that any surcharge or cess by whatever name called shall be included in the term “tax”.

In view of the amendment, it is clear that cess forms part of the tax and the same cannot be allowed as deduction by virtue of provisions of section 40(a)(ii) of the I.T.Act. Even prior to the insertion of Explanation 3 to section 40(a)(ii) of the I.T.Act, the Kolkata Bench of the Tribunal in the case of M/s.Kanoria Chemicals & Industries Ltd. v. Addl.CIT in ITA by following the judgment of the Hon’ble Apex Court in the case of CIT v. K.Srinivasan reported in (1972) 83 ITR 346 (SC) held that education cess is an additional surcharge levied on Income-tax and partakes the character of Income-tax.

As regards the assessee’s specific contention that the cess is not levied on the profits and gains of any business or profession, the  find the same is not acceptable. Though cess is calculated as % of Income-tax, effectively, it is a levy on the profits and gains of the assessee. The cess of 3% calculated on the Income-tax can be represented as % tax on the taxable income also. In the illustration submitted by the learned AR, the cess as a percentage of taxable income works out 1%, which demonstrates that, it is the mode of calculation of cess, that is represented as a levy on Income-tax, but effectively, it is a levy on the profits of the assessee, and therefore, will satisfy the second condition of section 40(a)(ii) of the I.T.Act.

Further, it is significant to note that the word `tax’ is used, in section 40(a)(ii), in conjunction with the words `any rate or tax’. The word `any’ goes both with the rate and tax. The expression is further qualified as a rate of 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. If the word `tax’ is to be given the meaning assigned to it by section 2(43), the word `any’ used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word `tax’ as defined in section 2(43) is subject to `unless the context otherwise requires’. In that view of the matter, the words `any tax’ in section 40(a)(ii) includes cess. For the aforesaid reasons, the submission of the learned AR is rejected. Since the cess is not an allowable deduction u/s 40(a)(ii) of the I.T.Act, the deductibility u/s 37 of the I.T.Act is not permissible. It is ordered accordingly. Therefore, ground 2, 2.1 and 2.2 are dismissed.

In the above ground, the assessee states that it was not granted credit of self-assessment tax paid u/s 140A of the I.T.Act amounting to Rs.5,14,63,960. After perusing the material on record, the court deem it appropriate to restore this issue to the files of the A.O. The A.O. shall examine the matter and shall give due credit for the self-assessment tax paid u/s 140A of the I.T.Act. Therefore, ground 3 is allowed for statistical purposes.

Conclusion

The appeal filed by the assessee is partly allowed for statistical purposes.

Cypress-Semiconductor-Technology-India-Private-Limited-Vs-DCIT-ITAT-Bangalore

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