Education cess paid by the assessee is not a permitted expense under the law. 37

Fact and issue of the case

The brief facts of the case are: The assessee is a company and is engaged in the business of manufacture of chemicals and bulk drugs. For the year under consideration, the assessee filed its return of income on 29/11/2012 declaring a total income of Rs.18,50,97,133/-. The return of income filed by the assessee was selected for scrutiny and statutory notices u/ss 143(2) and 142(1) of the Act were issued. The Assessing Officer (the “AO”) vide order dated 05/03/2015 passed u/s 143(3) assessed the total income of the assessee at Rs.22,00,50,904/- after making various disallowance/addition. In further appeal, the learned CIT(A) vide impugned order partially allowed the appeal filed by the assessee. Being aggrieved, the Revenue is an appeal before us.

The issue arising in ground no.1, raised in Revenue’s appeal, is pertaining to disallowance u/s 14A of the Act. 5. The brief facts of the case pertaining to this issue are: During the assessment proceedings, it was observed that the assessee has made investments on which it has earned exempt income. Accordingly, the assessee was asked to show cause as to why disallowance u/s14A r.w.r.8D should not be made. After considering the submission of the assessee, the AO computed the disallowance of Rs.31,65,557/- u/s 14A r.w.r. 8D(2)(ii) and disallowance of Rs.6,69,375/- u/s 14A r.w.r. 8D(2)(iii), aggregating to total disallowance of Rs.37,91,582/-.

The issue arising in ground no.5, raised in revenue’s appeal is pertaining to the allowance of prior period expenses.

The brief facts of the case pertaining to this issue are: During the assessment proceedings it was observed that the assessee has claimed prior period expenditure amounting to Rs.78,572/- and has debited the same to profit and loss account towards foreign bank charges. However, the same was not disallowed while computing the income in its return. In this regard, the assessee submitted that the period of payment comes within the accounting period and therefore the claim was made in the year under consideration. The AO vide order passed u/s 143(3) of the Act did not agree with the submission of the assessee and held that the assessee is maintaining its account on the mercantile basis and therefore, liability if incurred in the earlier year cannot be claimed as deduction during the year under consideration. Accordingly, the AO disallowed the prior period expenses of Rs.78,572/- claimed by the assessee towards foreign bank charges.

Observation of the court

We have considered the rival submissions and perused the material available on record. The assessee is a manufacturer of bulk drugs and also exports some of the products to various countries for which the government is providing certain subsidies under the Foreign Trade Policy. As noted above, the assessee initially, in its return of income, treated the subsidies received as Revenue receipts and offered the same to tax. However, before the learned CIT(A), the assessee filed additional grounds claiming that the subsidy received under the FPS, FMS, SHIS schemes are capital in nature and therefore cannot be included in the total income of the assessee. As noted elsewhere, the appellate authority can entertain a fresh claim made by the assessee, even if such a claim was not made in return of income or by way of a revised return of income. Thus, we find no infirmity in the impugned order admitting the additional ground filed by the assessee.

We further find that the Hon’ble Supreme Court dismissed the Revenue’s Special Leave Petition in PCIT Vs. Nitin Spinners Ltd., [2021] 283 Taxman 2(SC), against the aforesaid decision of the Hon’ble Rajasthan High Court. Thus, when the objective of the aforesaid subsidies has been admitted to be to encourage industries by providing industrial growth, technological upgradation, and development, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue in treating the amount received by the assessee under the aforesaid schemes as capital receipt. As a result, grounds no. 9-13 raised in Revenue’s appeal are dismissed.

The issue arising in grounds no. 14-18, raised in Revenue’s appeal, is pertaining to the claim of education cess as an allowable expenditure.

We find that Finance Act, 2022 with retrospective effect from 01/04/2005 inserted Explanation 3 to section 40(a)(ii), whereby it has been provided that the term ‘tax’ shall include and shall be deemed to have always included any surcharge of cess, by whatever name called, on such tax. We further find that the Hon’ble Supreme Court in JCIT Vs. Chambal Fertilisers & Chemicals Ltd., [2022] 145 com420 (SC) allowed the Revenue’s appeal against the Hon’ble Rajasthan High Court’s decision in Chambal Fertilisers & Chemicals Ltd. Vs. JCIT, [2019] 107 taxmann.com 484 (Raj.) and held that education cess paid by the respondent-assessee would not be allowed as an expenditure under Section 37 read with 40(a)(ii) of the Act. Thus, respectfully following the decision of the Hon’ble Supreme Court cited supra, grounds no. 14-18 raised in Revenue’s appeal are allowed.

In the result, the appeal by the Revenue is partly allowed.