The Union Budget 2022 has clarified the treatment of surcharge and cess and stated that the same shall be treated as tax and therefore, no deduction shall be allowed as business expenditures. While addressing the Parliament and the country during her Budget speech, the Finance Minister Nirmala Sitharaman said that the Courts pronouncing contradictory verdicts are misinterpreting the legislative intent.
Section 40 of the Act specifies the amounts which shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-clause (ii) of clause (a) of section 40 of the Act provides that 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”.
The assessees rely upon the decision of the Hon’ble Bombay High Court in the case of “Sesa Goa Limited Vs. JCIT” (2020) 117 taxmann.com and further on the decision of the Hon’ble Rajasthan High Court in the case of “Chambal Fertilizers & Chemicals Ltd Vs. JCIT”: D.B Income-tax Appeal No. 52/2018 decided on 31-07-2018, wherein, the Hon’ble High Courts relied upon the aforesaid CBDT Circular Dt. 18-05- 1967 and in view of the interpretation made by the CBDT have held that ‘education cess’ can be claimed as an allowable deduction while computing the income chargeable under the heads “profits and gains of business or profession”. Based on these decisions ITAT in various judgments have followed the same reasoning and have allowed deduction on account of payment of “Cess”.
However, one of the latest judgments of ITAT Kolkata has discussed the two High Court judgments as well as other judgments vide order dated 26-10-2021 in the case of M/s. Kanoria Chemicals & Industries Ltd ITA No. 2184/Kol/2018 (TS-1129- ITAT2021 Kol) and has held that the “Cess” is not to be allowed as deduction.
In a Circular issued by CBDT, ‘Cess’ is to be allowed under sub-clause (ii) of clause (a) of section 40 of the Act. However, it is to be noted that ‘Cess’ is imposed not only by the Central Government through Finance Act for a financial year, but also by various State Governments. It is pertinent to mention that in the above referred Circular of CBDT, there is no reference to the ‘Cess’ imposed by the Central Government through Finance Act for a particular year. This CBDT circular needs to be seen from the perspective that “Education Cess” imposed by Finance Act 2004 and subsequent Acts and then designated as “Education and Health Cess” are actually tax in the form of additional surcharge, as stated clearly in each of the relevant Finance Act imposing such “Cess”. It is only called “Cess” since they were imposed for a particular purpose of fulfilling the commitment of the Government to provide and finance quality health services and universalized quality basic education and secondary and higher education.
This circular was in reference to “Cess” imposed by State Government which is actually of the nature of “Cess” and not of the nature of “Additional Surcharge” being termed as “Cess” in the relevant Finance Act. When an additional surcharge is imposed by the Central Government and it is named as “Cess”, then its allowability needs to be examined whether an additional surcharge is allowed to be a deduction or not. Hon’ble Supreme Court in the case of K Srinivasan has held that “surcharge” and “additional surcharge” are tax. Hence, the additional surcharge named as “Cess”and imposed by the Central Government through the Finance Act is nothing but a tax and hence, needs to be disallowed under sub-clause (ii) of clause (a) of section 40 of the Act.
From the above discussion it may be seen that the interpretations of two High courts and various ITATs are against the intention of legislature and not in line with the judgment of Hon’ble Supreme Court. Hence, in order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to include an Explanation retrospectively in the Act itself to clarify that for the purposes of this sub-clause, the term “tax” includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Amendment is made retrospectively to make clear the position irrespective of the circular of the CBDT.
This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.
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