In a major relief to Qualcomm India, Delhi Bench of Income Tax Appellate Tribunal (ITAT) allowed deduction of Education Cess as it does not fall under capital expense and personal expenditure.
The assessee, Qualcomm India has been incorporated in India and is engaged in the business of rendering software development services, IT support services and business support services. QIPL has a 100% Export Oriented Unit (EOU) for the development of the software at Development Centers in Hyderabad, Bangalore and Chennai which are registered under the Software Technology Parks of India (STPI) scheme. The Development Centers are engaged in rendering software development services and IT support services to its Associated Enterprises (AEs). Further, QIPL also provides business support Services (BSS) to its AEs through its Mumbai unit.
The assessee argued that education cess paid on Income Tax doesn’t come under the purview of the definition as it is levied on the amount of Income Tax but not on profits of business. The assessee relied on the CBDT Circular dated 18.05.1967, which states the effect of the omission of the words ‘cess’ from Section 40(a)(ii) is that only taxes paid are to be disallowed in the assessment for the assessment years 1962- 63 onwards.
On the other hand, the department submitted that it is not the appropriate forum to raise the issue at this juncture. Since, there is no dispute between the assessee and the Assessing Authorities, a non- dispute cannot be adjudicated. He argued that the education cess is a part of the Income Tax and is a charge on the assessee. Hence, it cannot be treated as an expense eligible for deduction.
The corm of Judicial Member, Suchitra Kamble and Accountant Member, Dr. B. R. R. Kumar held that Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income ‘Tax’ is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction.
“Hence, keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66- ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon’ble High Court of Bombay and Hon’ble High Court of Rajasthan, we hereby hold that the assessee is eligible to claim the deduction of the ‘Education Cess’ as per the provisions of Section 37 of the Income Tax Act,” the ITAT said.
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