Deductibility of Cess as allowable Business Expenditure
“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”
Now, if the interpretation
of the law is done in a literal way, one can construe that the said
disallowance u/s. 40(a)(ii) does not cover cess payable on income tax under its
ambit and hence such disallowance for cess payable on Income Tax is a matter of
debate.
In this reference, recently Hon’ble Bombay HC, in the case of Sesa Goa Limited v. JCIT, Range 1, Panaji Goa (Order dated 28 February 2020 in ITA No. 17 of 2013), while adjudicating the question raised in respect of allowability of cess deduction that whether the expression "any rate or tax levied" as it appears in Section 40(a)(ii) of the IT Act includes "cess", has held that there is no reference to any cess in section 40(a)(ii) of the Act, accordingly there will not be any disallowance for cess paid u/s. 40(a)(ii) of the Act. The contention of the taxpayer was that the term ‘any rate or tax’ does not include ‘cess’ and therefore, cess should be allowed as a deduction against its business income and against this revenue’s stand was that ‘cess’ is inherently included in the scope of the expression ‘any rate or tax’ and therefore, should not be allowed as a deduction. The summary of the said ruling is as follows:
a) The legislature, in Section 40(a)(ii) has 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 is no reference to any "cess". 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) of the IT Act. 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 comes to computing income chargeable under the head "profits and gains of business or profession.
b) The word "cess" in this provision was originally included in the Income Tax Bill, but was omitted from the final Bill passed by the Legislature on recommendation of Select Committee of the Parliament and there is 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.
c) Board's circular no. F. No.91/58/66-ITJ(19), dated 18th May, 1967 clarified that the view of the Income Tax Officer is not correct in disallowing the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act and held that this is an additional reason as to why the expression "cess" ought not to be read or included in the expression "any rate or tax levied" as appearing in Section 40(a)(ii) of the IT Act.
d) The Division Bench of the Rajasthan High Court in case of Chambal Fertilisers and Chemicals Ltd. vs. PCIT Range-2, Kota, relying on the aforesaid CBDT Circular dated 18th May, 1967 has held that the ITAT erred in holding that the "education cess" is a disallowable expenditure under Section 40(a)(ii) of the IT Act and no appeal was filed by revenue.
Referring to judicial
precedents that discuss the various principles for interpreting taxing
statutes, the Hon’ble Bombay High Court, therefore, observed that the
legislature could have included a reference to cess in the provision, and the
non-inclusion of the same shows the intention to allow such cess as a
deduction. A deduction in relation to cess was therefore allowed to the taxpayer
in this case.
Further, the HC also held
on the point of taking deduction of claim during assessment proceedings that
though the claim for deduction was not raised in the original return or by
filing revised return, the Appellant – Assessee had indeed addressed a letter
claiming such deduction before the assessment could be completed. However, even
if we proceed on the basis that there was no obligation on the Assessing
Officer to consider the claim for deduction in such letter, the Commissioner (Appeals)
or the ITAT, before whom such deduction was specifically claimed was duty bound
to consider such claim.
Below is the relevant
Extract of the ruling in reference to such disallowance:
“… we find that the legislature, in Section 40(a)(ii) has
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 is no reference to
any “cess”. Obviously therefore, there is no scope to accept Ms. Linhares's
contention that “cess” being in the nature of a “Tax” is equally not deductable
in computing the income chargeable under the head “profits and gains of
business or profession”. Acceptance of such a contention will 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.”
Hence, form this ruling one can claim the deduction for cess leviable on the Income Tax. However, ruling does not provide for the procedure or method which would be considered to calculate the deductibility of cess as allowable business expenditure and also there are some other points where ambiguity still remains. Followings are the points which one should consider before claiming such deduction:
- On a plain reading of the above provision, it is can be seen that the sum paid on account of any rate or tax is expressly disallowed in two cases:
i. Where the rate is levied on the profits or gains of any business or profession, and;
ii. Where the rate or tax is assessed at a proportion of or otherwise on the basis of such profits or gains.
The cess levied upon on income tax is in the nature of fees and hence the cess on income tax is not covered by sec. 40(a)(ii) of the Act but another issue is whether cess can be considered as an expense incurred in connection with business, or can one contend that cess is an application of income earned by a business, and not as such an expense incurred for the business.
In this reference, one can place reliance on the ratio laid in the case of Kewal Krishan Puri and Anr. vs. State of Punjab and Anr. 1980 (1) SCC 416(SC) that there does exist a reasonable nexus between the payer of the cess and the services rendered by the Govt. and therefore, the said levy can be claimed as a deduction under section 37(1) of the Act as there lies an reasonable relationship between the levy of the cess and the services rendered.
- The High Court has not discussed the ruling of the Hon’ble Supreme Court in the case of CIT vs K. Srinivasan [1972] 20, wherein it has been held that, the words 'income-tax' would include 'surcharge’. Further, several decisions in the context of the definition of “tax” in tax treaties, observe that “cess” is nothing but a “surcharge”. The interplay of these decisions with the favourable decisions of the High Courts and the CBDT circular would, therefore, be considered before deciding the allowability of claim. In view of this ruling, it is possible that the department could succeed in contending that education cess is akin to tax and should not be considered as an allowable expenditure under the Act.
- As regards scope, as a deduction is available against the business income of a taxpayer, the deduction, if claimed should be restricted only to cess paid on the business income. The Quantifying amount of cess deductible should be determined on the net taxable business income after considering deduction for the cess on reiterative basis, this is to be calculated in excel by applying some formulae.
- As this is one kind of statutory liability, this would be covered under the scope of section 43B of the Act and hence question regarding allowability of claim arises that whether it would be allowable on an accrual basis or a payment basis.
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