{"id":8553,"date":"2020-09-26T09:50:38","date_gmt":"2020-09-26T04:20:38","guid":{"rendered":"https:\/\/itatonline.org\/articles_new\/?p=8553"},"modified":"2020-09-26T09:50:38","modified_gmt":"2020-09-26T04:20:38","slug":"education-cess-as-a-deduction-certain-deceptive-facets","status":"publish","type":"post","link":"https:\/\/itatonline.org\/articles_new\/education-cess-as-a-deduction-certain-deceptive-facets\/","title":{"rendered":"Education Cess As A Deduction \u2013 Certain Deceptive Facets"},"content":{"rendered":"<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/itatonline.org\/articles_new\/wp-content\/uploads\/Fenil-Bhatt.jpg\" alt=\"Fenil-Bhatt\" width=\"82\" height=\"100\" class=\"alignleft size-full wp-image-7259\" \/><strong>Advocate Fenil Bhatt has submitted that the prevalent judicial view that &#8216;education cess&#8217; is not affected by the bar in section 40(a)(ii) of the Income-tax Act, 1961 and is allowable as a deduction requires reconsideration. He has argued that education cess is nothing but the State\u2019s right in the profits of the Assessee, akin to income tax, is in the nature of distribution of income, and is not eligible for deduction <\/strong> <\/p>\n<p>Much water has flown under the bridge in relation to  allowability of education cess as a deduction. We have the benefit of two High  Court decisions elucidating as to why education cess can be claimed as a  deduction, being the recent decision of the <strong>Bombay High Court<\/strong> in the  case of <strong>Sesa Goa Ltd. vs. JCIT (117 taxmann.com 96)<\/strong> and the decision of  the <strong>Rajasthan High Court<\/strong> in the case of <strong>Chambal Fertilisers and  Chemicals Ltd. vs. CIT (ITA No. 52\/2018 dated July 31, 2018)<\/strong>. There are a  catena of Tribunal decisions as well allowing education cess as a deduction, to  refer to few: <\/p>\n<p><!--more--><\/p>\n<ul>\n<li><span dir=\"ltr\">Voltas Ltd. vs. <\/span>ACIT (ITA  No. 6612\/Mum\/2018 dated June   30, 2020) &ndash; Mum. Trib.<\/li>\n<li><span dir=\"ltr\">Aditya Birla Nuvo Ltd. vs. Add.  CIT (ITA No. 4220\/Mum\/2015 dated <\/span>February   24, 2020) &ndash; Mum. Trib.<\/li>\n<li><span dir=\"ltr\">Reckitt Benckiser I Pvt. Ltd.  vs. DCIT (117 taxmann.com 519) &ndash; Kol. Trib.<\/span><\/li>\n<li><span dir=\"ltr\">The Peerless General Finance  &amp; Investment Co. Ltd. vs. DCIT (ITA No. 937\/Kol\/2018 dated <\/span>April 24, 2019)<\/li>\n<li><span dir=\"ltr\">P. N. Gadgil Jewellers P. Ltd.  vs. <\/span>ACIT (113  taxmann.com 354) &ndash; Pun. Trib. <\/li>\n<li><span dir=\"ltr\">Symantic Software India P. Ltd.  vs. DCIT (114 taxmann.com 435) &ndash; Pun. Trib. <\/span><\/li>\n<\/ul>\n<p>Limited point of this discussion is to highlight that there  are certain aspects which, in my opinion, entail further deliberations on the issue  of allowability of education cess. The first being greater analysis of what is  the nature of education cess. Second would be whether it is an expenditure or  is it a distribution of profits \/ application of income. <\/p>\n<p>\n  We all are conversant with the controversy at hand and brief  reference to the decision of the <strong>Bombay High Court<\/strong> in the case of <strong>Sesa  Goa Ltd. (supra)<\/strong> would be sufficient for recapitulating the issue. The  Assessee, in this case raised for the first time, the claim of deduction of  education cess before the CIT(A). The CIT(A) as well as the Tribunal decided  the issue against the Assessee. The Assessee then took the matter before the  High Court. The High Court negated the contention of the Revenue that cess is  nothing but a tax and, therefore, it would be hit by section 40(a)(ii) of the  Income-tax Act, 1961 (&lsquo;the Act&rsquo;). The Court ruled that even though cess may be  collected as a part of income tax, that does not render cess as either a &ldquo;rate  or tax&rdquo;, as referred to in section 40(a)(ii) of the Act. The mode of collection  is really not determinative of the nature. The Court further held that section  40(a)(ii) of the Act uses the term &ldquo;any rate or tax levied&rdquo; and there is no  reference to the term &ldquo;cess&rdquo;. If the legislature intended to prohibit the deduction  of amount paid by the Assessee towards &ldquo;cess&rdquo;, it could have easily included  reference to the word &ldquo;cess&rdquo; in section 40(a)(ii) of the Act. The Court also  observed that section 10(4) of the Income-tax Act, 1922 specifically referred  to the word &ldquo;cess&rdquo;, however, the same did not find any mention in the current  Act. The fact that legislature has not done so means that it did not intend to  prevent the deduction of amount paid by an Assessee towards &ldquo;cess&rdquo;. The Court  also referred to CBDT  Circular No. 91\/58\/66-ITJ(19) dated May 18, 1967, which stated that omission of  the word &ldquo;cess&rdquo; from clause (ii) of section 40(a) of the Act after the opinion  of the Select Committee, meant that only taxes paid are to be disallowed for  the assessment year 1962-63 and onwards, and held that circular is binding on  the income tax authorities and also that circular is quite consistent with the  principles of interpretation of taxing statute. In view of the aforesaid, the  Court allowed deduction of education cess so paid by the Assessee. Also,  another contention in support of the view that it was never the intention of  the legislature to include &ldquo;cess&rdquo; under section 40(a)(ii) of the Act is that  wherever legislature so desired to specifically include &ldquo;cess&rdquo;, it has done so.  For instance, reference can be made to the language employed in section 43B of  the Act <\/p>\n<p>\n  <u>&ldquo;<em>(a) <\/em><\/u><em>any sum payable by the assessee by way<u> of  tax, duty, cess or fee, by whatever name called, <\/u>under any law for the time  being in force,.&rdquo;<\/em> <\/p>\n<p>\n  Also, Explanation 2 to  section 115JB states that<\/p>\n<p>\n  <em>&ldquo;For the purposes of clause (a) of&nbsp;Explanation 1, the amount of  income-tax shall include &ndash; <\/em><\/p>\n<p>\n  <em>&hellip;&hellip;&hellip;&hellip;.<\/em><\/p>\n<p>\n  <em>(iv)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Education Cess on  income-tax, if any, as levied by the Central Acts form time to time; and<\/em><\/p>\n<p>\n  <em>(v)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Secondary and Higher  Education Cess on income-tax, if any, levied by the Central Act from time to  time.&rdquo; <\/em><\/p>\n<p>Having appreciated the rationale behind allowing deduction  of education cess, as explained by the Bombay High Court, it would be apposite  to appreciate the two aspects referred above which, in my opinion, require  deeper deliberation.In connection with the first aspect, as to what would be  the nature of education cess, the principle laid down by the <strong>Constitution  Bench <\/strong>of the <strong>Supreme Court <\/strong>in the case of <strong>State of West Bengal  vs. Kesoram Industries Ltd. (266 ITR 721)<\/strong> has to be kept in mind. The  Constitution Bench held that the term &ldquo;Cess&rdquo;is commonly employed to connote tax  with a purpose or a tax allocated for a particular thing. Depending on the  context and purpose of levy, cess may not be tax; it may be collected even as a  fee.&nbsp; Therefore, keeping in view the  above dictum we would have to appreciate first the nature and purpose of the  levy of cess. We all are aware that the Act does not provide for levy of education  cess, the relevant Finance Act provides for its levy. Education Cess was  brought in for the first time by Finance Act, 2004. For our discussion, it  would be sufficient to refer to Finance Act, 2004 and section 2(11) and (12) of  Finance Act, 2020,wherein levy of Education cess, in its new label being  &ldquo;Health and Education Cess&rdquo;, is provided for. Relevant extracts are reproduced  hereunder, respectively:<\/p>\n<p>\n    <em>&ldquo;<\/em><em>(11) The amount of income-tax as specified in sub-sections  (4) to (10) and as increased by a surcharge for<\/em> <em>purposes of the Union calculated in the manner provided  therein, <u>shall be further increased by an additional<\/u><\/em> <em><u>surcharge for purposes of the Union, to be called the  &ldquo;Education Cess on income-tax&rdquo;, so as to fulfil the<\/u><\/em> <em><u>commitment of the Government to provide and finance universa  lised quality basic education, calculated at<\/u><\/em> <em><u>the rate of two per cent of such  income-tax and surcharge.&rdquo;<\/u><\/em><\/p>\n<p><em>&nbsp;<\/em><em>&ldquo;(11)  The amount of income-tax as specified in sub-sections (1) to (3) and as  increased by the applicable<\/em> <em>surcharge,  for the purposes of the Union, calculated in the manner provided therein, shall  be further<\/em> <em>increased  by an <u>additional surcharge, for the purposes of the Union, to be called the  &quot;Health and Education<\/u><\/em> <em><u>Cess  on income-tax&quot;, calculated at the rate of four per cent of such income-tax  and surcharge so as to fulfil<\/u><\/em> <em><u>the  commitment of the Government to provide and finance quality health services and  universalised<\/u><\/em> <em><u>quality  basic education and secondary and higher education.<\/u><\/em><\/p>\n<p><em>(12)  The amount of income-tax as specified in sub-sections (4) to (10) and as  increased by the applicable<\/em> <em>surcharge,  for the purposes of the Union, calculated in the manner provided therein, shall  be further<\/em> <em>increased  by an additional surcharge, for the purposes of the Union, <u>to be called the  &quot;Health and Education<\/u><\/em> <em><u>Cess  on income-tax&quot;, calculated at the rate of four per cent of such income-tax  and surcharge so as to fulfil<\/u><\/em> <em><u>the  commitment of the Government to provide and finance quality health services and  universalised<\/u><\/em> <em><u>quality  basic education and secondary and higher education:<\/u><\/em><\/p>\n<p><strong><em>Provided <\/em><\/strong><em>that  nothing contained in this sub-section shall apply to cases in which tax is to  be deducted or<\/em> <em>collected  under the sections of the Income-tax Act mentioned in sub-sections (5), (6), (7)  and (8), if the<\/em> <em>income  subjected to deduction of tax at source or collection of tax at source is paid  to a domestic company<\/em> <em>and  any other person who is resident in India.&rdquo;<\/em><\/p>\n<p>\n  From the aforesaid extract, it is amply clear that cess has  been levied as an additional surcharge for the purposes of the Union, so as  to fulfil commitment of the Centre to provide and finance quality health  services and education. It has only been termed as a cess. <\/p>\n<p>\n  Reference can be made to the decisions of the Tribunal,  wherein the issue had arisen that should education cess be added over the tax  rates prescribed under the various tax treaties entered into by India with  other contracting states? The Tribunal in the case of <strong>DIC Asia Pacific Pte.  Ltd. vs. Ass. DIT (IT) (52 SOT 447<\/strong>), while dealing with India- Singapore  treaty, held that education cess, as introduced by Finance Act, 2004, was in  the nature of additional surcharge. The Finance Act only describes it as such  while introducing it.&nbsp; Article 2(1)  defines tax as &lsquo;income tax&rsquo; including any surcharge thereon. Education cess  would form part of Article 2 and, therefore, it would be covered within  definition of tax prescribed under the Treaty.Since treaty provisions would  override the Act, the rate of tax provided under the treaty has to be taken,  which would be inclusive of basic tax and surcharge, and education cess need  not be added over and above the tax so calculated. The aforesaid decision has  been, inter alia, followed in the case of <strong>DDIT  vs. BOC Group Ltd. (156 ITD 402)(India  UK Treaty), JC Decaux S.A. vs. <\/strong><strong>ACIT<\/strong><strong> (116  taxmann.com 408) (India-France Treaty) and R.A.K. Ceramics vs. DCIT (176 ITD  294) (India &ndash; UAE Treaty). <\/strong> <\/p>\n<p>\n  It is pertinent to note that the <strong>Rajasthan High Court in  Chambal Fertilisers (supra)<\/strong> reversed the order of the Tribunal wherein it  was held by the Tribunal that cess is nothing but an additional surcharge by  relying upon the language used in the Finance Act. The Court relied upon the  CBDT Circular referred (supra) and alsoheld that cess is not a tax without  providing any reasoning to the argument that Finance Act has levied additional  surcharge terming it to be cess. The Court simply held that it is not a tax by  rejecting the contention that it is an additional surcharge. There cannot be any  doubt about the proposition that if cess is held to be as a surcharge then it  would be tantamount to a tax. <strong>The Supreme Court<\/strong> in the case of <strong>CIT  vs. K. Srinivasan (83 ITR 346)<\/strong> elucidated the concept of surcharge and  equated it with an additional tax. The Court observed that Article 270(1) of  the Constitution of India (&ldquo;the Constitution&rdquo;) provides that taxes levied and  collected by the Union has to  be distributed between the Union and  the States in the manner provided in clause 2 of Article 270. The Court also  observed that Article 271 of the Constitution provides that the Parliament,  notwithstanding anything contained in Article 269 and 270, may at any time  increase, inter alia, taxes referred to in such articles with a surcharge for  the purposes of the Union and whole proceeds of it would form part of the  Consolidated Fund of India, meaning thereby that the proceeds of surcharge are  wholly assigned to the Union, which the Finance Acts also provides expressly.  The Court thereafter referred to the dictionary meaning of the word &ldquo;surcharge&rdquo;  to mean that &ldquo;to charge too much or in addition&rdquo; and also &ldquo;additional tax&rdquo;. The  Court, thereafter, held that income tax is to be charged in four different  ways- basic charge, surcharge, special surcharge and additional surcharge.  Therefore, even additional charges form part of income tax and surtax. <\/p>\n<p>\n  It is pertinent to observe that the<strong> Bombay High Court in  Sesa Goa (supra)<\/strong> expressly rejected the argument of the Revenue that cess  is nothing but a tax and, therefore, section 40(a)(ii) of the Act would be  applicable disallowing the deduction of the same. Attention of the Court was  not brought to the language used in Finance Act. It is my submission that a  further consideration is required on the argument that cess is an additional  surcharge only and would not be allowed as a deduction. Keeping in mind the  clear language used in Finance Act equating cess with an additional surcharge  and the aforesaid decision of the Supreme Court in the K. Srinivasan (supra)  which holds that surcharge is nothing but an additional tax, the contention  raised that cess is nothing but a tax, in my opinion, requires a deeper  consideration.<\/p>\n<p>\n  Second aspect, and a larger point in my opinion, which can  be explored is whether payment of amount of education cess is an expenditure in  the first place, as is it nothing but distribution of profits \/ application of  income, without getting into the controversy as to whether it would fall within  the ambit of section 40(a)(ii) of the Act. To appreciate the distinction between  expenditure incurred for the purpose of earning income and application of that  income, reference can be made to the decision of the <strong>Supreme Court <\/strong>in  the case of <strong>CIT vs. Travancore Sugars &amp; Chemicals Ltd. (88 ITR 1)<\/strong>.The  Court was concerned with the issue whether payment to the Governmentunder a  contract for taking over another Company by the Assessee Company would be  eligible for deduction or not. The Assessee before the Court had entered into a  contract, inter alia, with a condition that the Government would be entitled to  twenty percent of net profits of the Assessee Company for every year,subject to  a maximum of Rs. 40,000. The Contract also stipulated the manner in which net  profit was to be calculated. After laying down that the expenditure so incurred  was revenue in nature, the Court went ahead to deal with the issue that when  payment is, computed with reference to profits, whether the same would be a  mere division of profits or is it an item of expenditure. The Court observed  that the amount paid by reference to profits can either be that it is paid  after the profits became divisible or distributable or that the amount is  payable prior to such distribution or division, to be computed by a reference  to notional or an apparent net profit. The Court ruled that in the former  instance, it will certainly be a distribution of profits and not deductible as  an expenditure incurred in running the business and in the latter, after  considering the facts of the case and nature of obligation under the instrument,  it would be possible to contend that expenditure was incurred as a contribution  to profit-earning apparatus or expended wholly and exclusively for the purposes  of business. Thereafter, the Court ruled in favour of the Assessee holding that  the Assessee is eligible for deduction of the payment so made. Classic example  to the latter part which the Court referred to would be payment of Remuneration  to Directors, which is determined on the basis of Net Profits of the Company.  However, in the present case,the question is whether cess would form part of  first category or second category. In view of the decision discussed above, it  is possible to contend that cess is an item falling in the first category and  therefore not allowable as deduction. <\/p>\n<p>\n  Reference can also be made to the decision of the <strong>Calcutta  High Court<\/strong> in the case of <strong>Molins of India Ltd. vs. CIT (144 ITR 317),<\/strong>wherein  the Court was dealing with the issue as to whether surtax paid would be  allowable as a deduction under section 37 of the Act or not. The Court rejected  the contention of the Assessee that surtax is a statutory charge on the income  and, therefore, income of the Company has been statutorily diverted at source  qua the surtax liability by holding that charge of surtax presupposes existence  of income of the Assessee, it does not prevent accrual of income in the hands  of the Assessee by diverting a portion of income to the Revenue at source. The  Court, thereafter, dealt with the second contention of the Assessee and held  that surtax would fall within the mischief of section 40(a)(ii) of the Act. The  Court, thereafter, went ahead to hold that payment of surtax would not evenbe  eligible for deduction under section 37 of the Act. The Court placed reliance  on decision of <strong>House of Lords<\/strong> in the case of <strong>IRC vs. Dowdall O&rsquo;  Mahoney &amp; Co. Ltd. (33 TC 259)<\/strong>, wherein it was held that foreign  income-tax and excess profit tax are not paid for the purposes of earning  profits of the trade, they are applications of those profits. The Court further  placed reliance upon the decision of <strong>Supreme Court<\/strong> in the case of <strong>Indian  Aluminium Co. Ltd. vs. CIT (84 ITR 735), <\/strong>the Supreme Court while dealing  with the issue whether wealth tax paid on business assets would be allowable as  a deduction or not observed that where profits, the net gains of business  determined after making all deductions, are taxed, the disbursements to meet  such taxes cannot be deducted. However, the Supreme Court observed, that where  the tax was levied, on capital assets used for the purpose of earning profits,  it was a permissible deduction. The High Court relying upon the Supreme Court  decision, consequently, held that surtax is of the same character as that of  income tax and similar treatment would follow for surtax too and, therefore, it  cannot be held that it is incurred wholly and exclusively for the purpose of  business.&nbsp; Similar view has been taken by  the <strong>Gujarat High Court<\/strong> in the case of <strong>S.L.M Maneklal Industries Ltd.  vs. CIT (172 ITR 176)<\/strong>, wherein it was held that the question of payment of  surtax would arise only after the profit or income is earned. It is an event  which takes places after the income is earned, meaning thereby that payment of  surtax is an application of the profits after they are earned. It is pertinent  to note here that when the matters from various High Courts travelled to the  Supreme Court, the Court in the case of <strong>Smith Kline &amp; French India Ltd.  vs. CIT (219 ITR 581)<\/strong> affirmed the aforesaid two decisions on the point  that surtax paid would be hit by section 40(a)(ii) of the Act. Though the  Supreme Court did not specifically deal with the other reasoning given by the  Calcutta High Court and the Gujarat High Court, its reasoning, discussed above,  stands.<\/p>\n<p>\n  Keeping in view the mechanism by which &ldquo;education cess&rdquo; is  levied by charging it over and above income tax and surcharge and the dictum of  the aforementioned judicial pronouncements, de hors section 40(a)(ii) of the  Act, it can be contended that education cess so paid, is a payment in the  nature of distribution of income, it is nothing but the State&rsquo;s right in the  profits of the Assessee, akin to income tax. As observed above, the question of  levy of cess would arise only after profits are determined and are available  for distribution, which the Supreme Court in the case of Travancore Sugars  (supra) stated would not be eligible for deduction. Once the aforesaid  contentions are deliberated and adjudicated upon, the law with respect to  deduction of education cess would present a much definite picture. <\/p>\n<table width=\"103%\" border=\"1\" cellpadding=\"5\" cellspacing=\"0\" bgcolor=\"#FFFFCC\">\n<tr>\n<td><strong>Disclaimer: <\/strong>The  contents of this document are solely for informational purpose. It does not  constitute professional advice or a formal recommendation. While due care has  been taken in preparing this document, the existence of mistakes and omissions  herein is not ruled out. Neither the author nor itatonline.org and its  affiliates accepts any liabilities for any loss or damage of any kind arising  out of any inaccurate or incomplete information in this document nor for any  actions taken in reliance thereon. No part of this document should be  distributed or copied (except for personal, non-commercial use) without  express written permission of itatonline.org<\/td>\n<\/tr>\n<\/table>\n","protected":false},"excerpt":{"rendered":"<p>Advocate Fenil Bhatt has submitted that the prevalent judicial view that &#8216;education cess&#8217; is not affected by the bar in section 40(a)(ii) of the Income-tax Act, 1961 and is allowable as a deduction requires reconsideration. He has argued that education cess is nothing but the State\u2019s right in the profits of the Assessee, akin to income tax, is in the nature of distribution of income, and is not eligible for deduction<\/p>\n<div class=\"read-more\"><a href=\"https:\/\/itatonline.org\/articles_new\/education-cess-as-a-deduction-certain-deceptive-facets\/\">Read more &#8250;<\/a><\/div>\n<p><!-- end of .read-more --><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-8553","post","type-post","status-publish","format-standard","hentry","category-articles"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts\/8553","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/comments?post=8553"}],"version-history":[{"count":0,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/posts\/8553\/revisions"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/media?parent=8553"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/categories?post=8553"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/articles_new\/wp-json\/wp\/v2\/tags?post=8553"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}