To Save Penalty Offer Cess to Tax If
Claimed as Deduction in Earlier Years
CA. Manoj Gupta
1. Introduction
As per section 40(a)(ii) 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 on the basis of any such profits or gains, is
not deductible.
However, following taxes are allowable :
(i) Profession tax.
(ii) Amount paid for carrying on
business in the particular premises and payment not on the basis of profits or
gains, is not covered by section 40(a)(ii) and is deductible under section
30.--Vide CIT v. Chuni Lal Rameshwar Lal (1968) 70 ITR 167 (Pat).
2. The controversy
In CIT v. Chambal Fertilizers and Chemicals Ltd. 2018
TaxPub 5619 (Raj-HC), the High Court held that, in view of the circular of
CBDT where word 'Cess' is deleted, the Tribunal has committed an error in not
accepting the contention of the assessee. The cess is not tax and thus not hit
by section 40(a)(ii).
In the case of Sesa Goa Limited v. JCIT 2020 TaxPub(DT)
1981 (Bom-HC), the Hon'ble High Courts relied upon the CBDT Circular
dt.18-5-1967 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. v. Addl. CIT 2021 TaxPub 6074 (Kol-Trib) and has held that cess is not
to be allowed as deduction.
Therefore, certain taxpayers claimed deduction on account
of 'cess' or 'surcharge' under section 40 of the Act claiming that 'cess' has
not been specifically mentioned in the aforesaid provisions of section
40(a)(ii) and, therefore, cess is an allowable expenditure. This view has been
upheld by Courts in a few judgments. Further, courts were also relying upon the
CBDT Circular No. 91/58/66-ITJ(19), dtd. 18-5-1967.
3. CBDT circular and departmental view
The Circular, dated 18-5-1967 issued by CBDT and
relied upon by Rajasthan High Court is being reproduced as under:
'Interpretation of provision
of section 40(a)(ii) of Income Tax Act, 1961--Clarification regarding
18-05-1967 Business Expenditure Section 40(a)(ii),
Recently a case has come to the
notice of the Board where the ITO has disallowed 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.
2. The view of the ITO is not
correct. Clause 40(a)(ii) of the IT Bill, 1961 as introduced in the Parliament
stood as under: '(ii) any sum paid on account of any cess, 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'. When
the matter came up before the Select Committee, it was decided to omit the word
'cess' from the clause. The effect of the omission of the word 'cess' is that
only taxes paid are to be disallowed in the assessments for the year 1962-63
and onwards.
3. The Board desire that the
changed position may please be brought to the notice of all the ITOs so that
further litigation on this account may be avoided.'
In the above referred 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 the 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 the 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 1972 TaxPub(DT) 0352 (SC) : (1972) 083 ITR 0346 :
(1972) 001 CTR 0090 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. The relevant part of Hon'ble Supreme Court judgment is as under:
'7. The above legislative
history of the Finance Acts, as also the practice, would appear to indicate
that the term 'Income tax' as employed in section 2 includes surcharge as also
the special and the additional surcharge whenever provided which are also
surcharges within the meaning of Article 271 of the Constitution. The
phraseology employed in the Finance Acts of 1940 and 1941 showed that only the
rates of income-tax and super tax were to be increased by a surcharge for the
purpose of the Central Government. In the Finance Act of 1958 the language used
showed that income tax which was to be charged was to be increased by a
surcharge for the purpose of the Union. The word 'surcharge' has thus been used
to either increase the rates of Income tax and super tax or to increase these
taxes. The scheme of the Finance Act of 1971 appears to leave no room for doubt
that the term 'Income tax' as used in section 2 includes surcharge.'
Since the judgments of Rajasthan High Court and Bombay High
Court did not consider the judgment of Hon'ble Supreme Court discussed above,
the judgments of these two High Courts appear to be per incuriam. It may
be mentioned that in paragraph 578 at page 297 of Halsbury's Laws of England,
Fourth Edition, the rule of per incuriam is stated as follows:
'A decision is given per
incuriam when the court has acted in ignorance of a previous decision of
its own or of a court of co-ordinate jurisdiction which covered the case before
it. in which case ft must be decided which case to follow; or when it has acted
in ignorance of a House of Lords decision, in which case it must follow that
decision; or when the decision is given in ignorance of the terms of a statute
or rule having statutory force.'
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.
2. Cess or surcharge to be disallowed retrospectively
In order to make the intention of the legislation clear and
to make it free from any misinterpretation, an Explanation 3 has been inserted
retrospectively in the Act itself to clarify that for the purposes of section
40(a)(ii) 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. It may be noted that section 2(43) defining the expression tax
have not been amended and thus cess or surcharge will form part of tax only for
the purposes of section 40(a)(ii).
The amendment relating to section 40 takes effect
retrospectively from 1st April, 2005 and accordingly applies In relation to the
assessment year 2005-06 and subsequent assessment years.
3. Rectification of assessments
A new sub-section (18) has been inserted in section 155
from 1-4-2022 so as to provide that where any deduction in respect of any surcharge
or cess, which is not allowable as deduction under section 40, has been claimed
and allowed in the case of an assessee in any previous year, such claim shall
be deemed to be under-reported income of the assessee for such previous year
for the purposes of sub-section (3) of section 270A, notwithstanding anything
contained in sub-section (6) of section 270A, and the assessing officer shall
recompute the total income of the assessee for such previous year and make
necessary amendment, and the provisions of section 154 shall, so far as may be,
apply thereto, the period of four years specified in sub-section (7) of section
154 being reckoned from the end of the previous year commencing on the 1st day
of April 2021.
It is provided that in a case where the assessee makes an
application to the Assessing Officer in the prescribed form and within the
prescribed time, requesting for recomputation of the total income of the
previous year without allowing the claim for deduction of surcharge or cess and
pays the amount due thereon within the specified time, such claim shall not be
deemed to be under-reported income for the purposes of sub-section (3) of
section 270A.
4. Procedural Aspects
(i) The Income-tax (32nd Amendment) Rules, 2022 has
inserted a new rule 132 so as to provide that an application requesting for
recomputation of total income of the previous year without allowing the claim
for deduction of surcharge or cess, which has been claimed and allowed as
deduction under section 40 in the said previous year, shall be made in Form No.
69 on or before the 31st day of March, 2023.
(ii) Form No. 69 shall be furnished electronically to the
Principal Director General of Income-tax (Systems) or the Director General of
Income-tax (Systems) or the person authorized by the Principal Director General
of Income-tax (Systems) or the Director General of Income-tax (Systems).
(iii) The Assessing Officer shall, on receipt of the
application in Form No. 69, recompute the total income by amending the relevant
order and issue notice under section 156 specifying the time period within
which amount of tax payable, if any, is to be paid,--
(i) for the assessment year
relevant to the previous year referred to above ; and
(ii) for the assessment years
subsequent to the assessment year for which application is filed in form no.
69, if the order for such assessment year results in variation in carry forward
of loss or allowance for unabsorbed depreciation or credit for tax under
section 115JAA or section 115JD.
(iv) The assessee shall, after making the payment of the
tax determined as above, furnish the details of payment of tax in Form No. 70
to the Assessing Officer within thirty days from date of making the payment.
5. Caution
If above steps are not taken before 31.03.2023 then the
assessee may have to pay penalty in terms of section 270A.