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The Tax Publishers 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: SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

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: