Education cess cannot be disallowed under the provisions of Section 40(a)(ii) since it is not ‘tax’

• December 3, 2018
• CA Chandan Agarwal's Office

Chambal Fertilizers and Chemicals Ltd.
Vs
Jt. Commissioner of Income Tax, Kota
31st July, 2018

Education cess cannot be disallowed under the provisions of Section 40(a)(ii) since it is not ‘tax’

The assessee had claimed deduction of education cess and secondary and higher education cess while computing the profits and gains from business. The AO disallowed the same in view of the provisions of Section 40(a)(ii). CIT(A) as well as ITAT ruled in favour of the Revenue.

Aggrieved, the assessee appealed before the Rajasthan High Court.

The assessee relied on CBDT Circular No. 91/58/66-ITJ(19) Dt. 18th May, 1967, which provided that the word ‘cess’ had been omitted under section 40(a)(ii). Revenue argued that the cess was introduced by Finance Bill 2004-05 and it was in the nature of a surcharge, which admittedly is not deductible while computing income for the purpose of lev of income-tax. As per Revenue, provisions of Section 40(a)(ii) are wide enough to cover any sum paid as rate or tax on the profits or assessed at a proportion of such profits.

High Court relied on CBDT Circular No. F. NO. 91/58/66-ITJ(19) Dt. 18th May, 1967 wherein it was provided that the ‘cess’ word has been deleted from the provisions of Section 40(a)(ii). High Court further relied on Supreme Court ruling in the case of Jaipuria Samla Amalgamated Collieries Ltd. (1971) 82 ITR 580 (SC) wherein it was held that ‘cess’ is not ‘tax’. High Court held that Education cess cannot be disallowed under the provisions of Section 40(a)(ii), and thus ruled in favour of the assessee.

Separately on other grounds related to allowability of deduction of capital expenses in computing gain from sale of mining rights, High Court noted that these were duly debited by the assessee in the books of assessee and noted that ITAT had erred in refusing to grant deduction of these in absence of relevant details. These expenses were related to dismantling of existing structure, expense towards fencing of boundary, etc.

High Court, thus ruled in favour of the assessee.