2022 (7) TMI 1518 - AT - Income Tax

Allowability of education cess and Secondary and Higher Education Cess - allowable deduction u/s 40(a)(ii) or deductibility u/s 37 - AR submitted that cess is not levied on the profits and gains of business, and therefore, does not satisfy the second limb of section 40(a)(ii) - DR submitted that insertion of explanation 3 to section 40(a)(ii) of the I.T.Act by Finance Act, 2022 with effect from 01.04.2005 makes it clear that cess is part of the tax and the same cannot be allowed as a deduction while computing the profits and gains of business of the assessee - HELD THAT - Explanation 3 to section 40(a)(ii) of the I.T.Act was inserted by Finance Act, 2022 with effect from 01.04.2005, wherein it is clearly stated that any surcharge or cess by whatever name called shall be included in the term tax . In view of the amendment, it is clear that cess forms part of the tax and the same cannot be allowed as deduction by virtue of provisions of section 40(a)(ii) of the I.T.Act. Even prior to the insertion of Explanation 3 to section 40(a)(ii) of the I.T.Act, the Kolkata Bench of the Tribunal in the case of M/s.Kanoria Chemicals Industries Ltd. 2021 (10) TMI 1153 - ITAT KOLKATA by following the judgment of K.Srinivasan 1971 (11) TMI 2 - SUPREME COURT held that education cess is an additional surcharge levied on Income-tax and partakes the character of Income-tax. As regards the assessee s specific contention that the cess is not levied on the profits and gains of any business or profession, we find the same is not acceptable. Though cess is calculated as % of Income-tax, effectively, it is a levy on the profits and gains of the assessee. As significant to note that the word tax is used, in section 40(a)(ii), in conjunction with the words any rate or tax . The word any goes both with the rate and tax. The expression is further qualified as a rate of 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. If the word tax is to be given the meaning assigned to it by section 2(43), the word any used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. The word tax as defined in section 2(43) is subject to unless the context otherwise requires . In that view of the matter, the words any tax in section 40(a)(ii) includes cess. For the aforesaid reasons, the submission of the learned AR is rejected. Since the cess is not an allowable deduction u/s 40(a)(ii) of the I.T.Act, the deductibility u/s 37 of the I.T.Act is not permissible. Ground dismissed. Denial of Credit of self-assessment tax paid u/s 140A - HELD THAT - After perusing the material on record, we deem it appropriate to restore this issue to the files of the A.O. The A.O. shall examine the matter and shall give due credit for the self-assessment tax paid u/s 140A of the I.T.Act. Therefore, ground 3 is allowed for statistical purposes.

Summary

Issues Involved:
1. Allowability of Education Cess.
2. Credit of self-assessment tax paid u/s 140A.

Summary:

Education Cess (Ground 2, 2.1 & 2.2):
The assessee argued that the education cess and secondary and higher education cess (collectively referred to as 'Cess') should be allowed as a deduction u/s 37(1) of the I.T.Act. The learned AR contended that cess is not levied on the profits and gains of business, thus not satisfying the second limb of section 40(a)(ii) of the I.T.Act. However, the Tribunal noted that Explanation 3 to section 40(a)(ii) of the I.T.Act, inserted by the Finance Act, 2022 with effect from 01.04.2005, clarifies that any surcharge or cess shall be included in the term "tax." The Tribunal referenced the Kolkata Bench's decision in M/s.Kanoria Chemicals & Industries Ltd. v. Addl.CIT, which followed the Hon'ble Supreme Court's judgment in CIT v. K.Srinivasan, holding that education cess is an additional surcharge on Income-tax. The Tribunal concluded that cess is effectively a levy on the profits and gains of the assessee and thus satisfies the conditions of section 40(a)(ii). Consequently, the deduction of cess u/s 37 of the I.T.Act is not permissible. Therefore, ground 2, 2.1, and 2.2 were dismissed.

Credit of Self-Assessment Tax (Ground 3):
The assessee claimed that the A.O. did not grant credit for the self-assessment tax paid u/s 140A amounting to Rs.5,14,63,960. The Tribunal found it appropriate to restore this issue to the files of the A.O. for examination and to give due credit for the self-assessment tax paid. Therefore, ground 3 was allowed for statistical purposes.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes.