2025 (4) TMI 79 - AT - Income Tax

Revision u/s 263 - claim of deduction of education cess written off by assessee - HELD THAT - The provision of section 40(a)(ii) disallows any tax levied on the profits or gains of any business and the cess levied on such tax. Such tax and cess would of course be income-tax or education cess on income-tax . The Excise duty/CENVAT and education cess thereon was levied on production of goods and not on the profit or gain of business. Therefore the assessee is very correct in claiming that the education cess written off by it was not hit by the provision of section 40(a)(ii) or by Explanation 3 thereto. When the claim made by assessee is not disallowable u/s 40(a)(ii) there is nothing wrong in the order of AO in giving deduction to assessee. Moreover during assessment-proceeding the assessee has submitted the details of claim to AO in response to the notice u/s 142(1) therefore also it is discernible that the AO was very much aware of the allowability of claim of assessee. Thus looking into these aspects we are persuaded to hold that the facts of the present case do not warrant application of section 263. Therefore the revision-order passed by Ld. PCIT is not a valid order. The assessee succeeds in this appeal.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue considered in this judgment was whether the deduction claimed by the assessee for the "Old Balance of Education Cess Written off" is disallowable under section 40(a)(ii) of the Income-tax Act, 1961, in light of the amendment made by the Finance Act, 2022, and the decision of the Supreme Court in Chambal Fertilizers & Chemical Limited.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework in question revolves around Section 40(a)(ii) of the Income-tax Act, which disallows deductions for any sum paid on account of any rate or tax levied on profits or gains of business. The Finance Act, 2022, introduced Explanation 3 to this section, clarifying that the term "tax" includes any surcharge or cess on such tax. The Supreme Court's decision in Chambal Fertilizers & Chemical Limited further reinforced this interpretation.

Court's Interpretation and Reasoning

The Tribunal analyzed whether the education cess written off by the assessee was related to income tax or excise duty. The Tribunal determined that the education cess in question was related to excise duty/CENVAT, an indirect tax, and not to income tax, which is a direct tax. Therefore, the Tribunal concluded that the disallowance provision under Section 40(a)(ii) did not apply.

Key Evidence and Findings

The Tribunal noted that the assessee had provided detailed explanations and evidence during the assessment proceedings and the revision proceedings. The assessee demonstrated that the education cess was related to excise duty and not income tax. The Tribunal found no dispute or rebuttal from the revenue regarding the factual nature of the assessee's claim.

Application of Law to Facts

The Tribunal applied the legal provisions of Section 40(a)(ii) and Explanation 3 to the facts of the case. It concluded that since the education cess was related to excise duty, it was not disallowable under Section 40(a)(ii), which pertains to taxes on profits or gains of business.

Treatment of Competing Arguments

The Tribunal considered the arguments presented by both the assessee and the revenue. The revenue supported the revision order, while the assessee argued that the deduction was allowable. The Tribunal found the assessee's argument persuasive, as the education cess was not related to income tax.

Conclusions

The Tribunal concluded that the revision order passed by the PCIT was incorrect, as the deduction claimed by the assessee was not disallowable under Section 40(a)(ii). The Tribunal quashed the revision order and restored the original assessment order.

SIGNIFICANT HOLDINGS

The Tribunal held that the provision of Section 40(a)(ii) disallows any tax levied on the profits or gains of any business and the cess levied on such tax. However, the education cess related to excise duty/CENVAT is not covered under this provision. The Tribunal stated, "The Excise duty/CENVAT and education cess thereon was levied on production of goods and not on the profit or gain of business."

The core principle established is that the disallowance under Section 40(a)(ii) applies only to taxes on profits or gains and not to indirect taxes like excise duty and the related education cess. The Tribunal's final determination was to allow the appeal, quash the revision order, and restore the original assessment order.