2020 (3) TMI 347 - HC - Income Tax

Addition u/s 40(a)(ii) - Allowable deduction in the year of its payment - Education Cess and Higher and Secondary Education Cess - whether the expression any rate or tax levied as it appears in Section 40(a)(ii) includes cess ? - HELD THAT - In the Income Tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of 'any cess, rate or tax levied on the profits or gains of any business or profession '. In the corresponding Section 40(a)(ii) the expression cess is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income Tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression cess and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) . The effect of such omission is that the provision in Section 40(a)(ii) does not include, cess and consequently, cess whenever paid in relation to business, is allowable as deductable expenditure. There is no scope for such implications, when construing a taxing statute. Even, though, cess may be collected as a part of income tax, that does not render such cess , either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii). The mode of collection, is really not determinative in such matters. In the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner (Appeals) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. - Decided in favour of assessee.

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act for demurrage paid to non-resident buyers.
2. Taxability of demurrage under Section 172 of the Income Tax Act.
3. Deductibility of Education Cess and Higher and Secondary Education Cess under Section 40(a)(ii) of the Income Tax Act.

Detailed Analysis:

Issue 1: Disallowance under Section 40(a)(i) for Demurrage Paid to Non-Resident Buyers

The court addressed whether the appellant's claim against disallowance under Section 40(a)(i) for demurrage paid to non-resident buyers of iron ore, which was considered taxable under Section 172, was covered by the decision in Orient Goa P. Ltd. The ITAT had previously ruled in favor of the appellant for the Assessment Year 2009-2010, stating that the appellant was not obliged to deduct TDS on demurrage charges as per Circular number 723, which clarified that Sections 194C and 195 were not applicable. The ITAT's decision for the Assessment Year 2008-2009, however, followed the Division Bench's decision in Orient Goa P. Ltd., resulting in disallowance. The Full Bench later overruled Orient Goa P. Ltd., leading the court to rule in favor of the appellant, stating that the substantial questions of law Nos. (i) and (ii) should be answered in favor of the appellant.

Issue 2: Taxability of Demurrage under Section 172

The court noted that the ITAT had previously ruled that demurrage charges were taxable under Section 172 and not subject to TDS under Sections 194C and 195. The Full Bench's decision further supported this view, leading the court to rule that the appellant was not liable to deduct TDS on demurrage charges, thus no disallowance under Section 40(a)(i) was warranted. This decision was consistent with the ITAT's earlier ruling for the Assessment Year 2009-2010, which was not challenged by the Revenue.

Issue 3: Deductibility of Education Cess and Higher and Secondary Education Cess

The court examined whether Education Cess and Higher and Secondary Education Cess, collectively referred to as "cess," were allowable as deductions under Section 40(a)(ii). The appellant argued that "cess" was not included in the expression "any rate or tax levied," and thus should be deductible. The court referred to the legislative history and CBDT Circular No. F. No.91/58/66-ITJ(19), which clarified that "cess" was deliberately omitted from Section 40(a)(ii), indicating that it was not intended to be disallowed. The court also cited various decisions supporting the view that "cess" should be deductible. Consequently, the court ruled in favor of the appellant, stating that the amounts paid towards "cess" were deductible.

Additional Considerations:

The court addressed the Revenue's argument that the appellant had not claimed the deduction for "cess" in the original or revised returns. Citing the decision in CIT Vs Pruthvi Brokers & Shareholders Pvt. Ltd., the court held that appellate authorities have the power to allow such deductions even if not claimed in the original returns. The court found that the appellant had claimed the deduction before the Commissioner (Appeals) and the ITAT, and thus the deduction should be considered.

Conclusion:

The court answered all substantial questions of law in favor of the appellant and against the Revenue. The ITAT's impugned judgments and orders were modified accordingly, and the necessary benefits were extended to the appellant. The appeals were disposed of with no order as to costs.

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