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2021 (8) TMI 982 - AT - Income TaxDeduction of education cess - allowable business expenditure - HELD THAT - We find that provisions of Section 40(a)(ii) of the Act, the education cess paid on Income Tax doesn't come under the purview of the definition as it is levied on the amount of Income Tax, but not on profits of business. We also find that the assessee also relied on the CBDT Circular No. 91/58/66-ITJ(19) dated 18th May 1967, which states that the effect of the omission of the words cess from section 40(a)(ii) of the Act is that, only taxes paid are to be disallowed in the assessment for the assessment years 1962-63 onwards. The assessee also relied on the judgment of Hon'ble Rajasthan High Court wherein identical issue was decided in favour of the assessee and particularly held that education cess is an allowable expenditure. We also note that the learned CIT(A) has also allowed the claim by referring to the contents of the CBDT Circular 91/58/66-ITJ(19), dated 18th May 1967 as while relying upon the judgment of CHAMBAL FERTILISERS AND CHEMICALS LTD. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT . We further notice that in the case of Sesa Goa Ltd. vs. JCIT, 2020 (3) TMI 347 - BOMBAY HIGH COURT , held the similar view. In view of the aforesaid, we see no legal infirmity in the impugned decision of the learned CIT(A) - Decided against revenue. Nature of receipts - Fertilizer Subsidy received - whether receipt is capital in nature and is chargeable to tax - HELD THAT - This scheme is introduced with the object of passing the benefit to the farmers at the same time, there is no fresh investment and innovations were not coming to the industry due to low profitability in this industry. In order to attract the new investments, to increase the productivity and to reduce the manufacturing cost by bringing new innovation in the industry in order to achieve ultimate reduction in the price of the fertilizers. Therefore, the scheme was mainly to attract the investment in the industry and the purpose test is that the attraction of new players in the industry and also attracts the existing players to bring new investment. How the benefit of scheme is passed on to the industry matters. Sometime, Govt. introduces direct concession in the investments or introduces mechanism in relation to the ultimate achievement of the objects of the scheme. In this scheme, the ultimate object is to make available the required fertilizers and at appropriate price to the farmers, this can be achieved only by bringing new investments in the industry. It is only the mechanism to pass on the capital subsidy to the companies, who bring in new investments and innovation. The subsidy calculated and MRP are under constant monitoring of the Ministry. Therefore, we are inclined to accept the adoption of purpose test by the learned CIT(A) in this case and the subsidy can be classified as capital in nature. In our considered opinion, a receipt that is held to be a capital in nature and not chargeable to tax under the normal provisions of the Act. Hence the same lies outside the purview of Act. When a receipt is not in the nature of income, it cannot form part of taxable profit - Decided against revenue.
Issues Involved:
1. Allowability of Education Cess as an expenditure. 2. Nature and taxability of Fertilizer Subsidy received by the assessee. Detailed Analysis: Issue 1: Allowability of Education Cess as an Expenditure Background: The Revenue challenged the CIT(A)'s decision allowing the assessee's claim of education cess as an allowable expenditure. Assessee's Argument: The assessee claimed education cess as an allowable expenditure based on CBDT Circular No. 91/58/66-ITJ(19), dated 18th May 1967, and the Rajasthan High Court decision in Chambal Fertilizers and Chemicals Ltd. vs. JCIT. CIT(A)'s Decision: CIT(A) allowed the claim, observing that the word "cess" was omitted from Section 40(a)(ii) of the Income Tax Act, 1961, indicating that cess should be treated as an allowable expenditure. Revenue's Argument: The Revenue argued that education cess is a tax and should be disallowed under Section 40(a)(ii). They cited the Supreme Court decision in Smith Kline & French (India) Ltd. vs. CIT, which interpreted Section 40(a)(ii) to include any tax levied on profits. Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, noting that: - Education cess is levied on the amount of income tax, not on business profits. - The CBDT Circular supports the exclusion of cess from the disallowance under Section 40(a)(ii). - The Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. and the Bombay High Court in Sesa Goa Ltd. have held that education cess is an allowable expenditure. Conclusion: The Tribunal found no legal infirmity in the CIT(A)'s decision and dismissed the Revenue's appeal on this ground. Issue 2: Nature and Taxability of Fertilizer Subsidy Background: The Revenue challenged the CIT(A)'s decision that the Fertilizer Subsidy received by the assessee is capital in nature and not chargeable to tax. Assessee's Argument: The assessee argued that the subsidy received under the Nutrient Based Subsidy (NBS) Policy is capital in nature, aimed at encouraging investment and modernization in the fertilizer industry. CIT(A)'s Decision: CIT(A) held that the subsidy is capital in nature, based on the purpose test laid down by the Supreme Court in Ponni Sugars & Chemicals and other judicial precedents. Consequently, the subsidy should be excluded from computing book profit under Section 115JB. Revenue's Argument: The Revenue contended that the primary purpose of the NBS Policy is to make fertilizers available to farmers at affordable prices, thereby increasing food productivity. They argued that the subsidy is revenue in nature and should be taxed. Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, noting that: - The NBS Policy aims to attract new investments and modernization in the fertilizer industry. - The subsidy is intended to reduce manufacturing costs and increase productivity, which aligns with the purpose test for capital receipts. - Judicial precedents support the classification of such subsidies as capital receipts. Conclusion: The Tribunal found no legal infirmity in the CIT(A)'s decision and dismissed the Revenue's appeal on this ground. Final Order: The Revenue's appeal was dismissed in its entirety, with the Tribunal upholding the CIT(A)'s decisions on both issues.
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