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TMI Blog2016 (10) TMI 1115X X X X Extracts X X X X X X X X Extracts X X X X ..... n HRSG. Under the facts and circumstances, the disallowances made deserve to be deleted and claim made by the appellant deserves to be allowed. 2. That the Ld. Assessing Officer erred in disallowing the claim of Rs. 28,12,000/- on the ground of notional interest in respect of investment in subsidiary companies without proving any nexus between investments and loans and the Ld. CIT (Appeals) further erred in confirming the same. Hence the disallowance made on this account should be deleted. 3. That the Ld. Additional Commissioner erred in not allowing the expenditure of education cess of Rs. 2,41,59,485/- from income claimed by the appellant and the Ld. CIT(Appeals) erred in confirming the same. The education cess was actually paid on income tax and is not a part of income tax as per the provisions of section 40(a)(ii) and is hence an allowable expenditure. Therefore the claim for deduction from income for expenditure of education cess should be allowed." Grounds of revenue's appeal: "On the facts and in the circumstances of the case, the Ld. CIT (A), Kota has erred in:- i) allowing deductions u/s 80IA on Captive Power Plant claimed by the assessee at Rs. 41,59,57,420/-; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer has observed that it is seen from the computation of income that a sum of Rs. 2,48,82,876/- had been claimed as deduction on account of incentive on prepayment of deferred Sales tax liabilities allowed against fixed capital investment of unit Gadepan-I. The assessee was requested to furnish its reply. Vide letter dated 13.12.2010, it is submitted that as regard to the prepayment of sales tax liability which is in accordance with the notified scheme of Rajasthan Govt., is a capital receipt and hence not taxable as revenue receipt. The assessee has filed its submission but not found acceptable by the Assessing Officer for the following reasons: (i) Since the assessee has collected the amount of sales tax but the payment has been made after availing incentive benefit as per the scheme of the State Government as claimed, the incentive received is a business receipt and the same has to be treated accordingly. (ii) No details of scheme of the State Government have been furnished so as to verify the claim of the assessee with regard conversion of this amount into an interest free loan. (iii) Notwithstanding the nomenclature given by the assessee, from the facts it app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net present value as specified in that notification. Net present value has been mentioned as percentage of amount payable and such percentage varies as per the period of month between the actual date of payment and the extended date of payment. However Board Circular 496 dated 25.9.87 stated that statutory liability is to be treated as paid in case the State Govt. makes an amendment that sales tax deferred under the scheme is to be treated as actually paid. Benovelent Circular of Board are mandatory. The liability is not that of sales tax but it is a liability of loan. Hence the decision of special bench in the case Sulzer India Ltd. is squarely applicable. It will be useful to reproduce Head Note in the case of Sulzer India Ltd. "Business income-Profits chargeable to tax under s.41(1)Payment of net present value against deferred sales-tax liability Assessee company obtained incentive by way of sales-tax deferral schemes of 1983 and 1988 notified by the Government of Maharashtra-As per the said schemes, the sales-tax collected by the assessee during the period from 1st Nov., 1989 to 31st Oct., 1996, was to be paid after 12 years in six equal annual instalments-Fourth proviso to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is to be examined is whether the waiver of loan would amount to a perquisite so as to be taxable, as such, under s. 28. The Bombay High Court in the case of Mahindra & Mahindra Ltd. Vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501(Bom) : (2003) 128 Taxman 394 (Bom), has explained that s. 28(iv) seeks to charge the value of any benefit or perquisite, meaning thereby that the benefit must be in kind; the Court further held that waiver of loan is in respect of money transaction and, therefore, would not be in nature of any benefit or perquisite as construed in s. 28(iv). 2.21 The argument of the ld. DR that scheme of Rajasthan Govt is different is not of relevance. In the case of Maharashtra, the scheme of receipt of prepayment of loan was by a State Corporation while in Rajasthan it has been implemented by State Govt. The implementing agency may be different but the nature of the scheme is the same 2.22 We therefore hold that Ld.CIT(A) was not justified in confirming the addition of Rs. 12,06,33,254/- as provisions of section 41(1) are not applicable. For the case of A.Y. 2007-08, the Coordinate Bench in ITA No. 374/JP/2010 has held as under:- "16.2 Following our order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 536/JP/2010 has held that the club expenses were allowable. The Hon'ble ITAT relied on its own order in A.Y. 2005-06. Accordingly, the ld. CIT(A) had deleted the addition of Rs. 10,16,659/-. 9. Now the revenue is in appeal before us. The ld CIT DR has vehemently supported the order of the Assessing Officer but admitted that the Hon'ble ITAT in earlier years had deleted the addition made by the Assessing Officer with regard to club expenses. 10. At the outset, the ld AR has vehemently supported the order of the ld. CIT(A) and prayed to uphold the order. 11. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee's own case for the A.Y. 2005-06 passed in ITA No. 445/JP/2009 order dated 09/09/2011, the Coordinate Bench has held as under:- "10.2 The details of payments made to club expenses are available at pages 158 to 161 of the paper book. In these details, the assessee has given the name of the employees, date, amount, name of the club, nature of payment and period. The club membership has been paid in respect of 28 employees. It is noticed from the period mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d thus have not reached finality. Therefore, donation made to DAV trust is disallowed and added to the total income of the assessee company. 13. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld. CIT(A), who had deleted the addition by following the earlier orders of the Hon'ble ITAT by observing that the Hon'ble ITAT while deciding the appeals for A.Y. 2006-07 and 2007-08 in ITA No. 268/JP/2010 and 374, 536/JP/2010 has held that payment to DAV Trust for running of school was allowable expenditure. Accordingly, the ld. CIT(A) had deleted the addition of Rs. 22,93,923/-. 14. Now the Revenue is in appeal before us. The ld CIT DR has vehemently supported the order of the Assessing Officer but admitted that the Hon'ble ITAT in earlier years had deleted the addition made by the Assessing Officer with regard to DAV Trust. 15. At the outset, the ld AR has vehemently supported the order of the ld. CIT(A) and prayed to uphold the order. 16. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee's own case for the A.Y. 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by the assessee by way of contribution to the welfare trust of the employees was rightly held to be deductible under section 37 of the Income- tax Act." By respectfully following the order of the Coordinate Bench in assessee's own case for the A.Y. 2006-07, we uphold the order of the ld. CIT(A) for this assessment year. Accordingly, this ground of the Revenue's appeal is dismissed. 17. Ground No. 5 of the Revenue's appeal is against deleting the addition of Rs. 11,71,382/- on account of depreciation disallowed on catalyst. This issue came up for discussion/deliberation during the assessment proceedings for the earlier assessment years where the facts are found to be similar to those of the assessment year under consideration. The assessee's appeal for earlier years has been allowed by the CIT (A) and the department is in further appeal before the Hon'ble ITAT and the order is still awaited. This being so, the claim of depreciation and additional claim as well on the catalyst is hereby disallowed at Rs. 11,71,382/- and added to the total income of the assessee company. 18. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claim of the assessee is not verifiable, therefore, the same is disallowed which works out to Rs. 3,49,57,657/- and added to the total income. 23. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld. CIT(A), who had deleted the addition by observing as under:- The assessee vide letter dated 19.09.2011 submitted as under: "Our submission in this regard is as under:- The deduction for certain statutory liabilities covered u/s 43B is allowable on payment basis only, so above referred amount was disallowed in respective earlier years due to non-payment. There are multiple dates of payment in case of leave encashment and bonus. We have enclosed a year wise break up of unpaid statutory liabilities covered u/s 43B as on 01.04.2007 and the same was not allowed in the respective years as certified by the auditors. As the assessee has paid/set off Rs. 3,47,70,861/- during the year under consideration and written back Rs. 1,86,796/- (towards bonus) during the year under consideration, so we have claimed deduction of Rs. 3,49,57,657/- u/s 43B during the year under consideration. We wish to clarify that the amount of Rs. 1,86,796/- in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's claim which is also certified by the Tax Auditor. We therefore do not find any infirmity in the order of ld CIT(A) and accordingly uphold the said order. Accordingly, this ground of the Revenue's appeal is dismissed. 27. Ground No. 7 of the Revenue's appeal is against allowing rent paid for flat of Rs. 10,80,000/- to a person specified U/s 40A(2)(b), the Assessing Officer has observed that the assessee company has paid rent @ Rs. 90,000/- per month to the specified person u/s 40A(2)(b). Vide para No. 10 of this office letter dated 06.12.2010, the assessee was asked to give the details. In response to above, the assessee has filed reply as per point No. 10 vide letter dated 13.12.2010, which is reproduced as under:- "In this regard we wish to submit before your goodself that referred accommodation is used exclusively as guest house of the assessee. Being artificial entity, the assessee itself cannot use the guest house for its residence but its employees who visit Delhi for purpose of business of the assessee use the guest house for their residence purpose only. Instead of staying in hotel which incurs cost to the assessee, the employees stay in the guest house while on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of same size and facility in the same locality. We therefore confirm the order of the ld CIT(A) who has allowed the rent payment as incurred for the purposes of the assessee's business. Accordingly, this ground of the Revenue's appeal is dismissed. 32. Ground No. 8 of the Revenue's appeal is against deleting the expenses of Rs. 89,41,361/- for payment made to Zuari Investment Ltd. The Assessing Officer has made a table regarding payment to the different companies, which is reproduced hereunder:- Voucher No. Date Amount Remarks 1900006179 31.08.2007 28,09,000/- Consultancy charges to ZIL for enhancing WC limit 1900011258 19.12.2007 6,06,702/- Brokerage charges from 03.04 to 19.11.2007 1900011534 27.12.2007 56,18,000/- Professional charges for arranging of termal. 1900012152 08.01.2008 61,798/- Brokerage charges from RTA Dt. 11.12.2007 1900015652 17.03.2008 1,79,776/- Brokerage charges M/O Feb.- March 2008 1900016314 26.03.2008 67,416/- Redemption and allotments charges M/O Feb.-March 2008 1900016535 26.03.2008 5,33,710/- Charges of maintain shareholders A/C (APR-March 2008) 1900017005 28.03.2008 28,090/- Brokerage charges of redemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or operation. Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in subsection (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted. (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:- (a) Expenditure in connection with - (i) Preparation of feasibility report; (ii) Preparation of project report; (iii) Conducting market survey or any other survey necessary for the business of the assessee; (iv) Engineering services relating to the business of the assessee : Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the ld CIT(A). 36. We have heard the rival contentions of both the parties and perused the material available on the record. For the purposes of invocation of section 35D, two conditions are prescribed. Firstly, the nature of expenditure should be as specified in section 35(2) and secondly, the expenditure should be incurred either before the commencement of the business, or where the business has been commenced, in connection with the extension of the undertaking or in connection with the set up of a new unit. Nothing has been brought on record to satisfy the above two conditions. Further, the Revenue has taken the ground that these expenses are with respect to the shipping division whose income was offered on the basis of Tonnage Scheme. However, there is nothing on record and which has been brought to our notice which suggest that these expenses are with respect to the Shipping Business subject to Tonnage tax scheme. In light of these, we are unable to accede to the position of the Revenue that the expenses are covered by the provisions of section 35D of the Act. Hence, the ground of the Revenue is dismissed. 37. Ground No. 9 of the Revenue's appeal is against deleting the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to extension of industrial undertaking or for setting up new unit. In view of the above, the A.O. is directed to delete addition of Rs. 24,39,596/-. 39. Now the revenue is in appeal before us. The ld CIT DR has vehemently supported the order of the Assessing Officer. 40. At the outset, the ld AR of the assessee has relied on the order of the ld. CIT(A). 41. We have heard the rival contentions of both the parties and perused the material available on the record. Our directions in respect of ground no. 8 shall apply mutatis mutandis to this ground as well. The ground of the Revenue is accordingly dismissed. 42. Ground No. 10 of the Revenue's appeal is against deleting the addition of Rs. 1148.87 lacs on slump sale of Food Processing Unit U/s 50B in spite of the fact that the assessee has failed to prove the sale consideration while purchaser has intimated the sale consideration of Rs. 2359.15 lacs instead of 2263.18 lacs claimed by the assessee. The ld AR took us through the submissions made before the ld CIT(A) to appreciate the facts of the case and submitted that the assessee (CFCL) had hived off its Food Processing Unit (FPU) to M/s Temptation Foods Ltd. (TFL) in November ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted a report of Chartered Accountant in the Form No. 3CEA certifying the computation of the net worth of the food processing division and its correctness. The working of short term capital gain of Rs. 1,35,21,415/- computed in accordance with the provisions of section 50B of the IT Act is as under:- Particulars Amount Amount Sale consideration as per Business Purchase agreement dated 07.11.2007 23,59,15,000 Final sale consideration as per Supplementary agreement dated 04.03.2008 A 22,63,18,455 Less: As per Form No. 3CEA submitted vide letter dated 29.10.2010 Net fixed assets as per depreciation chart B 10,83,77,497 Net current assets: i) Loans and advances 21,30,804 ii) Debtors 38,11,632 iii) Inventories 11,42,37,621 Total current assets 12,01,80,057 Less: Current Liabilities (1,36,71,428) Less: Provisions (20,89,086) Net Current assets C 10,44,19,543 Net worth (B+C) D 21,27,97,040 Short term capital gain (A-D) E 1,35,21,415 The assessee therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had deleted the addition of Rs. 11,48,87,000/- by observing as under:- "The assessee during the year sold its food processing unit (FPU) on slump sale basis and computed the capital gain u/s 50B. The A.O. computed the capital gain on the same as under:- i) Total sale consideration as received Rs. 2359.15 lacs ii) Less: Net assets of FPU as per depreciation chart Rs. 1083.76 lacs iii) Profit Rs. 1275.38 lacs iv) Less: Capital gain already shown Rs. 126.51 lacs v) Addition Rs. 1148.87 lacs The difference was due to the fact that assessee took sale consideration at Rs. 2263.18 lacs whereas A.O. took at Rs. 2359.15 lacs, secondly, the A.O. did not allow deduction of net current assets. I have gone through the Assessing Officer's order and assessee's submission and it was seen that the sale consideration was revised by supplementary agreement dated 04.03.2008 and accordingly the sale consideration has to be taken at Rs. 2263.18 lacs, secondly, as per the provisions of section 50B deduction for all other assets has to be allowed as per book value. The A.O. failed to do so. In view of the above, the A.O. is directed to delete the addition of Rs. 11,48,87,000/-." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,15,000 as stated in the BPA. Accordingly, there is differential amount of Rs. 95,96,545 payable in favour of the purchaser." Having taken cognizance of the supplementary agreement, the AO noted that since information collected u/s 133(6) from M/s Temptation Food Limited talks about the business purchase agreement executed on 7 November 2007 for a sale consideration of Rs. 23,59,15,000, he proceeded and brought to tax the original sale consideration of Rs. 23,59,15,000 ignoring the sale consideration of Rs. 22,63,18,455 as per supplementary agreement. The ld CIT(A) has also given a finding that "the sale consideration was revised by supplementary agreement dated 04.03.2008 and accordingly the sale consideration has to be taken at Rs. 2263.18 lacs." The question that arises for consideration is whether the existence and genuineness of the supplementary agreement can be doubted on account of the reason that the purchaser has not independently confirmed the same. In our view, it is advisable to seek an independent confirmation and we donot see anything wrong in the action of the AO in seeking an independent confirmation from the party concerned who has executed the supplementary agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all other assets. In light of this, we confirm the finding of ld CIT(A) that "as per the provisions of section 50B deduction for all other assets has to be allowed as per book value" and direct the AO to allow Rs. 10,44,19,543 as cost of acquisition while working out the capital gains in the hands of the assessee. The ground of the Revenue is thus partly allowed for statistical purposes. 47. Now we take the assessee's appeal as well as one of the ground of the revenue's appeal. The 1st ground of the assessee's appeal is against maintaining the disallowance of Rs. 3,62,55,540/- out of amount claimed u/s 80IA in respect of Captive Power Plant Industrial Undertaking on the ground of excess price of sale of power Rs. 64,02,938/-, understated cost of gas Rs. 20,83,589/- and presumed expenses of Rs. 2,77,69,013/- related to recovery in HRSG. The Revenue's ground is against the action of the ld CIT(A) in allowing deductions u/s 80IA on Captive Power Plant claimed by the assessee at Rs. 41,59,57,420/-. The Assessing Officer has observed that in the computation of income filed alongwith the return of income, the assessee company has claimed deduction U/s 80IA of the Act on the Captive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction u/s 80IA of the IT Act. Further, earning of income, if any, can be from others and no income can be earned by dealing with one self as held in numerous cases by various courts. It may at the most be a saving only or helpful in smooth and efficient running of plant as other parts of the plant. This issue has been discussed in very detail during the A.Y. 2003-04. The factual and legal position, as found during the assessment proceedings for the A.Y. 2003-04 except for that during the year an attempt has been made by filing separate P&L account and balance sheet for this plant. Sales of power plant has been based on the rate of power purchased from Jaipur Vidhyut Vitran Nigam Ltd. (net of duties) multiplied by number of own generated units available for distribution for the year. Moreover, if the production of unit was separately considered, then it was liable for duties & other taxes applicable for such generation of power which is admittedly not found to be paid. Thus, the facts are in pari materia with the position in the current year as well and hence the findings given there apply mutatis mutandis in the year under consideration also. In this regard, though the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be treated as market value as this represents purchase price by the assessee but does not represent sale price in the open market as contemplated in section 80IA(8). Accordingly, the assessee was asked why the sale price be not taken at long term power supply price given by various prominent suppliers (Adani, GMR, India Bulls etc.). The assessee in his reply explained that Central Electricity Regulatory Commission (CERC) promotes trading of electricity and as per the annual report of CERC average sale price of electricity was Rs. 4.52 per KWH. However, it was seen that as per the same document the average purchase price was Rs. 4.48 per KWH. Considering the above, the average purchase price of electricity as per the annual report of CERC can be taken as sale price in open market. Accordingly, for calculating profits of captive power plant the transfer price of electricity u/s 80IA(8) is taken at Rs. 4.48 per KWH. This resulted in excess claim of sale price of power by Rs. 64,02,938/-. Cost of Gas Consumed It was seen that in the annual report for the F.Y. 2007-08, the assessee has shown the following figures:- Electricity generated through Stream Turbine/Generat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,83,589/- and expenses of Rs. 2,77,69,013/- related to recovery in HRSG were not provided. This resulted in excess claim of 80IA by Rs. 3,62,55,540/-. Accordingly, the deduction u/s 80IA is restricted to Rs. 37,97,01,880/-. This ground of appeal is therefore partly allowed. 49. Now the assessee as well as the revenue is in appeal before us. The ld. AR of the assessee has reiterated the arguments made before the ld. CIT(A) and submitted that this is the tenth year of claim and the Hon'ble ITAT, Jaipur Bench in assessee's own case for the assessment year 1999-2000 and for the subsequent assessment years up to A.Y. 2007-08 has held that the deduction U/s 80IA would be allowable to the appellant in respect of the captive power plant. Therefore, he prayed to allow the appeal on this ground. Further, in respect of determination of market value of electricity captively supplied, the ld AR referred to the decision of the Coordinate Bench of the Tribunal in case of Additional CIT vs Jindal Steel and Power Ltd (16 SOT 509) where it was held as under: "15. Therefore, from the aforesaid, it can be deduced that market value is an expression which denotes a price arrived at between the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and the Board can be said to be an exercise between a buyer and seller neither in a competitive environment and nor in the ordinary course of trade and business. It is an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of preset statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Therefore, the price determined as per the Power Purchase Agreement cannot be equated with market value as understood in common parlance. We see no reason for not holding so for the purposes of section 80-IA(8) also. 17. In this background, we may make a gainful reference to the decision of the Hon'ble Calcutta High Court in the case of CAIT v.Manmatha Nath Mukherjee [1958] 34 ITR 567, which has been relied on by the assessee before us. The issue before the Hon'ble Calcutta High Court was in the context of the Bengal Agricultural Income-tax Act, 1944. Shorn of other details, the question considered by the Hon'ble High Court, relevant for the present, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the consumers are able to procure the power. We may consider hypothetical situation as well. Had the assessee not been saddled with restrictions of supplying surplus power to the State Electricity Board, it would have supplied power to the ultimate consumers at rates similar to those of the Board or such other competitive rates, meaning thereby that price received by the assessee would be in the vicinity of Rs. 3.72 per unit i.e. charged by the Board from its industrial consumers/users. Thus, under the given circumstances, it would be in the fitness of things to hold that the consideration recorded by the assessee's undertaking generating electric power for transfer of power for captive consumption at the rate of Rs. 3.72 per unit corresponds to the market value of power. Therefore, on this aspect, we uphold the stand of the assessee and set aside order of the CIT(A) and direct the Assessing Officer to allow relief to the assessee under section 80-IA as claimed. Assessee succeeds on this ground." The ld AR further referred to the decision of the Coordinate Bench of the Tribunal in case of West Coast Paper Mills Ltd vs Additional CIT (33 ITR(Trib) 560) where it was held as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are determined through negotiation between the parties and mutual agreement as arrived at a price which is acceptable between the buyer and the seller in the open market condition i.e., in an unrelated and uncontrolled transactions. Open market conditions refers to the conditions and price available for the public at large. In the present case, the market value of supply of electricity by power unit of the assessee to the paper division of the assessee has to be seen from the angle, if the paper unit has to purchase the electricity directly from the Karnataka Electricity Board (as both the power units as well as the paper units are situated in Karnataka), then what is the price which would be paid by the paper unit to the Karnataka Electricity Board. The transfer of the price as contemplated in section 80-IA(8) has to be seen having regard to the arm's length condition, i.e., what would be the price under uncontrolled transactions in the open market. If the paper division has been purchasing the electricity form the Karnataka Electricity Board at an average cost of Rs. 5.80, which fact is not in dispute, then the same price should be considered as market value for benchm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by any other factors like taxes, duties, etc., as the same are embedded in the price. Thus, we set aside the impugned order passed by the learned Commissioner (Appeals) on this issue and allow ground No. 8, is treated as allowed." The ld AR further referred to the decision of the Coordinate Bench of the Tribunal in case of Everready Spinning Mills Pvt Ltd vs. Assistant CIT (145 TTJ 393) where it was held as under: "6. We have perused the orders and heard the contention of learned D.R. The short question arising here is whether the per unit rate of electricity, for the purpose of computing the profits of the windmills of the assessee, has to be taken at Rs. 2.70 or at Rs. 3.50. Rs. 2.70 was the price given by Electricity Board to the assessee for the electricity generated by the windmills but, such electricity when supplied by the Electricity Board to the yarn manufacturing unit of the assessee, they had charged from the assessee Rs. 3.50 per unit. There is no dispute that the power manufactured by the assessee from its windmills though meant for the use of captive consumption in its yarn manufacturing unit, was not physically the same as was actually used by the yarn manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronment and under market conditions. Price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of competitive environment. Thus, the price at which assessee sold its power to the Electricity Board cannot be equated with market rate as understood for the purpose of Section 80-IA(8) of the Act. Now the question that remains is whether the price recorded by the assessee at Rs. 3.50 per unit for purchasing power from the Electricity Board for its yarn manufacturing unit can be considered the market value. Assessee undoubtedly is an industrial consumer and the Board supplies power to such industrial consumers at the rate of Rs. 3.50 per unit. Had the assessee not been saddled with the restrictions of supplying surplus power to the State Electricity Board, it would have supplied the power to ultimate customers at a price not less than Rs. 3.50 per unit, being the rate charged by the Board from its industrial consumers. Thus, under the given circumstances, it would be appropriate to hold that the consideration recorded by the assessee for transfer of power for captive consumption, which is at the rate of Rs. 3.50 per unit, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of energy and he therefore estimated 15% of the above amount can be attributed to recovery of energy worth Rs. 18,51,26,755/- which comes to Rs. 2,77,69,013/-. In our view, what is relevant to determine is the treatment of steam worth Rs. 18,51,26,755/- and how the same has been accounted for while computing the deduction under section 80IA. Secondly, the assessee has identified both direct and indirect expenses which have been allocated to Captive power plant following certain allocation methodology which has been accepted by the Revenue. Following the same methodology, the expenses in relation to generation of steam needs to be identified and properly accounted for. The ld CIT(A) has not given any basis as to how he has determined 15% an appropriate basis. Similar is the case where the ld CIT(A) has held that the cost of gas consumption has been understated by Rs. 20,83,589/- In our view, the matter require a fresh examination and we accordingly set aside these two matters to the file of the AO. 52.2 Now, coming to determination of the market value of the electricity generated and supplied by the captive power plant, the assessee took this value equal to Rs. 4.52 per unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under the heading "C-Deductions in respect of certain incomes", where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be. (5) Where the assessee fails to make a claim in his return of income for any deduction under section 10A or section 10AA or section 10B or section 10BA or under any provision of this Chapter under the heading "C.-Deductions in respect of certain incomes", no deduction shall be allowed to him thereunder.'; (b) after sub-section (5) as so inserted, the following subsection shall be inserted, namely:- '(6) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-Deductions in respect of certain incomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of any deduction under this Chapter, the profits and gains of such undertaking or unit or enterprise or eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date. The Explanation as proposed in the said sub-section provides that (i) in relation to any goods or services sold or supplied, market value means the price that such goods or services would fetch if these were sold by the undertaking or unit or enterprise or eligible business in the open market, subject to statutory or regulatory restrictions, if any; (ii) in relation to any goods or services acquired, market value means the price that such goods or services would cost if these were acquired by the undertaking or unit or enterprise or eligible business from the open market, subject to statutory or regulatory restrictions, if any. The said Explanation is clarificatory in nature. This amendment will take effect retrospectively from 1st April, 2009." We now refer to the Memorandum explaining the Finance Bill 2009 and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulatory restrictions, if any. This amendment will take effect from 1st April, 2009 and will accordingly apply to all cases where the proceedings are pending before any authority on or after such date. Further, with a view to preventing the misuse of the tax holiday under section 80-IA of the Income-tax Act, it is proposed to amend the Explanation to the said section to clarify that nothing contained in the said section shall apply in relation to a business referred to in subsection (4) of the said section which is in the nature of a works contract awarded by any person (including the Central or State Government) and executed by an undertaking or enterprise referred to in sub-section (1) thereof. This amendment will take effect retrospectively from 1st April, 2000 and will, accordingly, apply in relation to assessment year 2000-01 and subsequent years." The provisions of section 80A(6) provides that notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-Deductions in respect of certain incomes", the provisions of section 80A(6) will apply. In the instant case, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court has held as under: "17. We have considered the submission advanced by Mr. Khaitan but we are unable to agree with him. The benefit under Section 80-IA was intended to encourage the business of generating power. An entrepreneur who wants to avail the benefit of Section 80IA cannot hope to get any benefit more than what has been contemplated by the Act. It was a fortuitous circumstance that the entrepreneur in this case has a home consumption of electricity which any other entrepreneur engaged in the generation of electricity would not have. But that cannot be a reason why two entrepreneurs engaged in the same business will get benefit at rates computed differently. In order to avoid any such discrimination, the legislature has taken care to provide that the price which can be charged has to be the same, which electricity would fetch in the open market. It is true that at the relevant point of time the explanation added to sub-section 8 of Section 80-IA quoted above was not there in the statute. But this fact by itself does not advance the case of the assessee because what was already there during the relevant assessment year reads as follows:- 'Explanation.-For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generating companies can sell electricity to the distribution licensee are governed respectively by Sections 61 and 62 of the Electricity Act 2003. There is tariff regulatory commission which fixes both the rates for sale and purchase of electricity by the distribution licensee. There are provisions in Section 62 so that the generating companies can recover expected revenue on the basis of the tariff fixed by the commission. There are similarly provisions in Section 61 so that the distribution licensee can derive reasonable return. There is thus an in-built mechanism to ensure permissible profit both to the generating companies and the distribution licensees. The assessee's generating unit cannot as such claim any benefit under Section 80-IA of the I. T. Act computed on the basis of rates chargeable by the distribution licensee from the consumer. The benefit can only be claimed on the basis of the rates fixed by the tariff regulation commission for sale of electricity by the generating companies." The above decision of the Hon'ble High Court though has been rendered in the context of section 80IA(8) read with the explanation, to our mind, it resonates the intent behind introd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Assessing Officer, the assessee carried the matter before the ld. CIT(A), who had confirmed the addition made by the Assessing Officer by observing as under:- "The A.O. disallowed interest related to investment in subsidiary. On one hand, assessee was paying interest on the loans taken and on the other hand, made investments in subsidiary company. The income from subsidiary company (dividend) is exempt under Income Tax Act and in view of section 14 of the I.T. Act, no expenditure can be allowed in relation to such investment. The assessee claimed that these investments were made out of surplus funds available with the assessee, however, no supporting evidence was furnished. Therefore, disallowance of interest amounting to Rs. 28,12,000/- is confirmed." 55. Now the assessee is in appeal before us. The ld. AR of the assessee has reiterated the arguments made before the ld. CIT(A) and prayed to allow the appeal on this ground. 56. At the outset, the ld CIT DR has vehemently supported the orders of the lower authorities. 57. We have heard the rival contentions of both the parties and perused the material available on the record. The ld CIT(A) has given a finding that "th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of, any such profits or gains. (2) That in CBDT Circular No. 91/58/66 ITJ (19), dated May 18, 1967 it has been clarified that the effect of the omission of the word "cess" from section 40(a)(ii) is that only taxes paid are to be disallowed in the assessment for the years 1962-63 onwards. Thus, as per the said circular, Education cess cannot be disallowed; there cannot be a contradiction as the circulars bind the tax authorities. (3) That education cess cannot be treated at par with any "rate" or "tax" within the meaning of section 40(a)(ii) especially when the same is only a "cess" as may also be seen from the speech of the hon'ble Finance Minister while placing before the Parliament the budget for the year 2004-05 ([2004] 268 ITR (ST.) 1,6). "Education. 22. In my scheme of things, no issue enjoys a higher priority than providing basic education to all children. The NCMP mandates Government to levy an education cess. I propose to levy a cess of 2 per cent. The new cess will yield about Rs. 4000- 5000 crore in a full year. The whole of the amount collected as cess will be earmarked for education, which will naturally include providing a nutritious cooked midday meal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction tax and fringe benefit tax in section 40 of the Income-tax Act. For example, if fringe benefit tax is also a tax within the meaning of section 40(a)(ii), then there was no necessity of specifically mentioning it for disallowance in section 40(a)(ic). Likewise security transaction tax was disallowable under the provision of section 40(a)(ib). Had there been any intention of disallowing education cess, such provision would have been specifically been carved out in the Income-tax Act, which has not been done. (9) "Education cess" in consonance with Finance Minister's speech mentioned supra, is not only levied on direct taxes but also on indirect taxes such as customs duty and excise duty and service tax. In the absence of specific provisions in the Income tax Act, the same is not disallowable as education cess on indirect taxes is also allowed. (10) While income-tax and "surcharge on income-tax" for the purpose of Union levies fall under "tax" in the First Schedule, "education cess" does not find place in the same schedule as it is not a "tax". "Education cess" for the specific purpose finds place in the Finance Act as obviously not a "tax" but a separate levy. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld AR of the assessee has submitted as under: "1. Provisions of section 40(a) (ii): At the outset it is submitted that there is no dispute that the payment by way of education cess is a deductible expenditure under section 37(1) as the only reason given for disallowing the same is by invoking section 40(a)(ii). It is submitted that section 40(a) (ii) reads thus, "Notwithstanding anything to the contrary in sections 30 to 38 the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", - a) (i), (ia), (ib), (ic) (ii) any sum paid on account of any rate or 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." On a plain reading of section 40(a)(ii), it is evident that a sum paid on account of any rate or tax is expressly disallowed by this sub-clause in two cases: (i) where the rate or tax is levied on the profits or gains of any business or profession, and (ii) where the rate or tax is assessed at a proportion of or otherwise on the basis of any such profits or gains. Therefore, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a)(ii) as approved is reproduced hereunder:- "40(a)(ii) any sum paid on account of any rate or 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; 20. The C.B.D.T. have also clarified the effect of omission of word 'cess' from section 40(ii). Departmental circular being F. No. 91/58/66/-ITJ(19), dated 18-5-1967 relating to applicability of provisions of section 40(a)(ii) of the I.T. Act, 1961 is reproduced hereunder:- "Interpretation of provision of section 40(a)(ii) of the Income-tax Act, 1961 - Clarification regarding:- Recently a case has come to the notice of the Board where the Income- tax Officer has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and section 40(a)(ii) of the New Act. 2. The view of Income-tax Officer is not correct. Clause 40(a)(ii) of the Income tax Bill, 1961, as introduced in Parliament stood as under:- '(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would follow the determination or assessment of profits or gains of any business, profession or vocation in accordance with the provisions of section 10 of the Act.' It may be noted that the aforementioned decision of the Supreme Court is based on provisions of section 10 of 1922 Act and that unlike the provision for disallowance of cess levied on the profits or gains of any business, profession or vocation in certain cases under the 1922 Act, there is no provision under the 1961 Act. From the above it is clear that the cess does not fall within the prohibitory items of deduction under section 40(a)(ii). 3. Education cess not at par with any "rate" or "tax,": The terms cess, rate, tax, fee all have different connotations in law. The education cess cannot be treated at par with any "rate" or "tax," within the meaning of section 40(a)(ii) especially when the same is only a "cess" as is evident from the speech of the Hon'ble Finance Minister while placing the budget for the year 2004-05 before the Parliament. "Education 22. In my scheme of things, no issue enjoys a higher priority than providing basic education to all children. The NCMP mandates Government to levy an education c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly used when the levy is for some special purpose which may be named as health cess, education cess, road cess, etc. (see Shinde Brothers vs. Dy. Commissioner, Raichur, AIR 1967 SC 1512, 1525, [matter relating to Mysore Health Cess Act (28 of 1962), S.3] - Law Lexicon Ramanath Iyer Reprint 2002.) A Cess is recovered for a specific purpose whereas a tax need not be for any specific purpose. Therefore, under general law too there is a distinction between a cess and a tax or a rate and this distinction would be equally applicable whilst construing section 40(a)(ii). 7. 'Tax' defined in section 2(43): The term 'tax' has been defined in section 2(43) of the Act to include income tax and from the Assessment Year 2006-07 also fringe benefit tax payable under section 115W. There is nothing in the language of section 40(a)(ii), which would justify a different meaning to be given to the word "tax" appearing therein. 8. Harshad Shantilal Mehta's The Full bench decision of the Supreme Court in Harshad Shantilal Mehta vs.Custodian 231 ITR 871 (SC) held that the definition of tax under section 2(43) of the Act does not include a penalty or interest and therefore, it follows that interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 37 as a trade expense, for such a tax is analogous to license fee and is not a tax on profits but a necessary condition precedent to the earning of profits. [CIT vs. Nedungadi 1 ITC 355; Greaves Cotton vs. CIT 70 ITR 181]. Similarly, a rate imposed on the annual output of a coal mine or on the annual despatches of coal from the mine, irrespective of any profit being earned is deductible under section 37. [Re KM Coal 1 ITC 281] 11. Section 37: The expression used in section 37 is 'for the purpose of business'. This expression is wider in scope than the expression 'for the purpose of earning profits'. It may take in not only the day-to-day running of a business but also include measures for the preservation of the business and for the protection of its assets and property from expropriation, it may also comprehend payment of statutory dues and taxes. If education cess is not paid, it can lead to recovery proceedings resulting in expropriation of the assets of the taxpayers. Actually, the cess is in the nature of contribution for specific objectives from the taxpayers' side, which objectives are to be met by the Government and, hence would be allowable under section 37(1). 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready been issued by the Board. 16. 'Education Cess' is not in the First Schedule as it is not a 'Tax': While income-tax and "surcharge on income-tax" for the purposes of Union are specifically referred to in Part 1 of the First Schedule, which provides for the rates at which income-tax is to be levied whereas the 'education cess' is not finding place in the same Schedule as it is not a 'tax'. The levy of 'education cess' is to be found in sub-sections (11) and (12) of section 2 of the Finance Act which obviously is indicative of the fact that it is not a 'tax' but a separate levy. 17. Section 2(1) of the Finance Act, 2006: As per section 2(1) of the Finance Act, 2006: "Subject to the provisions of sub-sections (2) and (3) for the assessment year commencing on the first day of April, 2006, INCOME-TAX shall be charged at the rates specified in Part I of the First Schedule and such TAX as reduced by the rebate of income tax calculated under Chapter VIIIA of the Income-tax Act, 1961 (43 of 1961) (hereinafter referred to as the Income-tax Act), SHALL BE INCREASED BY A SURCHARGE FOR PURPOSES OF THE UNION calculated in each case in the manner provided therein. Education cess is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Part I of the First Schedule to the Act. In case of a domestic company, the rate of income tax is thirty per cent of the total income. The tax computed shall be enhanced by a surcharge of ten per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge. From the above circular also it is clear that Education Cess is to be separately levied. Therefore, it not being part of Paragraph E of Part I of the First Schedule to the Act, cannot be treated as income tax. 18. Speech made by the Minister or the mover of the Bill can be taken into consideration: We would like to state that in order to find out legislative intent or to ascertain the object or purpose behind the legislation the Speech made by the Minister or the mover of the Bill can be taken into consideration. In this respect one may rely on the decisions in the cases of CIT vs. Achal Das 217 ITR 799; Kerala SIDC vs. CIT 259 ITR 51(SC); Soorajmull Nagarmull vs. CIT 190 ITR 418; CIT vs. Vaidya 224 ITR 186; Lokashikshana Trust vs. CIT 101 ITR 234 (SC); Assam Frontier Tea vs. UOI 190 ITR 361. It was held in CP Bank vs. CIT 14 ITR 479, 481 and CIT vs. Shivarudrappa 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Rs. 99.1 (100-0.9) which would again necessitate recomputation of Income-Tax which would now be 30% of Rs. 99.1 i.e. Rs. 29.73 and also recomputation of Education cess which would be Rs. 0.89. The vicious circle of such recomputation would continue, which is why legislature in its wisdom has not allowed deductibility of amounts calculated at a proportion of profits. 4. Mechanism of recovery of unpaid Education cess: In case of unpaid education cess, Assessing Officer will raise demand of Income Tax and convey the same to 'assessee' vide notice of demand u/s 156. In case, the said demand is not paid during the notice period of 30 days of service of notice u/s 156, interest on such demand is chargeable u/s 220(2). In addition, the assessee is also liable for imposition of penalty u/s 221. The wordings of sec 221(1) are as follows: "When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under subsection (2) of section 220,be liable, by way of penalty, to pay such amount as the Assessing Officer may direct and in the case of a continuing default, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A; From the perusal of the aforesaid provisions of section 40(a)(ii), it is clear that : 1) where any sum is paid on account of any rate or tax levied on the profits or gains of any business or profession; or 2) where any sum is assessed as proportion of, or otherwise on the basis of any such profits and gains, it will not be allowable as a deduction in the computation of income chargeable under the head "Profits and gains of business or profession". The question that arises for consideration is what is the exact nature of education cess. For the purposes, it would be relevant to refer to the Finance Bill (No. 2) 2004 through which the education cess was first introduced in the legislation. Chapter II Rates of Income-tax Income-tax (1) Subject to the provisions of sub-sections (2) and (3), for the assessment year commencing on the 1st day of April, 2004, income-tax shall be charged at the rates specified in Part I of the First Schedule and such tax as reduced by the rebate of income-tax calculated under Chapter VIII-A of the Income-tax Act, 1961 (43 of 1961) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Chapter or section, as the case may be: Provided that the amount of income-tax computed in accordance with the provisions of section 112 shall be increased by a surcharge for purposes of the Union as provided in Paragraph A, B, C, D or E, as the case may be, of Part I of the First Schedule: Provided further that in respect of any income chargeable to tax under sections 115A, 115AB, 115AC, 115ACA, 115AD, 115B, 115BB, 115BBA, 115E and 115JB of the Income-tax Act, the amount of income-tax computed under this sub-section shall be increased by a surcharge for purposes of the Union, calculated,- (a) in the case of every individual, Hindu undivided family, association of persons and body of individuals, whether incorporated or not, at the rate of ten per cent of such income-tax where the total income exceeds eight hundred and fifty thousand rupees; (b) in the case of ever y co-operative society, firm, local authority and company, at the rate of two and one-half per cent of such income-tax; (c) in the case of every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, at the rate of ten per cent of such income-tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such amounts collected, and subject to the collection, exceeds eight hundred and fifty thousand rupees; (b) in the case of ever y co-operative society, firm, local authority and company, at the rate of two and one-half per cent of such tax; (c) in the case of every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, at the rate of ten per cent of such tax. (9) Subject to the provisions of sub-section (10), in cases in which income-tax has to be charged under sub-section (4) of section 172 or sub-section (2) of section 174 or section 174A or section 175 or subsection (2) of section 176 of the Income-tax Act or deducted from, or paid on, income chargeable under the head "Salaries" under section 192 of the said Act or in which the "advance tax" payable under Chapter XVII-C of the said Act has to be computed at the rate or rates in force, such income-tax or, as the case may be, "advance tax" shall be so charged, deducted or computed at the rate or rates specified in Part III of the First Schedule and such tax as reduced by the rebate of income tax calculated under Chapter VIII-A of the said Act shall be increased by a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en into account, in the manner provided in clause (b) [that is to say, as if the net agricultural income were comprised in the total income after the first fifty thousand rupees of the total income but without being liable to tax], only for the purpose of charging or computing such income-tax or, as the case may be, "advance tax" in respect of the total income; and (b) such income-tax or, as the case may be, "advance tax" shall be so charged or computed as follows:- (i) the total income and the net agricultural income shall be aggregated and the amount of income-tax or "advance tax" shall be determined in respect of the aggregate income at the rates specified in the said Paragraph A, as if such aggregate income were the total income; (ii) the net agricultural income shall be increased by a sum of fifty thousand rupees, and the amount of income-tax or "advance tax" shall be determined in respect of the net agricultural income as so increased at the rates specified in the said Paragraph A, as if the net agricultural income were the total income; (iii) the amount of income-tax or "advance tax" determined in accordance with sub-clause (i) shall be reduced by the amount of income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as non-corporate) liable to tax for the assessment year 2004-2005, the rates of income-tax have been specified in Part I of the First Schedule to the Bill and are the same as those laid down in Part III of the First Schedule to the Finance Act, 2003, for the purposes of computation of "advance tax", deduction of tax at source from "Salaries" and charging of tax payable in certain cases during the financial year 2003-2004. It has also been specified that in the case of individuals, Hindu undivided families, association of persons and body of individuals having total income exceeding Rs. 8,50,000, the tax so computed after rebate under Chapter Vlll-A shall be enhanced by a surcharge of ten per cent, for purposes of the Union. In the case of every artificial juridical person, the tax so computed shall be increased by a surcharge of ten per cent, for purposes of the Union. Further, in case of a firm, a local authority, a co-operative society and a company, the tax so computed shall be enhanced by a surcharge of two and one-half per cent for purposes of the Union. II. Rates for deduction of income-tax at source during the financial year 2004-05 from income other than "Salaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finance the Government's commitment to universalise quality basic education, is proposed to be levied at the rate of two per cent on the amount of tax deducted inclusive of surcharge. We now refer to Chapter VI of the Finance Bill 2004 which talks about Education Cess: "81. (1) Without prejudice to the provisions of sub-section (11) of section 2, there shall be levied and collected, in accordance with the provisions of this Chapter as surcharge for purposes of the Union, a cess to be called the Education Cess, to fulfil the commitment of the Government to provide and finance universalised quality basic education. (2) The Central Government may, after due appropriation made by Parliament by law in this behalf, utilise, such sums of money of the Education Cess levied under sub-section (11) of section 2 and this Chapter for the purposes specified in sub-section (1), as it may consider necessary. Education Cess on excisable goods. 83. (1) The Education Cess levied under section 81, in the case of goods specified in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), being goods manufactured or produced, shall be a duty of excise (in this section referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time being in force. (3) The provisions of the Customs Act, 1962 (52 of 1962) and the rules and regulations made thereunder, including those relating to refunds and exemptions from duties and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Education Cess on imported goods as they apply in relation to the levy and collection of the duties of customs on such goods under the Customs Act, 1962 or the rules or the regulations, as the case may be. Education Cess on taxable services. 85. (1) The Education Cess levied under section 81, in the case of all services which are taxable services, shall be a tax (in this section referred to as the Education Cess on taxable services) at the rate of two per cent, calculated on the tax which is levied and collected under section 66 of the Finance Act, 1994 (32 of 1994). (2) The Education Cess on taxable services shall be in addition to the tax chargeable on such taxable services, under Chapter V of the Finance Act, 1994 (32 of 1994). (3) The provisions of Chapter V of the Finance Act, 1994 (32 of 1994) and the rules made thereunder, including those relating to refunds and exemptions from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hapter as surcharge for purposes of the Union, a cess to be called the Education Cess. Further, clause 83 (1) provides that the Education Cess levied under section 81, in the case of goods specified in the First Schedule to the Central Excise Tariff Act, 1985, being goods manufactured or produced, shall be a duty of excise (in this section referred to as the Education Cess on excisable goods), at the rate of two per cent. Similar is the position in respect of education cess levied on import of goods where it is held as duty of Customs and education cess on taxable service where it is held as service tax. It is therefore clear that across all tax legislation - direct taxes as well as indirect taxes on goods and services, education cess has been defined as tax. The speech of the Finance Minister therefore has to be read and understood in the context of the Finance Bill which we have discussed above. Though the levy has been termed as a education cess, what is relevant to determine is its exact nature rather than its nomenclature. The nature of education cess is clearly tax and nothing else. Now looking at the issue from the angle of recovery of education cess, there is no separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether the assessment of the cesses is made on the basis of any such profits. The words "profits and gains of any business, profession or vocation" which are employed in section 10(4) can, in the context, have reference only to profits or gains as determined under section 10 and cannot cover the net profits or gains arrived at or determined in a manner other than that provided by section 10. The whole purpose of enacting sub-section (4) of section 10 appears to be to exclude from the permissible deductions under clauses (ix) and (xv) of sub-section (2) such cess, rate or tax which is levied on the profits or gains of any business, profession or vocation or is assessed at a proportion of or on the basis of such profits or gains. In other words, sub-section (4) was meant to exclude a tax or a cess or rate the assessment of which would follow the determination or assessment of profits or gains of any business, profession or vocation in accordance with the provisions of section 10 of the Act." "The road cess and public works cess are to be assessed on the annual net profits under sections 72 to 76 of the Cess Act, 1880. The net annual profits have to be calculated on the average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation of such levy of education cess is as a percentage of income tax, the basis of measurement of such levy will not determine or alter the basic character of such levy which continues to remain as tax. It satisfies both the first and the second limb of section 40(a)(ii). The first limb talks about the payment of tax levied on the profits or gains by the assessee and the second limb talks about the determination and assessment thereof by the Assessing officer on the basis of such profits or gains. It is, thus, clear that the aforesaid judgement of the Hon'ble Supreme Court support the case of the Revenue that education cess whose determination and assessment is based on the profits or gains of business, computed in accordance with the provisions of the Income tax Act, could not be allowed as a deduction under section 40(a)(ii) of the Act. The above view also find supports from the decision of the Coordinate Bench in case of Sesa Goa Ltd Vs JCIT [2013] 60 SOT 121 (Panaji) wherein it was held as under: "35. We heard the rival submissions and carefully considered the same. In our opinion, education cess and secondary higher education cess levied by the assessee has been collected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess within the ambit of income tax and in absence of such inclusion in section 40(a)(ii), the education cess is not a tax for the purposes of section 40(a)(ii). As we have already held above that the basic character of education cess is tax. Given that, we donot see a necessity for a specific inclusion of education cess in section 40(a)(ii). As far as Section 115JB is concerned, the specific inclusion of education cess is by way of an explanation and an explanation is always understood to mean what is intended originally at the time of enactment. In our view, the said explicit definition of income tax to include education cess is clarificatory in nature and the same cannot be taken as a basis of argument to contend that in absence of such clarification in context of section 40(a)(ii), education cess is not part of tax. 63.1. Now coming to the contention of the AR that where the legislature wanted certain taxes other than income-tax to be excluded for the purposes of computation of taxable income, it has specially provided for the same. The instances are amounts paid as wealth-tax, securities transaction tax and fringe benefit tax in section 40 of the IT Act. Had there been any int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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