Income Tax--Current Issues

Practice Update

V.K. Subramani

SURCHARGE AND HIGHER EDUCATION CESS DEDUCTIBLE EXPENDITURE UNDER SECTION 37/43B

Payment of income-tax is not deductible expenditure since it is specifically covered by section 40(a)(ii). Yet another economic concept is that the income liable to income-tax has to be computed without deducting income- tax thereon. In other words, it is pre-tax profit on which income-tax is to be computed. In the recent times, some new thoughts have emerged on the taxpayers based on the end use of such funds by the Government. When a collection is meant for earmarked purpose and is not shared with the States by the Union, it could not partake the character of the tax though it is computed by keeping the said tax (income-tax) as the base.

In Sesa Goa Ltd. v. Jt. CIT 2020 TaxPub(DT) 1546 (Bom) : (2020) 423 ITR 0426 (Bom) : (2020) 316 CTR (Bom) 0446 it was held that the amount paid by way of surcharge and HEC are not income-tax and hence not covered by section 40(a)(ii). This decision was rendered on 28th February, 2020. Similar decision could be found in Chambal Fertilisers and Chemicals Ltd. v. CIT, decided on 31-7-2018 : 2018 TaxPub(DT) 5619 (Raj). It may be noted that the definition of the term 'tax' in section 2(41) does not cover surcharge and HEC. Readers may note that the definition of the term 'interest' is quite exhaustive but whereas the term 'tax' is not defined in the same manner.

Taxpayers desirous of claiming Surcharge and HEC as deduction have to take note of section 43B which covers the term 'cess'. Whenever advance tax/self assessment tax is paid, both surcharge and HEC have to be identified and appropriated to an expenditure account. For the previous year 2020-21 also claim could be made based on the abovesaid legal decisions. In case payment of surcharge and HEC has not been identified, a journal entry could be passed for the advance tax paid by appropriating for the said items. Since substance is the core aspect, even if the total amount is paid as income-tax without identification of surcharge and HEC separately, the amount embedded therein is eligible for deduction.

Even self assessment tax paid in the previous year 2020-21 could be appropriated for making claim under section 43B. Unless the legislature comes up with an amendment to section 2(41), there would be a definite claim by every taxpayer of the HEC and surcharge as deduction under section 43B.