Taxpublishers.in - InterestingDecision/Flash_017.htm - Tax Publishers Your Tax Solution Hub

Share via Whatsapp 193 Views


Tax Publishers Voltas Ltd. v. Asstt. CIT [ITA Nos. 6612 & 7028/Mum/2018, dt. 30-6-2020] : 2020 TaxPub(DT) 2709 (Mum.-Trib.) Education or higher education cess whether an allowable business expenditure not hit by Section 40(a)(ii) Expenses expressly disallowable. *Facts* Assessee did not claim Education cess paid on income tax as an allowable expenditure in the return. Subsequently raised claim of the same at assessment stage before assessing officer citing that section 40(a)(ii) does not explicitly cover/include the word "cess" in its ambit. This went up to ITAT for adjudication. Held in favour of the assessee that cess since is not mentioned in the section 40(a)(ii) is an allowable expense against income from business or profession. Key takeaways -- 1. The legislature when it discussed section 40(a)(ii) way back in the Parliament did remove the word "cess" in its scope as the draft Income Tax Act, 1961 did have the word "cess" included in this section. So the parliament in its wisdom chose consciously to keep cess out of the scope of section 40(a)(ii). 2. CBDT circular existing on this topic clarifies the same as well--No. F.No. 91/58/66-ITJ(19), dated 18-5-1967 3. Allowability of cess as an expense was not claimed in return but only at assessment stage where decision of CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom) : 2012 TaxPub(DT) 2671 (Bom-HC) was applied in favour of the assessee. *Applied:* Sesa Goa Limited v. Joint Commissioner of Income Tax (2020) 107 CCH 375 (Bom), Chambal Fertilisers and Chemicals Ltd. v. CIT, Range-2, Kota Income Tax Appeal No. 52/2018 decided on 31-7-2018 Rajasthan High Court (Jaipur Bench) : 2018 TaxPub(DT) 5619 (Raj-HC), DCIT v. Peerless General Finance and Investment and Co. Ltd. (ITA No. 1469 and 1470/Kol/2019 decided on 5-12-2019 by the ITAT, Calcutta), DCIT v. Graphite India Ltd. (ITA No. 472 and 474, CO. No. 64 and 66/Kol/2018 decided on 22-11-2019 by the ITAT, Calcutta), DCIT v. Bajaj Allianz General Insurance (ITA No. 1111 and 1112/PUN/2017 decided on 25-7-2019 by the ITAT, Pune) : 2019 TaxPub(DT) 5399 (Pune-Trib). Section 40(a)(ii) reads as under -- "(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". "24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had section 40(a)(ii) which read as follows :-- (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, or otherwise on the basis of, any such profits or gains. 25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word "cess" from the aforesaid clause from the Income Tax Bill, 1961. The effect of the omission of the word "cess" is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head " profits and gains of business or profession". Since the deletion of expression "cess" from the Income Tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in section 40(a)(ii) of Income Tax Act and that too, under the guise of interpretation of taxing statute. 26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F.No. 91/58/66-ITJ(19), dated 18-5-1967 issued by the CBDT which reads as follows :-- "Interpretation of provision of section 40(a)(ii) of 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 the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax Bill, 1961 as introduced in the Parliament stood as under :-- "(ii) any sum paid on account of any cess, rate or tax levied on the profits of gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains". When the matter came up before the Select Committee, it was decided to omit the word 'cess' from the clause. The effect of the omission of the word 'cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards. 3. The Board desire that the changed position may please be brought to the notice of all the Income Tax Officers so that further litigation on this account may be avoided. [Board's F.No. 91/58/66-ITJ(19), dated 18-5-1967]." "27. The CBDT Circular, is binding upon the authorities under the Income Tax Act like assessing officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression "cess" ought not to be read or included in the expression "any rate or tax levied" as appearing in section 40(a)(ii) of the Income Tax Act. 28. 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) of the Income Tax Act, 1961 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) of the Income Tax Act, 1961. 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 deductible expenditure. 29. In Kanga and Palkhivala's "The Law and Practice of Income Tax" (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the Income Tax Act, 1961. There is reference to the decision of Privy Council in CIT v. Gurupada Dutta (1946) 14 ITR 100 (PC) : 1946 TaxPub(DT) 0039 (Privy Council), where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT (1971) 82 ITR 580 (SC) : 1971 TaxPub(DT) 0380 (SC) that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act".

Tax Publishers

Voltas Ltd. v. Asstt. CIT [ITA Nos. 6612 & 7028/Mum/2018, dt. 30-6-2020] : 2020 TaxPub(DT) 2709 (Mum.-Trib.)

Education or higher education cess whether an allowable business expenditure not hit by Section 40(a)(ii) Expenses expressly disallowable.

Facts

Assessee did not claim Education cess paid on income tax as an allowable expenditure in the return. Subsequently raised claim of the same at assessment stage before assessing officer citing that section 40(a)(ii) does not explicitly cover/include the word "cess" in its ambit. This went up to ITAT for adjudication.

Held in favour of the assessee that cess since is not mentioned in the section 40(a)(ii) is an allowable expense against income from business or profession.

Key takeaways --

1. The legislature when it discussed section 40(a)(ii) way back in the Parliament did remove the word "cess" in its scope as the draft Income Tax Act, 1961 did have the word "cess" included in this section. So the parliament in its wisdom chose consciously to keep cess out of the scope of section 40(a)(ii).

2. CBDT circular existing on this topic clarifies the same as well--No. F.No. 91/58/66-ITJ(19), dated 18-5-1967

3. Allowability of cess as an expense was not claimed in return but only at assessment stage where decision of CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom) : 2012 TaxPub(DT) 2671 (Bom-HC) was applied in favour of the assessee.

Applied: Sesa Goa Limited v. Joint Commissioner of Income Tax (2020) 107 CCH 375 (Bom), Chambal Fertilisers and Chemicals Ltd. v. CIT, Range-2, Kota Income Tax Appeal No. 52/2018 decided on 31-7-2018 Rajasthan High Court (Jaipur Bench) : 2018 TaxPub(DT) 5619 (Raj-HC), DCIT v. Peerless General Finance and Investment and Co. Ltd. (ITA No. 1469 and 1470/Kol/2019 decided on 5-12-2019 by the ITAT, Calcutta), DCIT v. Graphite India Ltd. (ITA No. 472 and 474, CO. No. 64 and 66/Kol/2018 decided on 22-11-2019 by the ITAT, Calcutta), DCIT v. Bajaj Allianz General Insurance (ITA No. 1111 and 1112/PUN/2017 decided on 25-7-2019 by the ITAT, Pune) : 2019 TaxPub(DT) 5399 (Pune-Trib).

Section 40(a)(ii) reads as under --

"(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".

"24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had section 40(a)(ii) which read as follows :--

(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, or otherwise on the basis of, any such profits or gains.

25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word "cess" from the aforesaid clause from the Income Tax Bill, 1961. The effect of the omission of the word "cess" is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head " profits and gains of business or profession". Since the deletion of expression "cess" from the Income Tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in section 40(a)(ii) of Income Tax Act and that too, under the guise of interpretation of taxing statute.

26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F.No. 91/58/66-ITJ(19), dated 18-5-1967 issued by the CBDT which reads as follows :--

"Interpretation of provision of section 40(a)(ii) of 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 the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax Bill, 1961 as introduced in the Parliament stood as under :--

"(ii) any sum paid on account of any cess, rate or tax levied on the profits of gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains".

When the matter came up before the Select Committee, it was decided to omit the word 'cess' from the clause. The effect of the omission of the word 'cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards.

3. The Board desire that the changed position may please be brought to the notice of all the Income Tax Officers so that further litigation on this account may be avoided. [Board's F.No. 91/58/66-ITJ(19), dated 18-5-1967]."

"27. The CBDT Circular, is binding upon the authorities under the Income Tax Act like assessing officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression "cess" ought not to be read or included in the expression "any rate or tax levied" as appearing in section 40(a)(ii) of the Income Tax Act.

28. 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) of the Income Tax Act, 1961 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) of the Income Tax Act, 1961. 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 deductible expenditure.

29. In Kanga and Palkhivala's "The Law and Practice of Income Tax" (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the Income Tax Act, 1961. There is reference to the decision of Privy Council in CIT v. Gurupada Dutta (1946) 14 ITR 100 (PC) : 1946 TaxPub(DT) 0039 (Privy Council), where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT (1971) 82 ITR 580 (SC) : 1971 TaxPub(DT) 0380 (SC) that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act".