TECH MAHINDRA BUSINESS SERVICES LTD.,MUMBAI vs. THE ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-13(3)(2), MUMBAI

The assessee in appeal has raised solitary ground assailing disallowance made u/s. 14A of Income Tax Act, 1961 (in short ‘the Act’) r.w. Rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’) amounting to Rs.80,08,567/-. The assessee vide application dated 13/09/2022 has raised an additional ground for allowing education cess including secondary and higher education cess paid on Income Tax. The additional ground raised by the assessee reads as under:

“1. On facts and circumstances of the case and in law, the Appellant prays that the Education cess, including secondary and higher education cess paid on income-tax for the year should be allowed as deductible expense while computing the taxable income of the Appellant for the year under consideration.”

Shri J.D,Mistri, Sr. Advocate appearing on behalf of the assessee submitted that the additional ground raised in the appeal is purely legal. The facts necessary for adjudication of the said ground are already on record and no fresh documentary evidence is required to be furnished for adjudication of the said ground. The ld.Counsel for the assessee placed reliance on various decisions including the decision rendered in the case of Jute Corporation of India Ltd., 187 ITR 688(SC), New India Industries Ltd., 207 ITR 1010 (Guj) and Contoller of Estate Duty vs. R. Brahadeeswaran, 163 ITR 680 (Mad) for admission of additional ground.

Ms. Richa Gulati representing the Department vehemently opposed admission of additional ground at this belated stage.

We have heard the submissions made by rival sides on the admission of additional ground. We find that the additional ground raised by the assessee is legal in nature and no fresh evidence is required to be adduced for adjudication of the said ground. In light of the decision rendered by Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. vs. CIT, 229 ITR 383(SC), additional ground raised by the assessee is admitted for adjudication.

In respect of additional ground of appeal relating to allowability of education cess while computing taxable income, the ld.Counsel for the assessee submits that the assessee had raised the ground of education cess for the first time before the CIT(A). The CIT(A) refused to admit additional ground on the pretext that the same does not arise from the assessment order. The CIT(A) has erred in not following the decision of Hon'ble Jurisdictional High Court in the case of Sesa Goa Ltd. Vs. JCIT, 117 taxmann.com 96(Bom).

The ld.Counsel for the assessee made two fold submissions on the issue. The first submission of ld.Counsel for the assessee is that provisions of section 40(a)(ii) of the Act were amended by the Finance Act, 2022 by way of insertion of Explanation –3. The said Explanation has been made effective retrospectively from 01/04/2005. He pointed that by way of insertion of Explanation – no part of the substantive law has changed. Further the said amendment can only be effective prospectively and not retrospectively.

The second plank of argument by the ld. Counsel for the assessee is that the Legislature by way of amendment cannot retrospectively overturn a judicial pronouncement and declare it to be a nullity. The ld.Counsel for the assessee submitted that the expression used in section 40(a)(ii) of the Act is “any rate or tax levied”. There is no reference to “cess” in section 40(a)(ii) of the Act. To read cess into the words “any rate or tax levied” would amount to reading something in the text of the provisions which is not found in that provision. He then referred to the Income Tax Bill 1961 vide which sub-clause (ii) was inserted. He pointed that in the original text of sub-clause (ii) the word “cess” was mentioned , however the Select Committee of the Parliament decided to omit the word “cess” deliberately, hence, no question of reintroducing cess by way of Explanation-3 that to when there is no mention of the same in the substantive provision in clause (ii). He further pointed that CBDT in Circular dated 18/05/1967 emphatically accepts that ‘ cess’ is not tax. Hence, education cess is an allowable deduction. To support his submissions he placed reliance on the following decisions:

The ld.Counsel for the assessee vehemently submitted that a perusal of Explanatory Memorandum to the Finance Bill, 2022 would show that one of the reason behind insertion of Explanation -3 to section 40Ia0(ii) of the Act is that the judgment rendered in the case of Sesa Goa Ltd. (supra) and Chambal Fertilizers& Chemicals Ltd.(supra) are per in-curium. Such a question does not lie within the scope and ambit of the Legislature and hence it is against the Legislative intent. A judicial pronouncement is always binding except where the entire basis of that judgment is removed by the Legislature. In that case only the Amendment could apply retrospectively. It is only when the Legislature retrospectively removes the substratum of a judgment to make the decision ineffective, the power of the sovereign legislature to legislate within its field, both prospectively and retrospectively, cannot be questioned. But where there is mere validation without the defect being legislatively removed, such Legislative action cannot apply retrospectively. He referred to the decision in the case of State of Karnataka vs. Karnataka Pawn Brokers Association, 91 taxmann.com 228 (SC) to contend that legislature cannot by way of introducing amendment overturn a judicial pronouncement and declare it to be wrong or a nullity. He further referred to the decision of Hon'ble Supreme Court of India in the case of Baharul Islam and Others Vs. Indian Medical Association in SLP No.32592-93 of 2015 decided on 24/01/2023 and the decision of Hon'ble Bombay High Court in the case Rohan Lobo vs. State of Goa & Others in bunch of Writ Petitions, lead case being Writ Petition No.23 of 2021 decided on 20/04/2023.

Per contra, the ld. Departmental Representative vehemently countered the arguments raised by the ld.Counsel for the assessee on additional ground. She submitted that a perusal of para-9 of the Memorandum explaining amendment to section 40(a)(ii) of the Act would show that the interpretation of the provisions by two Hon’ble High Courts in the case of Sesa Goa Ltd.(supra) and Chambal Fertilizers & Chemicals Ltd. (supra) were contrary to the intention of Legislature and were not in line with the judgment rendered by Hon'ble Supreme Court in the case of CIT vs. K. Srinivasan, 83 ITR 346. Hence, in order to make the intention of legislature clear and to make it free from any misinterpretation, Explanation – 3 was inserted retrospectively w.e.f. 01/04/2005. She further pointed that the decision of Hon’ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd.(supra) has been overturned by Hon’ble Supreme Court of India in 147 taxamnn.com 285. Thereafter, the Tribunal in various decisions including the following decisions has accepted that education cess cannot be allowed as deduction.

Cypress Semiconductor Technology India (P) Ltd., Vs. DCIT 142 taxmann.com 480 (Bang-Trib) 2. CC Engineers Pvt. Ltd. vs. ITO, A.Y.2018-19 decided on 07/11/2022 3. DCIT vs. National Bank for Agriculture & Rural Development vs. Addl.CIT, ITA No.3650/Mum/2016, A.Y.2010-11 decided on 24/08/2022 16. Without prejudice to the primary arguments ld. Departmental Representative submitted that vires of the amendment made by Finance Act, 2022 by way of insertion of Explanation -3 to Section 40(a)(ii) of the Act can only be challenged before the Constitutional court. The Tribunal lacks jurisdiction in entertaining any issue which challenges the validity of any provision of the Act or amendment made thereto by Legislature.

Controverting the arguments made on behalf of the Department, the ld. Counsel for the assessee asserted that in so far as the decision by Hon'ble Apex Court in the case of Chambal Fertilizers & Chemicals Ltd (supra) is concerned, the same was made on the basis of concession given by the Counsel of the respondent/assessee. He placed reliance on the decision in the case of Uptron India Ltd. vs. Shammi Bhan & Others (1998) 6 SCC 538 to contend that wrong concession on a question of law made by Counsel is not binding and such concession cannot constitute a binding precedent. For the similar proposition he also placed reliance on the decision in the case of Concord of India Insurance Co. Ltd. vs. Smt. Nirmala Devi, 118 ITR 507.

We have heard exhaustive arguments made by rival sides with respect to additional ground raised in the appeal. The Finance Act, 2022 has inserted an Explanation -3 to section 40(a)(ii) of the Act . The relevant provisions of section 40(a)(ii) after amendment reads as under:

In the above referred Circular issued by CBDT, ‘Cess’ is to be allowed under sub-clause (ii) of clause (a) of section 40 of the Act. However, it is to be noted that ‘Cess’ is imposed not only by the Central Government through Finance Act for a financial year, but also by various State Governments. It is pertinent to mention that in the above referred Circular of CBDT, there is no reference to the ‘Cess’ imposed by the Central Government through Finance Act for a particular year. This CBDT circular needs to be seen from the perspective that “Education Cess” imposed by Finance Act 2004 and subsequent Acts and then designated as “Education and Health Cess” are actually tax in the form of additional surcharge, as stated clearly in each of the relevant Finance Act imposing such “Cess”. It is only called “Cess” since they were imposed for a particular purpose of fulfilling the commitment of the Government to provide and finance quality health services and universalized quality basic education and secondary and higher education.

This circular was in reference to “Cess” imposed by State Government which is actually of the nature of “Cess” and not of the nature of “Additional Surcharge” being termed as “Cess” in the relevant Finance Act. When an additional surcharge is imposed by the Central Government and it is named as “Cess”, then its allowability needs to be examined whether an additional surcharge is allowed to be a deduction or not. Hon’ble Supreme Court in the case of K Srinivasan has held that “surcharge” and “additional surcharge” are tax. Hence, the additional surcharge named as “Cess”and imposed by the Central Government through the Finance Act is nothing but a tax and hence, needs to be disallowed under sub-clause (ii) of clause (a) of section 40 of the Act. The relevant part of Hon’ble Supreme Court judgment is as under: 7. The above legislative history of the Finance Acts, as also the practice, would appear to indicate that the term “Income tax” as employed in Section 2 includes surcharge as also the special and the additional surcharge whenever provided which are also surcharges within the meaning of Article 271 of the Constitution. The phraseology employed in the Finance Acts of 1940 and 1941 showed that only the rates of income tax and supertax were to be increased by a surcharge for the purpose of the Central Government. In the Finance Act of 1958 the language used showed that income tax which was to be charged was to be increased by a surcharge for the purpose of the Union. The word “surcharge” has thus been used to either increase the rates of income tax and super tax or to increase these taxes. The scheme of the Finance Act of 1971 appears to leave no room for doubt that the term Income tax” as used in Section 2 includes surcharge.”

Since the judgments of Rajasthan High Court and Bombay High Court did not consider the judgment of Hon’ble Supreme Court discussed above, the judgments of these two High Courts appear to be per incuriam. It may be mentioned that in paragraph 578 at page 297 of Halsbury’s Laws of England, Fourth Edition, the rule of per incuriam is stated as follows: “A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of co-ordinate jurisdiction which covered the case before it, in which case it must be decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.”

From the above discussion it may be seen that the interpretations of two High courts and various ITATs are against the intention of legislature and not in line with the judgment of Hon’ble Supreme Court. Hence, in order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to include an Explanation retrospectively in the Act itself to clarify that for the purposes of this sub-clause, the term “tax” includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Amendment is made retrospectively to make clear the position irrespective of the circular of the CBDT.

This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.”

Thereafter, the Hon’ble Apex Court in SLP filed by the Department in the case of Chambal Fertilizers Ltd. (supra) reversed the decision of Hon’ble Rajasthan High Court and allowed the appeal of the Department. The relevant extract of the order by Hon’ble Apex Court reads as under:

The ld. Counsel for the assessee has vehemently argued that by way of retrospective amendment the Legislature cannot overturn or set-aside the judgment when the substantive provisions of the section remain unchanged. He submitted that the retrospective amend by the legislature is an attempt to nullify the writ of mandamus issued by the Court, this is a case of judicial overreach, hence, cannot be allowed. Such retrospective amendments are illegal and invalid. To support this argument the ld. Counsel for the assessee has placed reliance on the decision rendered in the case of Karnataka Pawn Brokers Association(supra) and also on the decision rendered in the case of Baharul Islam (supra) and Rohan Lobo (supra).

The arguments raised by the ld. Counsel for the assessee appear to be quite attractive but we are unable to accept the same. To challenge the vires of any amendment made by the Legislature, the Tribunal is not the forum. The Tribunal is a creature of a statute and has defined limited jurisdiction.. The Tribunal is empowered to adjudicate the issues arising out of dispute in respect of appeals arising from appealable orders specified u/s. 253 of the Act and cannot exercise its jurisdiction to test vires of amendments made by legislature to the statute, out which it has been created.

As regards retrospective applicability of the amendment, we find that the Hon’ble Apex Court while allowing the appeal of Revenue accepted the statement of Counsel for the assessee that amendment vide Finance Act, 2022 is effective retrospectively w.e.f. 01/04/2005. Further, we find that the Co- ordinate Bench in the case of National Bank for Agriculture & Rural Development (supra) has rejected the assessee’s claim of deduction of Education Cess holding amendment by Finance Act, 2022 as retrospective. Similar view has been taken in the case of CC Engineers Pvt. Ltd. (supra). . Hence, we are unable to accept the arguments advanced by the ld. Counsel for the assessee, qua additional ground of appeal. Consequently, the additional ground raised in appeal is dismissed.

In the result, appeal by the assessee is partly allowed.