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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
This appeal preferred by the assessee is against the order of Ld. CIT(A)-5, Kolkata dated 19.11.2019 for A Y 2013-14.
At the outset the Ld. AR for the assessee Shri Amit Gupta submitted that though the assessee has preferred two grounds of appeal
, it is pressing only ground no.
2. And it was submitted that though ground no. 1 was preferred against the action of the Ld. CIT(A) who confirmed the action of AO wherein he disallowed the provision for leave encashment, the assessee is not pressing this ground in the light of the decision of Hon’ble Supreme Court in SLP (Civil) 22889 of 2008 in M/s. Exide Industries Ltd. Therefore, ground no.1 raised by the assessee stands dismissed.
3. Ground No. 2 is against the action of the Ld. CIT(A) in confirming the disallowance in respect of education ‘cess’ amounting to Rs.31,76,126/- while computing total income under normal provisions of the Act.
Gloster Limited (formerly known as Kettlewell Bullen & Co. Ltd. and successor in interest of Gloster Ltd.) AY 2013-14
Brief facts as noted by the AO are that the assessee in its return of income had claimed deduction of an amount of Rs.31,76,126/- on account of educational cess on income tax and dividend distribution tax for computing total income. The AO asked the assessee as to why the claim of education cess should not be disallowed as per provision of section 40(a)(ii) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). Pursuant to the same, the assessee replied that as per provision of section 40(a)(ii) of the Act only the rate of tax levied on the profits or gains of any business or profession is covered by the said section and since education cess is not levied on profits and gains of any business or profession, it is not covered by section 40(a)(ii) of the Act. And also the assessee relied on CBDT Circular No. 91/58/66-ITJ (19) dated 18.05.1967 for claiming so. The AO did not accept the claim of the assessee. According to him, income tax includes surcharge and additional sur-charge and education cess is nothing but an additional surcharge and relied on the decision of this Tribunal in the case of DIC Asia Paific Ltd. (ITA No. 1458/Kol/2011) and thus disallowed Rs.31,76,126/- which was added back in computing the total income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to confirm the order of the AO by holding as under:
“6.1 I have considered the submission of the appellant and perused the relevant assessment records. The A/R of the appellant has claimed deduction of Rs.31,76,126/- on account of Education Cess. The AO in the assessment order had disallowed the claim. The A/R of the appellant had referred to the decision of the Jurisdictional ITAT in the case of M/s. ITC Ltd vs DCIT in support of his claim. The relevant portion of the order is reproduced as follows: "the assessee's additional last/substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs.423618317.0 u/s 37 of the Act. We note that Hon'ble Rajasthan High Court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd vs DCIT decided on 31.07.2018 takes into account CBDT Circulated dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40(a)(ii) applied only on taxes such than earn cess(es). We therefore reject the revenue's contentions supporting the impugned disallowance. The assessee's instant substantive ground is accepted. The AO is direction to verify all the relevant facts and allow the impugned cess(es) as deduction u/s.37 of the Act. The assessee's appeal I.T.A. No. 685/Kol/2014 is partly accepted in above terms." The Cess is specially levy imposed by the Government for certain specific purposes, The payment of cess is directly linked with Income Tax Payable and imposition sanctioned by Parliament. Under no circumstances, cess can be considered business expenditure and is more of a contribution for national development. In this regard, referenced is made to Gloster Limited (formerly known as Kettlewell Bullen & Co. Ltd. and successor in interest of Gloster Ltd.) AY 2013-14
Circular 3 of 2018 issued by CBDT which lays down the monetary limits for filing of second appeal to the ITAT. The Circular reads as follows: 4. For this purpose, 'tax effect' means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed (hereinafter referred to as 'disputed issues'). Further, 'tax effect' shall be tax including applicable surcharge and cess. However, the tax will not include any interest thereon, except where chargeability of interest itself is in dispute. In case the chargeability of interest is the issue under dispute, the amount of interest shall be the tax effect. In cases where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions. In case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the order to be appealed against." The CBDT Circular is clear that the tax would include applicable surcharge and cess. This Circular would override the CBDT Circular 91/58/66-ITJ dated 18.05.1967 which has been relied upon by the appellant. Therefore, it has to be held that cess and surcharge are integral to tax payable and not deduction on account of payment of cess and surcharge can be allowed u/s 37 of the I T Act, 1961. After careful consideration of the submission of the appellant, perusal of assessment records and relevant CBDT's Circular, the disallowance of Rs.31,76,126/- claimed on account of Education Cess is confirmed, This ground of appeal fails and is therefore, not allowed.”
Aggrieved, the assessee is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that this Tribunal in the case of M/s. ITC Ltd. Vs. DCIT, has allowed the claim of the assessee citing the decision of the Hon’ble Rajasthan High court in the case of CIT Vs. M/s. Chambal Fertilizers & Chemicals Ltd. in (ITA No. 52/2018) wherein the Hon’ble High court had taken note of the CBDT Circular No. 91/58/66-ITJ(19) dated 18.05.1967 and held that the word ‘cess’ has not been expressly stated in Sec. 40(a)(ii) and so the word ‘cess’ has been rightly interpreted as not being tax. Hence, it was held that the education cess is an allowable expenditure u/s. 37(1) of the Act. It was brought to our notice that recently Hon’ble Bombay High court in the case of Sesa Goa Ltd. Vs. JCIT (2020) 117 taxman.com 96 (Bom.) also has taken a similar view.
Gloster Limited (formerly known as Kettlewell Bullen & Co. Ltd. and successor in interest of Gloster Ltd.) AY 2013-14
On this aspect, it would be worthwhile to have a look at the CBDT Circular No. 91/58/66-ITJ(19), which reads as under:
In this regard, reliance is placed on CBDT Circular No. 91/58/66 - ITJ(19) (supra) which reads as under: “1. 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 1922 Act and section 40(a)(ii) of the 1961 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 or 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 onwards.
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." (Emphasis added) On perusal of the aforesaid circular, it can be inferred that that the effect of the omission of the word 'cess' from sec. 40(a)(ii) is that only taxes paid are to be disallowed in the assessment for the year 1962-63 and onwards and not the Cess. Further, it is a well-accepted principle that a circular issued by CBDT is binding on the Income Tax Department as laid down by the Apex Court in the case of CCE -vs.- Dhiren Chemicals (2002) 254 ITR 554 (SC) wherein the Apex Court has observed as under: “We need to make it clear that, regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue.”\
The relevant portion of Section 40(a)(ii) of the Act reads as under: Amounts not deductible. “40. 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)………………..
Gloster Limited (formerly known as Kettlewell Bullen & Co. Ltd. and successor in interest of Gloster Ltd.) AY 2013-14
(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession are assessed at a proportion of, or otherwise on the basis of, any such profits or gains” 9. On plain reading of the above provision, it is can be seen that the sum paid on account of any rate or tax is expressly disallowed in two cases: i) Where the rate 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.
It is taken note that education cess is neither levied on the profits or gains of any business or profession nor assessed at a proportion of, or otherwise on the basis of any such profits or gains. In fact, it is levied on the amount of tax. Hence, it has been contended that Education cess is not covered by sec. 40(a)(ii) of the Act. As per the definition given in Section 2(43) of the Act “Tax” in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date. However, the Finance Act, 2005, w.e.f 01.04.2006 has inserted that in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year “tax” also includes the fringe benefit tax payable under section 115WA. From above it can be seen that education cess is not covered by the definition of tax.
Our attention was drawn to section 43B of the Act which says that “notwithstanding anything contained in any other provisions of the Act a deduction otherwise allowable under this Act, any sum payable by the assessee by way of tax, duty, cess or fee” by whatever name called under any law, is deductible upon actual payment. Hence, according to assessee education cess need to be allowed as deduction on payment basis only, irrespective of the year to which it relates. And it was pointed out that Parliament where ever it required has specified CESS as in section 43B of the Act, and whereas, Parliament by omitting to use the word CESS in section 40(a)(ii) of Gloster Limited (formerly known as Kettlewell Bullen & Co. Ltd. and successor in interest of Gloster Ltd.) AY 2013-14 the Act, has purposefully done so and so the word ‘cess’ cannot be read into section 40(a)(ii) of the Act.
The assessee relied on the decision in the case of Dewan Chand Builders & Contractors- vs- UOI (Civil Appeal No. 1830 to 1832 of 2008) (Dated 18-11-2011) wherein it has been stated that Statement of Objects and Reasons of the Cess Act, clearly spells out the essential purpose, the enactment seeks to achieve. The cess under BOCW Welfare Cess Act levied for ensuring sufficient funds to undertake social security schemes and welfare measures for building and other construction workers was considered as ‘fee’ and not ‘tax’. The cess collected did not become a part of the consolidated fund and was not subject to an appropriation in that behalf. The said fund is set apart, appropriated specifically for the performance of specified purpose not merged in the public revenues for the benefit of the general public and as such the nexus between the Cess and the purpose for which it is levied gets established, satisfying the element of quid pro quo in the scheme. Thus, the impugned cess is a fee and not a tax.
We note that recently, the Hon’ble Rajasthan High Court in the case of CIT – vs- M/s Chambal Fertilizers and Chemicals Ltd. (DB HC) relying on CBDT Circular No. 91/58/66- ITJ (19) dated 18.05.1967 held that the word ‘cess’ has been omitted from Section 40(a)(ii) and therefore the word ‘cess’ has been rightly interpreted as not being tax. Hence, education cess is an allowable expenditure u/s 37(1) of the Act. Relying on the decision of Chambal Fertilizers (supra), this Tribunal in the case of M/s ITC Ltd. vs. ACIT (ITA No. 685/Kol/2014 allowed similar claim. The relevant portion of the order is reproduced as follows:
“the assessee’s additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317.0 u/s 37 of the Act. We note that hon’ble Rajasthan high court’s decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue’s contentions supporting the impugned disallowance . The assessee’s instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 of the Act. The assessee’s appeal is partly accepted in above terms.”
Gloster Limited (formerly known as Kettlewell Bullen & Co. Ltd. and successor in interest of Gloster Ltd.) AY 2013-14
From the discussion above, it can be noted that Parliament has used the word “cess” specifically in certain provisions of the Act (refer inter alia Section 43B of the Act). Therefore, when Section 40(a)(ii) of the Act, does not spell out “cess” which is paid by the assessee as not allowable as deduction and the definition of ‘Tax’ does not specify ‘cess’ as Tax, we are of the opinion that cess cannot be treated as Tax for the purpose of Section 40(a)(ii) of the Act. And in this context, the legal maxim “Expressio Unius Est Exclusio Alterius” comes into play which means Express mention of one implies the exclusion of another. [Refer decision of Hon’ble Supreme Court in G V K Industries ltd. Vs. ITO (2011) 4 SCC 36. (Constitution Bench)] In the case of Ethiopian Airlines Vs. Ganesh Narain Saboo (2011) 8 SCC 539(S) the Hon’ble Supreme Court held that Express application of certain provisions of a statute (CPC in that case) to other (Consumer Protection Act in that case) are intentionally excluded from applicability to later statute.
From the aforesaid discussion, we find substance in the ground raised by the assessee in respect of its claim for allowing the education cess. Therefore, we following the Hon’ble Rajasthan High Court decision in M/s. Chambal Fertilizers Ltd. (supra) and the Hon’ble Bombay High Court decision in Sesa Goa Ltd. (supra) direct the AO to allow deduction in respect of amount paid by the assessee as education cess to the tune of Rs.31,76,126/- while computing total income under the normal provisions of the Act.
In the result, appeal of assessee is allowed. Order is pronounced in the open court on 13th January, 2021.