Cess and Surcharge not allowed as business expenditure- Finance Bill 2022 makes a retrospective amendment
Section 40 of the Income Tax Act, 1961 specifies the amounts which shall not be deducted in computing the income chargeable under the head “Profits and Gains of business or profession”. Section 40(a)(ii) of the Act provides that any sum paid on account of any rate or ‘tax’ levied on the profits or gains of business or profession shall not be deductible in computing the income chargeable under the head “Profits and gains of business or profession’. As we can see, section 40(a)(ii) does not specifically mention ‘cess’ or ‘surcharge’. This was interpreted by certain taxpayers by claiming that ‘cess’ has not been specifically mentioned in the aforesaid provisions of section 40(a)(ii) and therefore, cess is an allowable expenditure.
Hon’ble Bombay High Court in the case of JCIT vs. Sesa Goa Limited (2020) 117 taxmann.com and Hon’ble Rajasthan High Court in the case of JCIT vs. Chambal Fertilizers & Chemicals Ltd. decided the issue in favour of the taxpayers who were claiming the deduction on account of ‘cess’ after relying on the CBDT circular no. 91/58/66-ITJ (19) dated 18-05-1967. Based on these decisions, ITAT in various judgements has followed the same reasoning and have allowed a deduction on account of payment of “cess”.
Further, ITAT Kolkata in the case of M/s Kanoria Chemicals & Industries Ltd. ITA No. 2184/Kol/2018 (TS-1129-ITAT2021 Kol) dismissed the appeal of the assessee for allowing ‘cess’ as business expenditure based on the judgement of the Supreme Court of India in the case of “CIT vs. K. Srinivasan” that “surcharge” and “additional surcharge” are the part of income tax.
It may be seen that the interpretations of two high courts and various ITATs are against the intent of the legislature and not in line with the judgement of the Supreme Court. Hence, to clarify the position and the intent of the law, the Government has brought an amendment in the law by inserting an explanation in the law on a retrospective basis. Such amendment shall have retrospective effect from 1st April 2005 and accordingly apply in relation to the assessment year 2005-06 and onwards.
The Finance Bill 2022 proposes to insert the following Explanation-3 to Section 40(a)(ii) as below:
|
“Explanation-3- For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.” |
Thus, the Government has made an attempt to nullify the impact of the above-quoted judgements by making an amendment on a retrospective basis. As such “Cess” and “Surcharge” shall be treated as “tax” and therefore no deduction shall be available for cess or surcharge as business expenditure. However, the newly inserted explanation might be subject to test by the judiciary again due to its retrospective nature which will be clear in the near future.
About Author: The author of this article is CA Naveen Goyal. He is having an experience of more than 15 years in the field of Direct Taxation as well as Indirect Taxation. You can post him for further queries: ca.naveen80@gmail.com
Disclaimer: The above article is meant only for educational purposes and therefore, Taxwink is not responsible for any loss or damage caused to any person on account of the above information. Readers are requested to act diligently and under consultation with any professional before applying the information contained in this article.
