Education cess is allowable expenditure under Section 37 of the Income Tax Act 1961 – ITAT

Education cess is an allowable expenditure under Section 37 of the Income Tax Act 1961. ITAT allows deduction on the basis of CBDT circular and PAN India judgments

ABCAUS Case Law Citation
ABCAUS 3450 (2021) (02) ITAT

Important case law relied referred:
National Thermal Power Co. Ltd. vs CIT (1998) 229 ITR 383
Chambal Fertilisers and Chemicals Ltd. vs JCIT
Peerless General Finance & Investment Co. Ltd. vs DCIT
Dewan Chand Builders & Contractors vs Union of India & Others
Hingir Rampur Coal Co. Ltd. vs. State of Orissa

In the instant case, the assessee had challenged the order passed by the CIT(A) in inter alia not allowing the claim of   education cess as an allowable business expenditure u/s 37 of the Income Tax Act, 1961 (the Act).

The assessee had taken up additional grounds pertaining to deduction of Education Cess before the CIT(A) who did not allow the grounds holding that it did not emanate from the assessment order.

The Tribunal accepted the additional ground in view of the Hon’ble Supreme Court which had held that the view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal. It was held that the Tribunal had jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee.

The assessee argued that reading the provisions of Section 40(a)(ii), the education cess paid on Income Tax doesn’t come under the purview of the definition as it is levied on the amount of Income Tax but not on profits of business.  The  assessee also relied on the   CBDT Circular No. 91/58/66-ITJ(19) dated 18.05.1967, which states  the effect of the omission of the words ‘cess’ from Section 40(a)(ii) is that only taxes paid are to be disallowed in the assessment for the assessment years 1962-63 onwards.

The assessee also relied on the judgment of Hon’ble Rajasthan High Court wherein the same issue was decided in favour of the assessee and particularly held that education cess is an allowable expenditure. The assessee also relied upon several judgments of Coordinate Benches of the ITAT.

The Tribunal took note of the said CBDT circular clarifying interpretation of provisions of Section 40(a)(ii) of the Act and judgments relied upon by the assessee.

The Tribunal also observed provisions of Section 115JB of the Act where Explanation-2 defines the term “income tax” and includes education cess therein. Thus, the Tribunal opined that wherever the legislature wanted to include the education cess specifically in the statue it has done so under the Act.

The Tribunal pointed out that the term ‘tax’ has been defined in section 2(43) of the Act to include only Income-tax, Super Tax and Fringe Benefit Tax (FBT).

The Tribunal said that surcharge on income-tax finds place in the First Schedule, but that is not the case so far as Education Cess is concerned. Therefore, the education cess on this reasoning cannot   be equated as tax or surcharge.  Based on this, it can be said that since the word ‘Cess’ is not specifically included in the definition, it   cannot be considered a part of tax, and accordingly, it should not be disallowed in u/s 40(a)(ii) of the Act.

The Tribunal noted that the Constitution Bench explained different features of a `tax’, a `fee’ and `cess’ holding that a “Tax” is a compulsory exaction of money by public authority for public   purposes enforceable by law and is not payment for services rendered. Whereas a cess levied by way of fee is not intended to be, and does not become, a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied.

The Tribunal also noted that the proceeds from collection of “Education Cess” are not credited to Consolidated Fund but to a non-lapsable Fund for elementary education namely “Prarambhik Shiksha Kosh”.

The Tribunal opined that since the proceeds from collection of Education Cess are kept separate for a specified purpose, applying the principles in the decision of Apex Court it could be said that the same is not in the nature of tax. Hence, it is allowable as deduction.

The Tribunal further stated that as per section 37 of the Act, the Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income Tax is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction.

The Tribunal also went through the various judgments of judicial authorities pan India wherein the fresh claim of the assessee is considered and the deduction u/s 37 of Education Cess has been allowed.

Education cess is an allowable expenditure

Accordingly, the Tribunal held that the assessee is eligible to claim the deduction of the ‘Education Cess’ as per the provisions of Section 37 of the Income Tax Act and allowed the appeal in the favour of the assessee.

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