Education Cess cannot be allowed as an expenditure in view of the subsequent amendments in the Income Tax Act, 1961 – Supreme Court
In a recent judgment, the Hon’ble Supreme Court had allowed the appeal of the Revenue observing that in view of the subsequent amendments in the Income Tax Act, 1961, “Education Cess” cannot be allowed as an expenditure.
ABCAUS Case Law Citation:
ABCAUS 3973 (2024) (04) SC
However, in 2020 the Bombay High Court had held that education cess is allowable expenditure as word “cess” is absent under the provisions of section 40(a)(ii) of the Income Tax Act, 1961 (the Act)
The Hon’ble Supreme Court had admitted the Special Leave Petition of the Department against the said judgment of the Bombay High Court.
The question raised before the Hon’ble Bombay High Court was as to whether on the facts and in the circumstances of the case and in law, the Education Cess and Higher and Secondary Education Cess is allowable as a deduction in the year of payment?
The Hon’ble High Court had observed that in section 40(a)(ii) there was no reference to any “cess”. Therefore, there was no scope to consider “cess” being in the nature of a “Tax” as contended by the Revenue. Further, the Hon’ble High Court had opined that if the legislature intended to prohibit the deduction of amounts paid by a Assessee towards “education cess” or any other “cess”, then, the legislature could have easily included reference to “cess” in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature had not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the “cess”, when it comes to computing income chargeable under the head “profits and gains of business or profession.
Several ITAT have allowed the deduction of “education cess” as expenditure following the judgment of the Hon’ble Bombay High Court and also in view of the judgment of the Hon’ble Supreme Court that the cess is not tax.
However, the Finance Act 2022 has amended the section 40(a)(ii) by inserting Explanation 3 to the clause (ii) as above providing that tax shall also include any cess and hence shall be not deductible u/s 40 of the Income Tax Act, 1961 (the Act).
It is notable that the Finance Act 2022 had made the said amendment w.e.f. 01.04.2005 to nullify the impact of the judgements passed by the Hon’ble Bombay High Court and Rajasthan High Court.
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