As per Section 40(a)(ii) of the Income-tax Act, 1961 (“ITA”), any expenditure in the nature of income-tax is not a deductible expenditure while computing taxable income of a taxpayer. There is a debate as to whether education cess is in the nature of income-tax and hence, is not an eligible deduction in view of Section 40(a)(ii) of the ITA.
Recently, in the case of DCIT Vs M/s Bajaj Allianz General Insurance Company Ltd. (ITA No. 1111 & 1112/PUN/2017), the Hon’ble Income-tax Appellate Tribunal (“ITAT”), Pune bench, has upheld tax deductibility of “education cess” from the taxable income of the taxpayer. The ITAT relied on the decision of the Hon’ble Rajasthan High Court (“HC”) in the case of Chambal Fertilisers And Chemicals Ltd. [TS-489-HC-2018 (Raj HC)], wherein the HC had upheld deductibility of education cess. The ITAT has observed that in view of the settled nature of the issue as per the ratio laid down by the Rajasthan HC, the taxpayer’s claim is allowed.
In the case of Chambal Fertilisers and Chemicals Ltd, the HC upheld deductibility of education cess on the following grounds:
- The word “cess”, which was also present in Income Tax Bill, 1961, as originally introduced in the Parliament, was omitted by the Select Committee and thus, Section 40(a)(ii) of the Act does not have this word.
- The reason for specific exclusion of the term “cess” has been stated in CBDT’s Circular No. 91/58/66 – ITJ(19) dated 18-05-1967 that, “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.”
Relying on these favourable rulings, taxpayers could consider claiming a tax deduction in respect of education cess levied on income-tax applicable on business profits. Penalty could be mitigated by making a disclosure of the technical position adopted in the tax return. Also, taxpayers could consider raising an additional claim for this deduction during their pending assessment proceedings, in case a deduction has not been claimed in the income-tax return.
It may be noted that there are certain adverse rulings in which the ITATs have held that EC is not deductible since it is income-tax. However, these rulings have not been discussed by the Pune ITAT. Also, there is an Indian Supreme Court ruling which has held that surcharge is part of income-tax and the ITA defines education cess as an additional surcharge. In view of this, further litigation on this issue cannot be ruled out.