Education cess and Secondary Higher Education Cess not deductible under section 40(a)(ii) or 37

ITAT Bangalore ruled that education cess and Secondary and Higher Education Cess are not allowable deductions under section 40(a)(ii) or section 37. The tribunal held that Explanation 3 to section 40(a)(ii), inserted by Finance Act 2022 with retrospective effect from 01.04.2005, clarifies that cess forms part of tax and cannot be deducted. The tribunal rejected the assessee's argument that cess is not levied on business profits, noting that though calculated as percentage of income tax, it effectively constitutes a levy on profits and gains. The matter regarding self-assessment tax credit was remanded to the Assessing Officer for proper examination.

---

---

Issues Involved:
1. Allowability of Education Cess.
2. Credit of self-assessment tax paid u/s 140A.

Summary:

Education Cess (Ground 2, 2.1 & 2.2):
The assessee argued that the education cess and secondary and higher education cess (collectively referred to as 'Cess') should be allowed as a deduction u/s 37(1) of the I.T.Act. The learned AR contended that cess is not levied on the profits and gains of business, thus not satisfying the second limb of section 40(a)(ii) of the I.T.Act. However, the Tribunal noted that Explanation 3 to section 40(a)(ii) of the I.T.Act, inserted by the Finance Act, 2022 with effect from 01.04.2005, clarifies that any surcharge or cess shall be included in the term "tax." The Tribunal referenced the Kolkata Bench's decision in M/s.Kanoria Chemicals & Industries Ltd. v. Addl.CIT, which followed the Hon'ble Supreme Court's judgment in CIT v. K.Srinivasan, holding that education cess is an additional surcharge on Income-tax. The Tribunal concluded that cess is effectively a levy on the profits and gains of the assessee and thus satisfies the conditions of section 40(a)(ii). Consequently, the deduction of cess u/s 37 of the I.T.Act is not permissible. Therefore, ground 2, 2.1, and 2.2 were dismissed.

Credit of Self-Assessment Tax (Ground 3):
The assessee claimed that the A.O. did not grant credit for the self-assessment tax paid u/s 140A amounting to Rs.5,14,63,960. The Tribunal found it appropriate to restore this issue to the files of the A.O. for examination and to give due credit for the self-assessment tax paid. Therefore, ground 3 was allowed for statistical purposes.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes.

---