2020 (3) TMI 347 - HC - Income Tax

Education cess and higher secondary education cess qualify as deductible business expenses under Section 40(a)(ii)

The Bombay HC held that education cess and higher secondary education cess are deductible business expenses under income tax law. The court examined ... Deductibility under Section 40(a)(ii) of the Income Tax Act - disallowance under Section 40(a)(i) and TDS obligations - taxation of demurrage under Section 172 and source/residence provisions - interpretation of taxing statute - no taxation by implication - appellate authorities' power to allow deductions not claimed in original return - binding effect of CBDT Circular in departmental practice Disallowance under Section 40(a)(i) and TDS obligations - taxation of demurrage under Section 172 and source/residence provisions - binding effect of CBDT Circular in departmental practice - Whether demurrage paid to non-resident buyers attracted liability to deduct tax at source and consequent disallowance under Section 40(a)(i) or was taxable under Section 172 so that no disallowance arose. - HELD THAT: - The Court examined the ITAT's reliance on the Division Bench decision in Orient (Goa) Pvt. Ltd. and noted that a subsequent Full Bench of this Court answered the controlling question of law in favour of the assessee, rejecting Orient (Goa). The Full Bench held that Section 172 could be invoked without the payer being required to treat the payee as a resident for the purpose of that provision in the manner previously supposed, and thereby supported the view that demurrage could be taxed under Section 172 rather than attracting TDS provisions under Sections 194C/195/194C as a requirement to deduct tax at source. The ITAT had earlier, for a different assessment year (2009-2010), held that the Circular No.723/19-9-1995 (dealing with Sections 172, 194C and 195) made clear that TDS provisions were not applicable and therefore no disallowance under Section 40(a)(i) arose; that view was not challenged by Revenue for 2009-2010. Given the Full Bench decision overruling the Division Bench in Orient (Goa), the Court modified the ITAT's impugned order for 2008-2009 and answered the substantial questions in favour of the assessee, restoring the approach that demurrage accepted as taxable under Section 172 did not mandate TDS and consequent disallowance under Section 40(a)(i). [Paras 10, 11, 12, 13, 14] Answered in favour of the assessee; demurrage taxable under Section 172 and no disallowance under Section 40(a)(i) in the facts of the case. Taxation of demurrage under Section 172 and source/residence provisions - disallowance under Section 40(a)(i) and TDS obligations - Whether amounts paid as demurrage to non-resident buyers accrued or arose to such non-residents in India within the meaning of Section 5(2)(b) read with Explanation 1(b) to Section 9(1)(i). - HELD THAT: - The Court treated this question alongside the question on TDS/disallowance because the ITAT's contrary view for the 2008-2009 assessment relied on Orient (Goa). The Full Bench decision addressed the legal proposition that had led to Orient (Goa) and resolved the controlling question in favour of the assessee. On that basis the Court concluded that the reasoning adopted by the ITAT (following Orient) could not stand and the substantial question regarding accrual/arising to non-residents in India was answered for the assessee, thereby supporting the ITAT's earlier favorable outcome for the 2009-2010 assessment and modifying the impugned order for 2008-2009. [Paras 10, 11, 12, 13, 14] Answered in favour of the assessee; demurrage did not, in the circumstances, result in income accruing/arising to the non-resident buyers in India so as to attract disallowance. Deductibility under Section 40(a)(ii) of the Income Tax Act - interpretation of taxing statute - no taxation by implication - binding effect of CBDT Circular in departmental practice - appellate authorities' power to allow deductions not claimed in original return - Whether Education Cess and Higher and Secondary Education Cess are excluded from deduction under Section 40(a)(ii) or are allowable as a deduction in the year of payment. - HELD THAT: - Applying settled principles of interpretation of taxing statutes, the Court held that Section 40(a)(ii) disallows 'any rate or tax levied on the profits or gains of any business or profession' and does not, by its text, refer to 'cess'. Legislative history shows that the original Bill included the word 'cess' but the Select Committee deliberately omitted it; the CBDT Circular dated 18-5-1967 clarifies that 'cess' was omitted and only taxes are to be disallowed, and that Circular is binding on departmental authorities. The Court rejected the ITAT's approach of treating cess as tax merely because it is collected along with income-tax or fringe benefit tax, and found that decisions such as Unicorn Industries were inapposite because they addressed a different statutory context. The Court also held that appellate authorities have power to allow deductions raised before them even if not claimed in the original return, distinguishing Goetze (which concerns assessing officer's powers) and relying on precedent recognizing wide appellate powers. For these reasons the Court answered the question in favour of the assessee and directed modification of the ITAT's orders. [Paras 38, 39, 40, 41, 42] Answered in favour of the assessee; education cess and higher and secondary education cess are deductible in computing business profits and are not disallowed by Section 40(a)(ii). Appellate authorities could allow the deduction despite its absence in the original return where the claim was raised before them. Final Conclusion: All substantial questions of law in Tax Appeal No.17 of 2013 (including demurrage/TDS issues and deductibility of cess) and the sole question in Tax Appeal No.18 of 2013 are answered in favour of the appellant (assessee) and against the Revenue; the impugned ITAT orders are modified and benefits granted to the assessee. There shall be no order as to costs. Issues Involved:1. Disallowance under Section 40(a)(i) of the Income Tax Act for demurrage paid to non-resident buyers.2. Taxability of demurrage under Section 172 of the Income Tax Act.3. Deductibility of Education Cess and Higher and Secondary Education Cess under Section 40(a)(ii) of the Income Tax Act.Detailed Analysis:Issue 1: Disallowance under Section 40(a)(i) for Demurrage Paid to Non-Resident BuyersThe court addressed whether the appellant's claim against disallowance under Section 40(a)(i) for demurrage paid to non-resident buyers of iron ore, which was considered taxable under Section 172, was covered by the decision in Orient Goa P. Ltd. The ITAT had previously ruled in favor of the appellant for the Assessment Year 2009-2010, stating that the appellant was not obliged to deduct TDS on demurrage charges as per Circular number 723, which clarified that Sections 194C and 195 were not applicable. The ITAT's decision for the Assessment Year 2008-2009, however, followed the Division Bench's decision in Orient Goa P. Ltd., resulting in disallowance. The Full Bench later overruled Orient Goa P. Ltd., leading the court to rule in favor of the appellant, stating that the substantial questions of law Nos. (i) and (ii) should be answered in favor of the appellant.Issue 2: Taxability of Demurrage under Section 172The court noted that the ITAT had previously ruled that demurrage charges were taxable under Section 172 and not subject to TDS under Sections 194C and 195. The Full Bench's decision further supported this view, leading the court to rule that the appellant was not liable to deduct TDS on demurrage charges, thus no disallowance under Section 40(a)(i) was warranted. This decision was consistent with the ITAT's earlier ruling for the Assessment Year 2009-2010, which was not challenged by the Revenue.Issue 3: Deductibility of Education Cess and Higher and Secondary Education CessThe court examined whether Education Cess and Higher and Secondary Education Cess, collectively referred to as 'cess,' were allowable as deductions under Section 40(a)(ii). The appellant argued that 'cess' was not included in the expression 'any rate or tax levied,' and thus should be deductible. The court referred to the legislative history and CBDT Circular No. F. No.91/58/66-ITJ(19), which clarified that 'cess' was deliberately omitted from Section 40(a)(ii), indicating that it was not intended to be disallowed. The court also cited various decisions supporting the view that 'cess' should be deductible. Consequently, the court ruled in favor of the appellant, stating that the amounts paid towards 'cess' were deductible.Additional Considerations:The court addressed the Revenue's argument that the appellant had not claimed the deduction for 'cess' in the original or revised returns. Citing the decision in CIT Vs Pruthvi Brokers & Shareholders Pvt. Ltd., the court held that appellate authorities have the power to allow such deductions even if not claimed in the original returns. The court found that the appellant had claimed the deduction before the Commissioner (Appeals) and the ITAT, and thus the deduction should be considered.Conclusion:The court answered all substantial questions of law in favor of the appellant and against the Revenue. The ITAT's impugned judgments and orders were modified accordingly, and the necessary benefits were extended to the appellant. The appeals were disposed of with no order as to costs.