Tribunal allows deduction of education cess in computing total income under Income-tax Act

The Tribunal allowed the assessee's appeal, directing the AO to permit the deduction of education cess amounting to Rs. 31,76,126/- while computing total income under the Income-tax Act. The Tribunal relied on precedents to support the view that education cess should not be disallowed as a tax under Section 40(a)(ii) since it is levied on the amount of tax, not on business profits. The decision was pronounced on 13th January 2021.

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Issues Involved:
1. Disallowance of provision for leave encashment.
2. Disallowance of education cess while computing total income under normal provisions of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Leave Encashment:

The assessee initially raised a ground against the action of the CIT(A) confirming the AO's disallowance of the provision for leave encashment. However, the assessee decided not to press this ground in light of the decision of the Hon'ble Supreme Court in SLP (Civil) 22889 of 2008 in M/s. Exide Industries Ltd. Consequently, this ground was dismissed.

2. Disallowance of Education Cess:

Facts and Arguments:
- The assessee claimed a deduction of Rs. 31,76,126/- on account of education cess on income tax and dividend distribution tax in its return of income.
- The AO disallowed this claim, arguing that education cess is an additional surcharge and falls under the purview of section 40(a)(ii) of the Income-tax Act, 1961.
- The AO relied on the decision of the Tribunal in DIC Asia Pacific Ltd. (ITA No. 1458/Kol/2011) to support his disallowance.
- The CIT(A) upheld the AO's decision, referencing CBDT Circular No. 3 of 2018, which includes surcharge and cess in the definition of tax effect for appeal purposes.

Tribunal's Analysis:
- The Tribunal noted that in the case of M/s. ITC Ltd. Vs. DCIT (ITA No. 685/Kol/2014), the Tribunal had allowed the deduction for education cess, citing the Hon'ble Rajasthan High Court's decision in CIT Vs. M/s. Chambal Fertilizers & Chemicals Ltd. (ITA No. 52/2018).
- The Rajasthan High Court had taken note of CBDT Circular No. 91/58/66-ITJ(19) dated 18.05.1967, which clarified that the word 'cess' was omitted from Section 40(a)(ii) during the legislative process, indicating that 'cess' should not be treated as a tax.
- The Tribunal also referenced the Hon'ble Bombay High Court's decision in Sesa Goa Ltd. Vs. JCIT (2020) 117 taxman.com 96 (Bom.), which supported a similar view.

Legal Interpretation:
- Section 40(a)(ii) of the Income-tax Act disallows deductions for any sum paid on account of any rate or tax levied on the profits or gains of any business or profession.
- The Tribunal observed that education cess is neither levied on the profits or gains of any business nor assessed at a proportion of such profits or gains. Instead, it is levied on the amount of tax.
- The Tribunal referred to Section 43B of the Act, which allows deductions for sums payable by way of tax, duty, cess, or fee upon actual payment, suggesting that cess should be deductible on a payment basis.
- The Tribunal applied the legal maxim "Expressio Unius Est Exclusio Alterius" (the express mention of one thing excludes all others) to conclude that the omission of 'cess' from Section 40(a)(ii) indicates that it should not be treated as a tax for disallowance purposes.

Conclusion:
- The Tribunal found merit in the assessee's claim for allowing the education cess as a deduction.
- Following the decisions of the Hon'ble Rajasthan High Court in M/s. Chambal Fertilizers Ltd. and the Hon'ble Bombay High Court in Sesa Goa Ltd., the Tribunal directed the AO to allow the deduction of Rs. 31,76,126/- paid as education cess while computing the total income under the normal provisions of the Act.

Final Order:
- The appeal of the assessee was allowed, and the order was pronounced in the open court on 13th January 2021.

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