Cess/Surcharge is not allowed as business expenditure u/s 37 of the IT Act, 1961

The Hon’ble Supreme Court ("the Supreme Court") in the case of Joint Commissioner of Income Tax v. M/s. Chambal Fertilizers & Chemicals Limited [SLP(C) No. 7379 of 2019] dated December 14, 2022, held that the term "tax" under Section 40(a)(ii) of the Income Tax Act, 1961 ("the IT Act") should also include cess.

Facts

M/s. Chambal Fertilizers & Chemicals Limited ("the Respondent") filed an appeal before the Hon’ble Rajasthan High Court ("the High Court") against the Order passed by the Income Tax Appellate Tribunal ("the Tribunal") contending that Section 40(a)(ii) of the IT Act, does not disallow "cess" from claiming it as expenditure under Section 37 of the IT Act. Therefore, the cess paid should be allowed as business expenditure under Section 37 of the IT Act.

The High Court vide Judgment dated July 31, 2018 ("the Judgment") allowed the Respondent to claim "cess" as business expenditure under Section 37 of the IT Act.

The Parliament vide Section 13 of the Finance Act, 2022, added the explanation to Section 40(a)(ii) retrospectively from April 01, 2005, clarifying that the term "tax" includes any surcharge or cess. 

The Joint Commissioner of Income Tax ("the Appellant") filed a Special Leave Petition ("SLP") before the Supreme Court against the Judgment of the High Court in light of the explanation added in the section 40(a)(ii) of the IT Act, contending to set aside the Judgement passed by the High Court.

Issue

Whether the cess is allowed as a business expenditure under Section 37 of the IT Act?

Held

The Supreme Court held that

•  The appeal was allowed in view of the amendment of explanation vide the Finance Act, 2022 and directed that the Education Cess paid by the Respondent would not be allowed as an expenditure under Section 37 read with Section 40(a) (ii) of the IT Act.

Relevant Provision

Section 40(a)(ii) of the IT Act

any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

Explanation 3 inserted vide Finance Act, 2022 w.e.f. April 01, 2005

For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term "tax" shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.