Income Tax Appellate Tribunal – Mumbai
Ashok Kirtanlal Shah, Mumbai vs Add. Cit Cc-22 (1), Mumbai on 1 September, 2021 ITA No.5842/Mum/2019 A.Y. 2010-11 1
Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH “A” MUMBAI
BEFORE SHRI M.BALALGANESH (ACCOUNTANT MEMBER) AND
SHRI RAVISH SOOD (JUDICIAL MEMBER)
ITA No.5842/MUM/2019
(Assessment Year: 2010-11)
Ashok Kirtanlal Shah Addl. CIT-Range 19(1)
401, 4th Floor, Anand House, Vs. (Presently, Addl, Circle 22(1)
13th Road, Off. Linking Road, Piramal Chambers, Lal Baug,
Khar West, Mumbai – 400 052 Mumbai 400 012
PAN No. AAHPS3203L
(Assessee) (Revenue)
Assessee by : Shri Dharmesh Shah, A.R
Revenue by : Shri Brajendra Kumar, D.R
Date of Hearing : 23/08/2021
Date of pronouncement : 01/09/2021
ORDER
PER RAVISH SOOD, J.M:
The present appeal filed by the assessee is directed against the
order passed by the CIT(A)-32, Mumbai, dated 19.08.2019, which in turn arises
from the order passed by the A.O u/s 143(3) of the Income Tax Act, 1961 (for
short ‗Act’) dated 29.01.2013 for A.Y. 2010-11. The assessee has assailed the
impugned order on the following grounds before us:
―1. The ld. CIT(A) had erred in law and in facts n confirming the action of the ld.
Assessing Officer in making disallowance u/s 14A of the Act of Rs.11,13,567/-.
2. The appellant craves leave to add to, alter, amend and/or delete in all the
foregoing grounds of appeal.‖
Further, the assessee has raised the following additional ground of appeal before
us:
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Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
―On the facts and circumstances of the case, the ld. Assessing Officer and ld. CIT(A)
ought to have appreciated that education cess on tax payable by the appellant should
have been allowed as deduction while computing income of the appellant.‖
2. Briefly stated, the assessee who is engaged in the business of providing
services to large steel mills and leading steel trading houses located worldwide,
had filed his return of income for A.Y. 2010-11 on 27.09.2010, declaring a total
income of Rs.5,80,37,190/-. Return of income filed by the assessee was initially
processed as such u/s 143(1) of the Act. Subsequently, the case of the assessee
was selected for scrutiny assessment u/s 143(2) of the Act.
3. During the course of the assessment proceedings, it was, inter alia,
observed by the A.O that though the assessee had received exempt dividend
income of Rs.1,12,52,736/-, viz. (i) dividend on shares: Rs.2,10,715/-;(ii) dividend
on UTI and ARS bonds: Rs.3,25,668/-; and (iii) dividend on mutual funds:
Rs.1,07,16,353/-, however, no expenditure was attributed and therein disallowed
in relation to earning of the said exempt income. On being queried that as to why
the disallowance qua the aforesaid exempt income may not be worked out u/s
14A r.w. Rule 8D, the assessee vide his reply dated 19.12.2012 submitted that
as he had maintained separate books of accounts for his proprietary concern,
viz. M/s Kirtanlal and Company; and the investments in shares and mutual funds
from which exempt dividend income was received by him pertained to his
personal ‗balance sheet’ in which no expenditure was claimed, therefore, no
disallowance u/s 14A of the Act was warranted. However, the A.O was not
inclined to accept the aforesaid explanation of the assessee and worked out the
disallowance under Sec. 14A r.w Rule 8D of Rs.11,73,567/-, as under:
―Computation of 14A Disallowance as per Notification No.46/2008 dated 24.03.2008
A. Directly Attributed Expenses Amount
Direct Expenses
Total Direct Expenses
B. Interest Expenses
Interest which cannot be directly attributed
ITA No.5842/Mum/2019 A.Y. 2010-11 3
Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
Average Value of Investment related to tax
Free income
Opening Investment 182,436,727.00
Closing Investment 262,991,244.00 222,713,485.50
Average Total Assets in BS
Opening Total Assets 339,968,383.00
Closing Total Assets 387,807,074.00 363,887,728.50
Interest Expenses
C. Deemed Expenses
Average Value of Investment related to tax fee income
Opening Investment 182,435,727.00
Closing Investment 262,991,244.00 222,713,485.50
0.5% of Average Investments 1,113,567.00
D. Total 14A Disallowance 11,13,567.00‖
After inter alia making the aforesaid disallowance, the A.O, vide his order passed
u/s 143(3) of the Act, dated 29.01.2013 assessed the income of the assessee at
Rs.5,91,50,760/-.
4. Aggrieved, the assessee assailed the assessment order before the CIT(A).
It was, inter alia, submitted by the assessee before the first appellate authority
that the A.O had worked out the disallowance u/s 14A without recording his
satisfaction that as to why the claim of the assessee that no disallowance u/s
14A could be attributed for earning of the exempt dividend income was not to be
accepted. It was the claim of the assessee that as he had maintained separate
books for his personal and business purpose and no nexus was shown by the
A.O between the earning of the dividend income and the expenditure claimed in
respect of his regular business, therefore, the disallowance u/s 14A was not
warranted and was liable to be struck down. Alternatively, it was submitted by the
assessee that salary of one of his employee viz. Mr. Henry D’souza who used to
spent 20% of his working hours may be attributed to the earning of the exempt
dividend income, and thus, disallowance at best of Rs.1,38,820/- be made.
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However, the CIT(A) was not inclined to accept the aforesaid contentions of the
assessee. Observing, that the assessee had a sizeable activity of making
investments in shares and mutual funds on which a substantial amount of
exempt income had been earned by him, the CIT(A), thus, was of the view that
the use of the services of staff, office and establishment expenses pertaining to
the assessee’s proprietary business for the purpose of earning of exempt
income by him could not be ruled out. Backed by his aforesaid observation, the
CIT(A) was of the view that the A.O had rightly observed that the claim of the
asessee that no expenditure was incurred in relation to the earning of the exempt
income could not be accepted merely on the ground that he had maintained
separate books of accounts for the aforesaid streams of income. Also, the CIT(A)
did not find any merit in the alternative claim of the assessee that the
disallowance u/s 14A be restricted to the extent of the ad hoc disallowance of
Rs.1,38,820/- pertaining to salary of one of his employee. Backed by his
aforesaid observations the CIT(A) was of the view that no infirmity did emerge
from the order of the A.O who had rightly worked out the disallowance u/s 14A
r.w. Rule 8D(2)(iii) at Rs.11,13,567/-.
5. The assessee being aggrieved with the order passed by the CIT(A) has
carried the matter in appeal before us. The ld. Authorized Representative (for
short ‗A.R’) for the assessee at the very outset of the hearing of the appeal
submitted, that, the A.O without recording his satisfaction as to why the
assessee’s claim that no expenses could be attributed to the earning of the
exempt dividend income, had however, in a mechanical manner worked out the
disallowance u/s 14A r.w Rule 8D(2)(iii) of Rs.11,13,567/-. It was submitted by
the ld. A.R that as per the settled position of law it was obligatory on the part of
the A.O to record his satisfaction that as to why the claim of the assessee qua
the expenses incurred, if any, for earning of the exempt dividend income was not
to be accepted. In support of his aforesaid contention the ld. A.R had drawn
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support from the judgments of the Hon’ble Supreme Court in the case of Godrej
& Boys Manufacturing Company Ltd. Vs. PCIT and Anr. (2017) 394 ITR 449 (SC)
and that in the case of Maxopp Investments Ltd. Vs. CIT (2018) 402 ITR 640
(SC). It was, thus, submitted by the ld. A.R that in the backdrop of the aforesaid
invalid assumption of jurisdiction by the A.O the disallowance worked out by him
u/s 14A r.w.Rule 8D could not be sustained and was liable to be vacated.
6. Per contra, the ld. Departmental Representative (for short ‗D.R’) relied on
the orders of the lower authorities. It was submitted by the ld. D.R that the A.O
had duly recorded his satisfaction as per the mandate of law before working out
the disallowance u/s 14A r.w.Rule 8D(2)(iii).
7. We have heard the ld. Authorized Representatives for both the parties,
perused the orders of the lower authorities and the material available on record,
as well as considered the judicial pronouncements that have been pressed into
service by the ld. A.R to drive home his aforesaid contention. Admittedly, it is a
matter of fact borne from the record that though the assessee during the year in
question was in receipt of exempt dividend income of Rs.1,12,54,736/-, however,
he had not attributed and therein disallowed any part of the expenditure qua
earning of the said exempt income. As is discernible from the records, it was the
claim of the assessee that he had maintained separate books of accounts qua
his regular business and the activity of making investments in shares and mutual
funds. It was, thus, the claim of the assessee that as no expenditure was claimed
by him with respect to the activity of making investments in shares and mutual
funds, therefore, no disallowance was warranted u/s 14A of the Act. On the other
hand, we find that the A.O after exhaustively discussing Sec. 14A of the Act a/w
the mechanism for working out the disallowance as contemplated in Rule 8D of
the Income Tax Act, Rules 1963, and the law pertaining to the said statutory
provision as had developed over the time, therein, without recording his
satisfaction as to why the assessee’s claim that no expenditure could be
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attributed for earning of the exempt dividend income had in a mechanical manner
worked out the disallowance as per the mechanism contemplated in Rule 8D of
the Income Tax Rules, 1963. On appeal, we find that the CIT(A) taking
cognizance of the aforesaid objection of the assessee had merely recorded a
general observation that the possibility of use of the services of staff, office and
establishment relating to the assessee’s proprietary business could not be ruled
out for earning of the exempt dividend income by the assessee. In our
considered view, neither of the lower authorities had recorded their satisfaction
as to why the assessee’s claim that no part of the expenditure pertaining to his
proprietary business could be attributed to earning of the exempt dividend
income by the assessee. In our considered view the issue as to whether it is
obligatory on the part of the A.O to record his satisfaction as to why the claim of
the assessee in respect of the expenses incurred for earning of the exempt
dividend income, if any, was not to be accepted is no more res integra and has
been settled by the Hon’ble Supreme Court in the case of Godrej & Boyce
Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). The
Hon’ble Apex Court in its aforesaid order had observed that it is obligatory on the
part of the A.O to record his satisfaction that having regard to the accounts of the
assessee, as placed before him, it was not possible to generate the reasonable
satisfaction with regard to the correctness of the claim of the assessee. It was
observed by the Hon’ble Apex Court that it was only after the A.O had recorded
his dissatisfaction as regards the correctness of the claim of the assessee that
the provisions of Sec.14A(2) and (3) r.w Rule 8D could be invoked. It was
observed by the Hon”ble Apex Court, as under:
―37. We do not see how in the aforesaid fact situation a different view could have been
taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of
the Act read with Rule SD of the Rules merely prescribe a formula for determination of
expenditure incurred in relation to income which does not form part of the total income
under the Act in a situation where the Assessing Officer is not satisfied with the claim of
the assessee. Whether such determination is to be made on application of the formula
prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law
ITA No.5842/Mum/2019 A.Y. 2010-11 7
Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
postulates is the requirement of a satisfaction in the Assessing Officer that having regard
to the accounts of the assessee, as placed before him, it is not possible to generate the
requisite satisfaction with regard to the correctness of the claim of the assessee. It is
only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the
Rules or a best judgment determination, as earlier prevailing, would become applicable.‖
Also, a similar view have been taken by the Hon’ble Supreme Court in the case
of Maxopp Investment Ltd. Vs CIT (2018) 402 ITR 640 (SC). In the case before
us, it is a matter of fact borne from the record that though the A.O had discussed
at length the rationale behind introduction of Sec.14A and also Rule 8D that
contemplates the mechanism for computing the disallowance under the
aforementioned statutory provision, as well as had exhaustively dealt with the
aspect as to how the law insofar the aforementioned statutory provision had
developed over the time, but then, we are afraid that there is no whisper of any
dissatisfaction on his part that having regard to the accounts of the assessee, as
were placed before him, it was not possible on his part to generate the requisite
satisfaction with regard to the correctness of the assessee’s claim that no part of
expenditure pertaining to his proprietary business could be attributed to earning
of exempt dividend income by him. As observed by us hereinabove, the state of
affairs qua dissatisfaction as regards the claim of the assessee that no part of the
expenses incurred by him with respect to his regular business could be attributed
to his activity of making investments in shares and mutual funds remained more
or less the same before the CIT(A). Although, the CIT(A) had observed that the
possibility of use of services of staff, office and establishment relating to the
proprietary business of the assessee for making investments in shares and
mutual funds could not be ruled out, however, we find, that he too had failed to
record his satisfaction that having regards to the accounts of the assessee, it was
not possible to accept the correctness of the assessee’s claim that no
disallowance of any expenditure was called for u/s 14A of the Act. Our aforesaid
view is all the more fortified by the fact that the assessee had maintained
separate books of accounts for his activity of making investments in shares and
ITA No.5842/Mum/2019 A.Y. 2010-11 8
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mutual funds. Accordingly, in case the A.O; or the CIT(A) in exercise of his
powers which are coterminous with that of an A.O, sought to disallow the claim of
the assessee that no expenses could be attributed to earning of the exempt
dividend income by him, then, there was an innate obligation cast upon them to
have recorded the requisite satisfaction that having regard to the accounts of the
assessee, as placed before them, it was not possible to generate the requisite
satisfaction with regards to the correctness of the aforesaid claim of the
assessee. We are afraid that as there is a clear lapse on the part of the lower
authorities in validly assuming jurisdiction for dislodging the assessee’s claim that
no disallowance u/s 14A was called for in his hands, therefore, the disallowance
worked out by the A.O u/s 14A r.w. Rule 8D(2)(iii) of Rs.11,13,567/- which
thereafter had been sustained by the CIT(A) cannot be upheld and is liable to be
vacated. The Ground of appeal no.1 is allowed in terms of our aforesaid
observations.
8. The Ground of appeal no. 2 being general is dismissed as not pressed.
9. We shall now deal with additional ground of the assessee, wherein he had
claimed that the ‗education cess’ on the tax payable by him should have been
allowed while computing his income for the year under consideration. It was
submitted by the ld. A.R that the aforesaid additional ground of appeal was being
raised on the basis of the recent judgment of the Hon’ble High Court of Bombay
in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020)
107 CCH 375 (Bom). The ld. A.R submitted that the Hon‟ble High Court in its
said judgment, had observed, that if the legislature intended to prohibit the
deduction of amounts paid by an assessee towards ―Education Cess‖ or any
other ―Cess‖ and Higher and Secondary Education Cess, then, the legislature
could have easily included reference to ―cess‖ in clause (ii) of Sec. 40(a). It was
further submitted by the ld. A.R that the High Court had observed, that as the
legislature had not included ―education cess‖ or any other ―cess‖ in clause (ii) of
ITA No.5842/Mum/2019 A.Y. 2010-11 9
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Sec. 40(a), therefore, it would mean that there was no prohibition in claiming
deduction of the said amounts while computing the income of the assessee
under the head ―Profits and gains of business or profession‖. As regards
admissibility of the said issue by way of an additional ground of appeal, it was
submitted by the ld. A.R that the Hon’ble High Court in its aforesaid order, had
observed, that where the assessee had raised a claim for deduction of the
amount paid towards ―cess‖, such claim for deduction was bound to be
considered by the CIT(Appeals) or the ITAT before whom such claim was
specifically raised. Per contra, the ld. D.R did not object to the admission of the
aforesaid additional ground of appeal raised by the assesse before us.
10. As observed by us hereinabove, the assessee has sought our indulgence
for adjudication on an issue i.e as to whether or not the amount paid towards
―Education Cess‖ or any ―other cess‖ viz. the Secondary and Higher Education
Cess is disallowable as an expenditure u/s 40(a)(ii) of the Income-tax Act, 1961,
which being a purely legal issue that would not require any verification of facts,
therefore, we have no hesitation in admitting the same.
11. We have heard the ld. authorized representatives for both the parties,
perused the orders of the lower authorities and the material available on record,
and also considered the judicial pronouncements relied upon by ld. A.R in
context of additional ground of appeal raised before us. Insofar the claim of the
Ld. A.R that unlike ―rates‖ and ―taxes‖ the amount paid by an assessee towards
―Education Cess‖ or any ―other cess‖ viz. the Secondary and Higher Education
Cess is not a disallowable expenditure u/s 40(a)(ii) of the Income-tax Act, 1961,
we find that the said issue is squarely covered by the recent order of the Hon’ble
High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner
of Income-tax (2020) 107 CCH 375 (Bom). In the case before the Hon’ble High
Court the following substantial question of law was, inter alia, raised :
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Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
―iii. Whether on the facts and in the circumstances of the case and in law, the Education
Cess and Higher and Secondary Education Cess is allowable as a deduction in the year
of payment.‖
After exhaustive deliberations, the Hon‟ble High Court had observed that the
legislature in Sec. 40(a)(ii) had though provided that ―any rate or tax levied‖ on
―profits and gains of business or profession‖ shall not be deducted in computing
the income chargeable under the head ―profits and gains of business or
profession‖, but then, there was no reference to any ―cess‖. Also, the High Court
held observed that there was no scope to accept that ―cess‖ being in the nature
of a ―tax‖ was equally not deductible in computing the income chargeable under
the head ―profits and gains of business or profession‖. It was further observed
that if the legislature would had intended to prohibit the deduction of amounts
paid by an assessee towards say, ―education cess‖ or any other ―cess‖, then, it
could have easily included a reference to ―cess‖ in clause (ii) of Section 40(a). On
the basis of its aforesaid observations, the Honble High Court had concluded that
now when the legislature had not provided for any prohibition on the deduction of
any amount paid towards ―cess‖ in clause (ii) of Sec. 40(a), therefore, holding to
the contrary would amount to reading something which is not to be found in the
text of the provision of Sec. 40(a)(ii). Accordingly, the Hon‟ble High Court had
concluded that there was no prohibition on the deduction of any amount paid
towards ―cess‖ in Sec. 40(a)(ii) while computing the income chargeable under the
head ―profits and gains of business or profession‖, observing as under :
―16. The aforesaid question arises in the context of provisions of Section 40(a)(ii) which
Act, the following amounts shall not be deducted in computing the income chargeable
under the head ―Profits and gains of business or profession‖,
(a) in the case of any assessee –
(ia)………………………
(ib)…………………………..
(ic) ………………………….
(ii) 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.
ITA No.5842/Mum/2019 A.Y. 2010-11 11
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[Explanation 1.–For the removal of doubts, it is hereby declared that for the purposes of
this sub-clause, any sum paid on account of any rate or tax levied includes and shall be
deemed always to have included any sum eligible for relief of tax under section 90 or, as
the case may be, deduction from the Indian income-tax payable under section 91.]
[Explanation 2.–For the removal of doubts, it is hereby declared that for the purposes
of this sub-clause, any 9 TXA17&18-13 dt.28.02.2020 sum paid on account of any rate
or tax levied includes any sum eligible for relief of tax under section 90A;]
17. Therefore, the question which arises for determination is whether the expression
―any rate or tax levied‖ as it appears in Section 40(a)(ii) of the IT Act includes ―cess‖. The
Appellant – Assessee contends that the expression does not include ―cess‖ and
therefore, the amounts paid towards ―cess‖ are liable to be deducted in computing the
income chargeable under the head ―profits and gains of business or profession‖.
However, the Respondent – Revenue contends that ―cess‖ is also included in the scope
and import of the expression ―any rate or tax levied‖ and consequently, the amounts paid
towards the ―cess‖ are not liable for deduction in computing the income chargeable
under the head ―profits and gains of business or profession‖.
18. In relation to taxing statute, certain principles of interpretation are quite well settled.
In New Shorrock Spinning and Manufacturing Co. Ltd. Vs Raval, 37 ITR 41 (Bom.), it is
held that one safe and infallible principle, which is of guidance in these matters, is to
read the words through and see if the rule is clearly stated. If the language employed
gives the rule in words of sufficient clarity and precision, nothing more requires to be
done. Indeed, in such a case the task of interpretation can hardly be said to arise :
Absoluta sententia expositore non indiget. The language used by the Legislature best
declares its intention and must be accepted as decisive of it.
19. Besides, when it comes to interpretation of the IT Act, it is well established that no
tax can be imposed on the subject without words in the Act clearly showing an intention
to lay a burden on him. The subject cannot be taxed unless he comes within the letter of
the law and the argument that he falls within the spirit of the law cannot be availed of by
the department. [See CIT vs Motors & General Stores 66 ITR 692 (SC)].
20. In a taxing Act one has to look merely at what is clearly said.
There is no room for any intendment. There is no equity about a tax. There is no
presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the
provisions which has not been provided by the legislature [See CIT Vs Radhe
Developers 341 ITR 403 ]. One can only look fairly at the language used. No tax can be
imposed by inference or analogy. It is also not permissible to construe a taxing statute
by making assumptions and presumptions [See Goodyear Vs State of Haryana 188 ITR
402(SC)].
21. There are several decisions which lay down rule that the provision for deduction,
exemption or relief should be interpreted liberally, reasonably and in favour of the
assessee and it should be so construed as to effectuate the object of the legislature and
not to defeat it. Further, the interpretation cannot go to the extent of reading something
that is not stated in the provision [See AGS Tiber Vs CIT 233 ITR 207].
22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has
provided that ―any rate or tax levied‖ on ―profits and gains of business or profession‖
shall not be deducted in computing the income chargeable under the head ―profits and
gains of business or profession‖. There is no reference to any ―cess‖. Obviously
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therefore, there is no scope to accept Ms. Linhares’s contention that ―cess‖ being in the
nature of a ―Tax‖ is equally not deductable in computing the income chargeable under
the head ―profits and gains of business or profession‖. Acceptance of such a contention
will amount to reading something in the text of the provision which is not to be found in
the text of the provision in Section 40(a)(ii) of the IT Act.
23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee
towards say, ―education cess‖ or any other ―cess‖, then, the legislature could have easily
included reference to ―cess‖ in clause (ii) of Section 40(a) of the IT Act. The fact that the
legislature has not done so means that the legislature did not intend to prevent the
deduction of amounts paid by a Assessee towards the ―cess‖, when it comes to
computing income chargeable under the head ―profits and gains of business or
profession‖.
24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the
Parliament, had Section 40(a)(ii) which read as follows :
―(ii) any sum paid on account of any cess, 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‖
25. However, when the matter came up before the Select Committee of the Parliament,
it was decided to omit the word ―cess‖ from the aforesaid clause from the Income Tax
Bill, 1961. The effect of the omission of the word ―cess‖ is that only any rate or tax levied
on the profits or gains of any business or profession are to be deducted in computing the
income chargeable under the head ― profits and gains of business or profession‖. Since
the deletion of expression ―cess‖ from the Income Tax Bill, 1961, was deliberate, there is
no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too,
under the guise of interpretation of taxing statute.
26. In fact, in the aforesaid precise regard, reference can usefully be made to the
Circular No. F. No.91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which
reads as follows :-
―Interpretation of provision of Section 40(a)(ii) of IT Act, 1961-Clarification regarding.
―Recently a case has come to the notice of the Board where the Income Tax Officer has
disallowed the ‗cess’ paid by the assessee on the ground that there has been no material
change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new
Act.
2. The view of the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax
Bill, 1961 as introduced in the Parliament stood as under:-
“(ii) any sum paid on account of any cess, 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”.
When the matter came up before the Select Committee, it was decided to omit the word
‗cess’ from the clause. 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 and onwards.
3. The Board desire that the changed position may please be brought to the notice of all
the Income Tax Officers so that further litigation on this account may be avoided.[Board’s
F. No.91/58/66-ITJ(19), dated 18-5-1967.]‖
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27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing
Officer and the Appellate Authority. The CBDT Circular is quite consistent with the
principles of interpretation of taxing statute. This, according to us, is an additional reason
as to why the expression ―cess‖ ought not to be read or included in the expression ―any
rate or tax levied‖ as appearing in Section 40(a)(ii) of the IT Act.
28. In the Income Tax Act, 1922, Section 10(4) had banned allowance of any sum paid
on account of ‘any cess, rate or tax levied on the profits or gains of any business or
profession’. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression
―cess‖ is quite conspicuous by its absence. In fact, legislative history bears out that this
expression was in fact to be found in the Income Tax Bill, 1961 which was introduced in
the Parliament. However, the Select Committee recommended the omission of
expression ―cess‖ and consequently, this expression finds no place in the final text of the
provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the
provision in Section 40(a)(ii) does not include, ―cess‖ and consequently, ―cess‖ whenever
paid in relation to business, is allowable as deductable expenditure.
29. In Kanga and Palkhivala’s ―The Law and Practice of Income Tax‖ (Tenth Edition),
several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of
the IT Act, 1961. There is reference to the decision of Privy Council in CIT Vs Gurupada
Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government 15
TXA17&18-13 dt.28.02.2020 Act upon the assessee as the owner or occupier of
business premises, and the quantum of the rate was fixed after consideration of the
‘circumstances’ of the assessee, including his business income. The Privy Council held
that the rate was not ‘assessed on the basis of profits’ and was allowable as a business
expense. Following this decision, the Supreme Court held in Jaipuria Samla
Amalgamated Collieries Ltd Vs CIT [82 ITR 580] that the expression ‘profits or gains of
any business or profession’ has reference only to profits and gains as determined in
accordance with Section 29 of this Act and that any rate or tax levied upon profits
calculated in a manner other than that provided by that section could not be disallowed
under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should
be allowed, where a tax is imposed by a district board on business with reference to
‘estimated income’ or by a municipality with reference to ‘gross income’. Besides, unlike
Section 10(4) of the 1922 Act, this sub-clause does not refer to ‘cess’ and therefore, a
‘cess’ even if levied upon or calculated on the basis of business profits may be allowed
in computing such profits under this Act.
30. The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income Tax
Appeal No.52/2018 decided on 31st July, 2018 (Chambal Fertilisers and Chemicals Ltd.
Vs CIT Range-2, Kota ), by reference to the aforesaid CBDT Circular dated 18th May,
1967 has held 16 TXA17&18-13 dt. 28.02.2020 that the ITAT erred in holding that the
―education cess‖ is a disallowable expenditure under Section 40(a)(ii) of the IT Act. Ms.
Linhares was unable to state whether the Revenue has appealed this decision. Mr.
Ramani, learned Senior Advocate submitted that his research did not suggest that any
appeal was instituted by the Revenue against this decision, which is directly on the point
and favours the Assessee.
31. Mr. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the
Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd.(supra) was followed
and it was held that the amounts paid by the Assessee towards the ‘education cess’
were liable for deduction in computing the income chargeable under the head of ―profits
and gains of business or profession‖. They are as follows :- (i) DCIT Vs Peerless
ITA No.5842/Mum/2019 A.Y. 2010-11 14
Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
General Finance and Investment and Co. Ltd. (ITA No.1469 and 1470/Kol/2019 decided
on 5th December, 2019 by the ITAT, Calcutta; (ii) DCIT Vs Graphite India Ltd. (ITA
No.472 and 474 Co. No.64 and 66/Kol/2018 decided on 22nd November, 2019 )by the
ITAT, Calcutta; (iii) DCIT Vs Bajaj Allianz General Insurance (ITA No.1111 and
1112/PUN/2017 decided on 25th July, 2019) by the ITAT, Pune.
32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say
whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani,
learned Senior Advocate for the Appellant submitted that to the best of his research, no
appeals were instituted by the Revenue against the aforesaid decisions of the ITAT.
33. The ITAT, in the impugned judgment and order, has reasoned that since ―cess‖ is
collected as a part of the income tax and fringe benefit tax, therefore, such ―cess‖ is to
be construed as ―tax‖. According to us, there is no scope for such implications, when
construing a taxing statute. Even, though, ―cess‖ may be collected as a part of income
tax, that does not render such ―cess‖, either rate or tax, which cannot be deducted in
terms of the provisions in Section 40(a)(ii) of the IT Act. The mode of collection, is really
not determinative in such matters.
34. Ms. Linhares, has relied upon M/s Unicorn Industries Vs Union of India and others,
2019 SCC Online SC 1567 in support of her contention that ―cess‖ is nothing but ―tax‖
and therefore, there is no question of deduction of amounts paid towards ―cess‖ when it
comes to computation of income chargeable under the head profits or gains of any
business or profession.
35. The issue involved in Unicorn Industries ( supra ) was not in the context of provisions
in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the ‘education
cess, higher education cess and National Calamity Contingent Duty (NCCD)’ on it could
be construed as ―duty of excise‖ which was exempted in terms of Notification dated 9th
September, 2003 in respect of goods specified in the Notification and cleared from a unit
located in the Industrial Growth Centre or other specified areas with the State of Sikkim.
The High Court had held that the levy of education cess, higher education cess and
NCCD could not be included in the expression ―duty of excise‖ and consequently, the
amounts paid towards such cess or NCCD did not qualify for exemption under the
exemption Notification. This view of the High Court was upheld by the Apex Court in
Unicorn Industries (supra).
36. The aforesaid means that the Supreme Court refused to regard the levy of education
cess, higher education cess and NCCD as ―duty of excise‖ when it came to construing
exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts
paid by the Appellant – Assessee towards the ―cess‖ can never be regarded as the
amounts paid towards the ―tax‖ so as to attract provisions of Section 40(a)(ii) of the IT
Act. All that we may observe is that the issue involved in Unicorn Industries (supra ) was
not at all the issue involved in the present matters and therefore, the decision in Unicorn
Industries ( supra ) can be of no assistance to the Respondent – Revenue in the present
matters.
37. Ms. Linhares, learned Standing Counsel for the Revenue however submitted that the
Appellant – Assessee, in its original return, had never claimed deduction towards the
amounts paid by it as ―cess‖. She submits that neither was any such claim made by filing
any revised return before the Assessing Officer. She therefore relied upon the decision
of the Supreme Court in Goetze (India) Ltd. Vs Commissioner of Income Tax (2006) 284
ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying
ITA No.5842/Mum/2019 A.Y. 2010-11 15
Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
such a deduction, but further the Assessing Officer had no power or jurisdiction to grant
such a deduction to the Appellant – Assessee. She submits that this is what precisely
held by the ITAT in its impugned judgments and orders and therefore, the same,
warrants no interference.
38. Although, it is true that the Appellant – Assessee did not claim any deduction in
respect of amounts paid by it towards ―cess‖ in their original return of income nor did the
Appellant – Assessee file any revised return of income, according to us, this was no bar
to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the
Appellant – Assessee in the facts and circumstances of the present case. The record
bears out that such deduction was clearly claimed by the Appellant – Assessee, both
before the Commissioner (Appeals) as well as the ITAT.
39. In CIT Vs Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336, one of the
questions of law which came to be framed was whether on the facts and circumstances
of the case, the ITAT, in law, was right in holding that the claim of deduction not made in
the original returns and not supported by revised return, was admissible. The Revenue
had relied upon Goetze (supra ) and urged that the ITAT had no power to allow the claim
for deduction. However, the Division Bench, whilst proceeding on the assumption that
the Assessing Officer in terms of law laid down in Goetze (supra) had no power,
proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to
permit such a deduction. In taking this view, the Division Bench relied upon the Full
Bench decision of this Court in Ahmedabad Electricity Co. Ltd Vs CIT (199 ITR 351) to
hold that the Appellate Authorities under the IT Act have very wide powers while
considering an appeal which may be filed by the Assessee. The Appellate Authorities
may confirm, reduce, enhance or annul the assessment or remand the case to the
Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax
appeal is to ascertain the correct tax liability of the Assessee in accordance with law.
40. The decision in Goetze (supra) upon which reliance is placed by the ITAT also
makes it clear that the issue involved in the said case was limited to the power of the
assessing authority and does not impinge on the powers of the ITAT under section 254
of the said Act. This means that in Goetze (supra), the Hon’ble Apex Court was not
dealing with the extent of the powers of the appellate authorities but the observations
were in relation to the powers of the assessing authority. This is the distinction drawn by
the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the
ITAT failed to note in the impugned order.
41. Besides, we note that in the present case, though the claim for deduction was not
raised in the original return or by filing revised return, the Appellant – Assessee had
indeed addressed a letter claiming such deduction before the assessment could be
completed. However, even if we proceed on the basis that there was no obligation on
the Assessing Officer to consider the claim for deduction in such letter, the
Commissioner ( Appeals ) or the ITAT, before whom such deduction was specifically
claimed was duty bound to consider such claim. Accordingly, we are unable to agree
with Ms. Linhare’s contention based upon the decision in Goetze (supra ).
42. For all the aforesaid reasons, we hold that the substantial question of law No.(iii) in
Tax Appeal No.17 of 2013 and the sole substantial question of law in Tax Appeal No.18
of 2013 is also required to be answered in favour of the Appellant – Assessee and
against the RespondentRevenue. To that extent therefore, the impugned judgments and
orders made by the ITAT warrant interference and modification.
ITA No.5842/Mum/2019 A.Y. 2010-11 16
Ashok Kirtanlal Shah Vs. Addl.CIT, Range-19(1)
43. Thus, we answer all the three substantial questions of law framed in Tax Appeal
No.17 of 2013 in favour of the Appellant – Assessee and against the Respondent –
Revenue. Similarly, we answer the sole substantial question of law framed in Tax Appeal
No.18 of 2013, in favour of the Appellant – Assessee and against the Respondent –
Revenue.‖
We, thus, respectfully follow the aforesaid judgment of the Hon‟ble High Court of
Bombay in the case of Sesa Gold Limited (supra), and therein conclude that
―Education Cess‖ and the Secondary and Higher Education Cess is not
disallowable as a deduction u/s 40(a)(ii) of the Act. Accordingly, we herein
restore the issue to the file of the A.O with a direction to give consequential effect
to our aforesaid observations. The additional ground of appeal raised by the
assessee is allowed in terms of our aforesaid observations.
12. Resultantly, the appeal of the assessee is allowed in terms of our aforesaid
observations.Order pronounced in the open court on 01.09.2021
Sd/- Sd/-
(M. Balaganesh) (Ravish Sood)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai;
Dated: 01.09.2021
PS: Rohit
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A)-
4. CIT
5. DR, ITAT, Mumbai
6. Guard file.
BY ORDER,
//True Copy//
(Sr. Private Secretary)
ITAT, Mumbai
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