Business Expenditure shall not be allowed on payment of any Cess and Surcharge – Finance Bill 2022 makes a retrospective amendment.
The Union Budget 2022 has clarified the treatment of Cess and Surcharge and stated that the same shall be treated as tax and therefore, no deduction shall be allowed as business expenditures. While addressing the Parliament and the country during her Budget speech, Finance Minister Nirmala Sitharaman said that the Courts pronouncing contradictory verdicts are misinterpreting the legislative intent.
Section 40 of the Act specifies the amounts which shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-clause (ii) of clause (a) of section 40 of the Act provides that 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 shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”.
Hon’ble Bombay High Court in the case of JCIT vs. Sesa Goa Limited (2020) 117 taxmann.com and Hon’ble Rajasthan High Court in the case of JCIT vs. Chambal Fertilizers & Chemicals Ltd. decided the issue in favor of the taxpayers who were claiming the deduction on account of ‘cess’ after relying on the CBDT circular no. 91/58/66-ITJ (19) dated 18-05-1967. Based on these decisions, ITAT in various judgments has followed the same reasoning and has allowed a deduction on account of payment of “cess”.
Further, ITAT Kolkata in the case of M/s Kanoria Chemicals & Industries Ltd. ITA No. 2184/Kol/2018 (TS-1129-ITAT2021 Kol) dismissed the appeal of the assessee for allowing ‘cess’ as business expenditure based on the judgment of the Supreme Court of India in the case of “CIT vs. K. Srinivasan” that “surcharge” and “additional surcharge” are the part of income tax.
It may be seen that the interpretations of two high courts and various ITATs are against the intent of the legislature and not in line with the judgment of the Supreme Court. Hence, to clarify the position and the intent of the law, the Government has brought an amendment in the law by inserting an explanation in the law on a retrospective basis.
Such amendment shall have retrospective effect from 1st April 2005 and accordingly apply in relation to the assessment year 2005-06 and onwards.
The Finance Bill 2022 proposes to insert the following Explanation-3 to Section 40(a)(ii) as below:
“Explanation-3- 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.”
Thus, the Government has made an attempt to nullify the impact of the above-quoted judgments by
This amendment will take effect retrospectively from 1st April 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.
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