of Cess under
Disallowance
Section 40(a)(ii): Impact of Retrospective Amendment vide Finance Act, 2022 – An Analysis [Advocate Kavita Jha] 0
WHAT IS CESS?
• A cess is an additional levy on the basic tax liability by the Central Government to raise funds for specific purpose, which is usually for social welfare, for instance:
Particular Finance Act Purpose
Education cess Finance Act 2004 To provide and finance universalized quality basic education.
Secondary and Higher Education cess Finance Act 2007 To provide for the purpose of Secondary and Higher Education
Swachh Bharat cess Finance Act 2015 For the purposes of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto
Krishi Kalyan Cess Finance Act, 2016 To meet the needs of agriculturist and farmers
1
1922 Act:
HISTORICAL BACKGROUND
10 (4) Nothing in clause (ix) or [clause (xv)]of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains…. ”
Clause 40(a)(ii) of the IT Act, 1961 was enacted 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.”
2
Circular
18th May 1967, by
• CBDT clarified that it was decided to omit the word ‘ cess ’ from the clause, thus only taxes paid were to be disallowed in assessments from 196263 onwards
3
Number No 91 58 66 ITJ(19),
CBDT
DISPUTEAROUNDCESS: SETTLED BY HIGH COURT(S), UNSETTLEDBYTHETRIBUNAL?
4
5 Sesa Goa Ltd vs Jt CIT 2020 117 taxmann com 96 Bom & CIT Chambal Fertilizers & Chemicals Ltd.: 2019] 107 taxmann com 484(Raj : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it. Subject cannot be taxed unless he comes within the letter of the law. There is no equity about tax. Nothing can be read in or implied into the provisions. No reference to any “ cess ” in the section, which is clear indication of Legislative intent. Reliance on CBDT Circular No. 91/58/66-ITJ (19) dated 18.05.1967. ‘Education cess ’ can be claimed as an allowable deduction while computing the income chargeable under the head PGBP.
&
Tribunal observed that issue regarding allowability of cess as business expenditure was squarely covered by the decision of the Hon’ble Supreme Court in CIT vs. K. Srinivasan:
346 (sc) which held that surcharge and additional surcharge are part of cess.
made to Finance Act, 2004 & 2011 to show
cess
is additional surcharge levied on the
tax.
the provisions of Finance Act, 2004 and 2006 and the decision of K. Srinivasan (supra) was not considered by the High Courts in Sesa Goa (supra) and Chambal Fertilizers (supra), therefore the decision of K. Srinivasan (supra) would prevail.
6 Kanoria Chemicals
Industries Ltd vs ACIT ITA NO 2184 Kol 2018: The
(1972) 83 ITR
Reference
‘education
’
income
Further,
EXPLANATION ADDED TO SECTION40(a)(ii) OFTHEACT BY FINANCEACT 2022
7
Amounts not deductible.
40. Notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",
(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.
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;]
8
— ……………………………….
………………………………………
SECTION 155(18) (DEEMED UNDER REPORTING):
“(18) Where any deduction in respect of any surcharge or cess, which is not allowable as deduction under section 40, has been claimed and allowed in the case of an assessee in any previous year, such claim shall be deemed to be under-reported income of the assessee for such previous year for the purposes of sub-section (3) of section 270A, notwithstanding anything contained in subsection (6) of section 270A, and the Assessing Officer shall recompute the total income of the assessee for such previous year and make necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of section 154 being reckoned from the end of the previous year commencing on the 1st day of April, 2021:
Provided that in a case where the assessee makes an application to the Assessing Officer in the prescribed form and within the prescribed time, requesting for re-computation of the total income of the previous year without allowing the claim for deduction of surcharge or cess and pays the amount due thereon within the specified time, such claim shall not be deemed to be underreported income for the purposes of sub-section (3) of section 270A”
9
Amendment made by Income tax 32nd Amendment) Rules, 2022.
Rule 132 in Income-tax Rules, 1962, inserted for the application for re computation of income under section 155(18).
Request for recalculation of total income for the preceding year without admitting the claim for deduction of cess claimed and accepted as deduction to be made under Form No. 69.
On receipt of Form No. 69, AO shall recompute the total income by modifying the relevant order and issue a notice under section 156 detailing the time limit within which the amount of tax payable, if any, is to be paid.
The assessee, after making the payment, shall furnish the details in Form No.70 to the AO within thirty days from date of making the payment.
10
Intent/Validity of
Retro Amendment –Legislative
Retrospective Amendment Making a retrospective amendment to the Act from 2005-06, it is clear that cess and surcharge will not be allowed to be claimed as deduction in the form of expenditure General Principles Concerning Retrospectivity: CIT vs Vatika Township (P) Ltd.: 2014] 49 taxmann com 249 227 Taxman 121 367 ITR 466 (SC): Lex prospicit non respicit: law looks forward not backward. Unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. Thus, legislations which modified accrued rights or impose obligations or attach new disability have to be treated as prospective unless legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. If legislation confers benefit on some person without inflicting a corresponding detriment on another or on public generally, it would warrant retrospective effect 11
was with regard to addition made to the taxable
on account of insertion of
of the
to section
Finance Act, 2006 with retrospective effect from 01.04.1989
from
the
of the
the
laid down the following canons of interpretation:-
Since Explanation 3C was added in 2006 with the object of plugging a loophole - i.e. misusing section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual
are not meant
be
in
to be
the language
which is
the
even where such language is
M.M. Aqua Technologies Ltd. vs. CIT: [2021] 129 taxmann.com 145 282 Taxman 281 (SC) Controversy
income
assessee
Explanation 3C
43B of the Act vide
i.e.
AY 1989-90. Interpreting
insertion
aforesaid Explanation,
Hon’ble Supreme Court
payments
to
affected; A retrospective provision
a tax Act
"for
removal of doubts" cannot be presumed
retrospective,
used, if it alters or changes the law as it earlier stood. Any ambiguity in
of Explanation 3C shall be resolved in favour of the assessee 12
Testing the amendment by Finance Act, 2022 on the principles of retrospectivity laid down by the Supreme Court:
Prior to 2022, vested right to claim cess as business expenditure had accrued to the assessee.
The provision was not suffering from any obvious defect, in fact as per the 1967 circular CBDT itself clarified that deduction for cess was an allowable expenditure.
An Explanation, normally, should be so read as to harmonise with and clear up any ambiguity in the main section. It cannot in any way interfere with or exchange the enactment or any part thereof.
An Explanation, cannot take away a statutory right which any person under a statute has been clothed.
By creating a legal fiction by way of an Explanation, it may be inferred that the Explanation is creating a new liability that could not be fathomed in the main provision.
13
Challenges: Effect of uncertainties created by amendment By amendment to 155, dead proceedings stands resurrected –direct contravention of principles settled by Hon’ble Supreme in KM Sharma v. ITO: [2002]122 Taxman 426/254 ITR 772 (sc) and SS Gadgil v. Lal & Co. : [1946] 53 ITR 231 (sc) Ex post facto levy of penalty under section 270A- legislative competence Defences available under section 270A(6) taken away- arbitrary In the garb of amnesty under Rule 132 levy which is otherwise impermissible is sought to be recovered – Article 265 14
Accrued and crystalised rights of the assesses where the subject disallowance was not made and the ROI was accepted are sought to be reversed with retrospective effect – Arbitrary In the garb of extension of limitation under section 155(18) the scope of 154, which is otherwise very restrictive and limited, is sought to be expanded – Arbitrary Only intent of amendment is to nullify the judicial precedents and affect the outcome of controversy pending before the apex Court –Testing the legislative competence 15
THANK YOU
16
Our Offices
NEW DELHI
1st & 11th Floors, Mohandev Building, 13 Tolstoy Marg, New Delhi -110001 INDIA Phone: +91 11 49252525
Fax: +91 11 23320484
Email: delhi@vaishlaw.com
MUMBAI
106, Peninsula Centre, Dr. S. S. Rao Road, Parel, Mumbai - 400012 INDIA
Phone: +91 22 42134101
Fax: +91 22 42134102
Email: mumbai@vaishlaw.com
BENGALURU
105 -106, Raheja Chambers, #12, Museum Road, Bengaluru, 560001 (India) Tel: +91 80 40903588/89 Email: bangalore@vaishlaw.com
©2022, Vaish Associates Advocates
All rights reserved. www.vaishlaw.com