Education Cess Allowable As Bsiness Expense
Education Cess is an additional levy that is applied on the basic tax liability of an assessee by the Government for generating some additional revenue. This revenue as suggested by its name would then be used for funding primary, secondary and higher education. Education cess should be paid by every taxpayer irrespective of the type they belong to i.e., corporate or non-corporate. The rates at which the cess should be paid would be determined by the annual budget and currently the same is 3% and shall be paid on the amount of income tax plus surcharge (if any).
Utilization of the Fund
The fund which is generated via education cess from taxpayers of the country will be utilized by the government for the building and betterment of the educational infrastructure of the country. It will also be used for improving the quality of the education given to the mass of the country along with the betterment of their health and living standards through the arrangement of midday meals, the opening of new colleges and schools which are coming under the government.
This fund is also used for providing educational loans for the students who are coming from backward or low-income backgrounds such that they are given equal opportunity for gaining a quality education. It is also utilized for the payment of salaries to the staff and faculties working in the Government-funded schools, colleges, and other educational institutions along with funding specialized schemes for the students.
Computation of Educational Cess
Under education cess, we can say that there are two variants which are education cess and secondary and higher secondary education cess. This in total i.e., 3% shall be applied on the income tax plus surcharge amount if any. A health cess of 1% will also be added to this which makes it to a total of 4%.
Taking an example for this, let’s take an individual who is earning INR 6,00,000 per year. Out of this, there is an allowable deduction of say INR 50,000, say under Sec.80 C, making INR 5,50,000 taxable under the Income Tax Act. The normal tax on this amount would be equal to as below:
Tax on Total Income INR 27,500
Surcharge INR 0
Health and Education Cess INR 1,100 [27,500*4%]
Total Tax Payable INR 28,600
Education Cess Allowed as a Business Expense or Not?
We all know that the income tax paid by an assessee cannot be allowed as a business expense. But does this word income tax include cess with it or not is a matter of question or debate. For deriving a conclusion on the same, a reference can be taken with respect to section 40(a)(ii) of the Income Tax Act, and the same would be read as under:
- Notwithstanding anything to the contrary in sections 30 to 41, 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—
(ii) any sum paid on account of rate on 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 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 sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A
From the above said, it can be understood that any rate or tax which is levied on the profits and gains of business or profession, shall not be deducted while computing the income which is chargeable for taxation under the head profits and gains from business or profession. But it is also to be noted that the word cess is not specified in the section or there is no definition given for the same under the Income Tax Act. Thus, we can say that it has not been specifically and evidently provided that cess, cannot be claimed as a deduction or business expense.
We can also take reference to Circular No. 91/58/66-ITJ (19) dated 18.05.1967, which has clearly stated that Cess shall not be disallowable. Further referring to the case of Sesa Goa Limited Vs. Joint Commissioner of Income Tax (2020), it was held that education cess and higher and secondary education cess can be claimed as an expense while computing income under the head, Profits, and gains from Business or Profession.
Taking virtue of section 115JB, we can also understand that, tax includes cess as levied by the Central Act for computing the book profit. But it should be understood and accepted that there is a major difference between tax and cess as the Income Tax Act and the concerned Authorities have made proper usage of the term Cess in all the relevant places.
Similarly, in the case of Chambal Fertilizers and Chemical Ltd. v. CIT-Range (2), Kota by its order dated 31.07.2018, was held that cess and tax are not the same due to which the same need not be disallowed as per section 40(a)(ii) while computing profits and gains from business or profession.
Contrary to all this, Hon’ble Supreme Court in the case of Commissioner of Income-tax vs. K. Srinivasan [1972] 83 ITR 346 held that;
“……The meaning of surcharge is to charge in addition or to be subject to an additional or extra charge. If that meaning is applied to section 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge; (iii) special surcharge; and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way, the additional charges form a part of the income tax and super-tax. According to the revenue, the word ‘surcharge’ has been used in Article 271 for the purpose of separating it from the basic charge of a tax or duty of the purposes of distributing the proceeds of the same between the Union and the States….”
In the light of the above statement, and referring to the memorandum of Finance Bill of 2004, it was mentioned that: “An additional surcharge, to be called the Education Cess to finance the Government’s commitment to universalize quality basic education, is proposed to be leviedon the amount of tax deducted or advance tax paid, inclusive of surcharge.”
Hence, we can conclude that education cess forms a part of the income tax paid by an assessee, making the same disallowable.
To Summarize
Alongside all the above statements, judgments, and reading of the sections, there are certain other points which should be considered by us as a reader and a taxpayer. If Cess is allowed as an expenditure to the taxpayer, the impact which it creates on the tax collection by the government will be substantial. And this when allowed as a deduction or business expense would lose the basic motive of such collection.
Hence, we hope that the same will be studied in depth by the CBDT (Central Board of Direct Taxes) for giving a conclusion on the same with at least a prospective effect.
