Section 43B of the IT Act, 1961 (Act) says that notwithstanding anything contained in any other provisions of the IT Act, any sum payable by the assessee by way of tax, duty, cess or fee by whatever name called under any law, is deductible upon actual payment. Hence, education cess, if deductible, can be deducted on payment basis only irrespective of the year to which it relates.
The term 'tax' has been defined in section 2(43) of the Act to include income tax and from the AY 2006-07 also fringe benefit tax payable u/s 115W. Section 4 says that income-tax shall be charged for any assessment year at any rate or rates so prescribed and it would include the levy of additional income-tax. Apparently, education cess cannot be said to be in the nature of income tax or additional income tax for the purposes of the Act.
The next issue that arises for consideration is whether this cess could be considered as 'surcharge' for the purposes of IT Act. Surcharge is in the nature of income-tax, which is exclusively assigned to the Union Government. Even in the Finance Acts themselves, levying surcharge, it is expressly stated that the surcharge is meant for the purposes of Union Government.
The education cess cannot be said to be a form of surcharge because the Finance Acts, which provide for levy of 'education cess' also specifically provide for the levy of surcharge in specified situations.
If the two concepts were intended to be identical, then, instead of calling the extra amount as education cess, the legislature would have designated it as merely 'surcharge'. Obviously, education cess cannot be surcharge/additional surcharge merely by describing it as such.
In respect of other surcharges at 10% or 2.5%, there is no mention of the purpose for which surcharge is to be used. In the case of 'education cess', it has been said that it has to be earmarked for education and "nutritious cooked mid-day meals".
Obviously, the levy is for special purposes and is not in the nature of surcharge as it is commonly understood.
On the issue of allowability of deduction, I am of the view that the same should be deductible. The expression used in section 37 is 'for the purpose of business'. This expression is wider in scope than the expression 'for the purpose of earning profits'.
It may take in not only the day-to-day running of a business but also include measures for the preservation of the business and for the protection of its assets and property from expropriation, it may also comprehend payment of statutory dues and taxes.
If education cess is not paid, it can lead to recovery proceedings resulting in expropriation of the assets of the taxpayers.
Actually, the cess is in the nature of contribution for specific objectives from the taxpayers' side, which objectives are to be met by the Government. In this connection, it needs to be mentioned that during the budget exercise of 1999-2000, the surcharge was increased for specific purposes consequent to expenditure burden because of Kargil War, for meeting the needs consequent to national calamity and Gujarat earthquake relief.
But such surcharges were not designated, adding to the levy of additional surcharges, the specific purposes for which such surcharges were levied as is case for education cess.
In this context, the decisions concerning allowability of wealth tax in computation of taxable income can have relevance. Earlier, under the law as it then stood, the Supreme Court held that the amount of wealth-tax paid by an assessee on his net wealth was not a permissible deduction in the computation of his taxable income because tax under the Wealth Tax Act, 1957, is imposed on the owner of the assets and not on any commercial activity.
It was, however, later held that the wealth-tax paid on assets held by the assessee for the purpose of his business was, nevertheless, deductible as business expenditure. The same reasoning can apply in the context of education cess.
In this context, it may be mentioned that where the legislature wanted certain taxes to be excluded for the purposes of computation of taxable income, it has specially provided for this. The instances are amounts paid as securities transaction tax and fringe benefit tax in section 40 of the IT Act.
The substance of the discussion, as above, could be summed up by saying that the education cess, though described as 'additional surcharge' is not so. It is a special levy for education and hence, cannot be disallowed on the ground that it is 'additional surcharge'.
The author is former chairman, Central Board of Direct Taxes