No deduction is allowed for any amount that shares the character of a tax, rate, or levy when computing income under the head ‘Profits and Gains of Business or Profession’. Accordingly, amounts such as education cess and higher secondary education cess are not eligible for deduction, as they form part of the overall tax liability { Royal Sundaram General Insurance Company Ltd. vs. Deputy Commissioner of Income-tax, LTU [2025] 175 taxmann.com 427 (Chennai – Trib.)[08-01-2025]]
Facts
- Royal Sundaram, a general insurance company, claimed a deduction for tax expenses paid, including education cess and higher secondary education cess.
- The Assessing Officer disallowed this portion, citing Section 40(a)(ii), which bars deduction of any amount in the nature of “rate, tax or levy” for business-profit calculations unless tax was deducted at source.
- The cess amounts in question were paid over and above the base income-tax liability.
Issue
Are education cess and higher secondary education cess considered “tax,” and therefore non-deductible under Section 40(a)(ii) when computing business income?
Held
The ITAT held firmly: no deduction is permissible for education cess or higher secondary education cess. These levies are deemed part of tax liability, not an allowable business expense. They fall squarely within the ambit of Section 40(a)(ii) and must thus be disallowed.
Legal Rationale
- The cess is computed as a surcharge over established income-tax and surcharges.
- The Tribunal concluded this makes it functionally equivalent to tax, even if the Finance Act labels it a “cess”.
- As such, cess is not deductible without appropriate tax-withholding procedures
