Taxing times: Businesses face tax heat over deductions claimed for cess

CBDT tells I-T officials to nudge entities; move could help garner over Rs 5,000 cr

The Central Board of Direct Taxes (CBDT) has asked top income-tax officers to nudge entities that had claimed deduction on account of cess or surcharge over the past several years to voluntarily pay the differential tax to avoid penalties.

The deadline to resolve and rectify tax returns is March 31.

After March 31, the amount claimed or taken will be treated as “under-reported” income and subject to a 50 per cent penalty.

The directive was among the key items taken up by the CBDT in its Tuesday meeting, chaired by Chairman Nitin Gupta.

Besides, the apex body took stock of tax collection in FY23, tax deducted at source (TDS), the cases disposed of by the commissioner of income tax (appeals), pending taxpayers’ grievances, and so on.

The exercise could earn the tax authorities Rs 5,000 crore, according to rough estimates. This could further shore up the direct tax revenue kitty for 2022-23.

“We need to ensure proper collection from assessees who had misused cess deduction claims under I-T provisions,” said an official privy to the discussion.

“The tax payable amount however would depend on the number of applications seeking rectification of returns in the past years,” the person said. 

“We expect assessees to file them by February-end to save penalties,” the official, privy to the discussion, added.

The government had last year brought retrospective amendments to Section 40 (a) (ii) of the Income-Tax Act. This was aimed at preventing misuse of the provision, especially by business entities that have treated it as exemption or business expenditure.

This Section says any amount paid on account of any rate or tax levied on the profits or gains of any business or profession is not “allowable expenditure”.

“This is win-win window for taxpayers. They could get an opportunity to rectify tax returns by settling tax differences claimed earlier as deduction. The benefit to the government is acceleration in tax collection,” said Sudhir Kapadia, senior tax partner, EY India.

The rule came into effect in assessment year 2005-06. The Income-Tax Department under the rule needs to re-compute the income and amend its assessment order for prior financial years. To avail themselves of the opportunity, taxpayers have to move an application electronically on or before March 31. Applications will seek re-computing the income of the previous year without allowing a deduction of surcharges/cess. Following the application, a tax officer will re-compute the income and issue notice specifying the period within which the tax has to be paid.

Before the amendment, there was a long-standing dispute on allowing cess and surcharges as deduction. The reason was that the provision was ambiguous because it did not specify the term “cess”.

“There are a plethora of decisions in various courts in the context of whether cess is regarded as income-tax. In some cases it is held that cess is part of the tax, whereas in some it has been observed that cess and tax are separate,” said chartered accountant Naveen Wadhwa.

The Finance Act, 2022, has clarified the term “tax” includes and will be deemed to have always included any surcharge or cess in any name.

Taxing times

• The deadline for assessees to resolve/rectify tax returns will end on March 31

• After that, deductions claimed for cess or surcharge in the past will be treated as ‘under-reported’ income

• Such income will attract 50% penalty

• Govt last year brought retrospective amendment under Section 40 (a)(ii) of the I-T Act to prevent its misuse