Section 40(a)(ii) of the Income Tax Act, 1961 (‘Act’) provides
for disallowance of any rate or tax levied on profits or gains of
any business or profession in computing the gross total
income of a taxpayer. Pursuant to this provision, typically,
taxpayers have been disallowing income tax, surcharge,
education cess , and interest paid thereon, while computing
profits and gains from business or profession.

However, recently, there a spate of rulings have held
education cess as not part of ‘tax’ and therefore allowable as a
deduction. Notably, the Hon’ble Bombay High Court in the
case of Sesa Goa Limited 1 and Rajasthan High Court in the
case of Chambal Fertilisers and Chemicals Ltd 2 , have held
that education cess is not part of ‘tax’, and accordingly, the
same is allowable as a deduction. While deciding the issue,
the Courts relied upon the Supreme Court ruling in the case of
Jaipuria Samla Amalgamated Collieries Ltd 3 as well as the
CBDT Circular of 18 May 1967 and has held that education
cess is a deductible expenditure since it cannot be regarded
as ‘tax’.

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