The Income Tax Appellate Tribunal, Mumbai, has clarified that education cess and secondary and higher education cess paid by a taxpayer cannot be claimed as a deduction under Section 37 of the Income Tax Act, 1961, following a retrospective amendment that deems such cesses to be part of the term 'tax'. This ruling reinforces the binding effect of legislative clarifications and aligns with the Supreme Court’s interpretation in JCIT v. Chambal Fertilisers.
Background & Facts
The Dispute
The present appeals arise from an order dated 03.10.2025 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for the assessment year 2009-10. Two appeals were filed: one by the assessee, Export Import Bank of India, challenging the disallowance of managerial expenses under Section 14A read with Rule 8D(2)(iii); and another by the Revenue challenging the allowance of education cess as a deduction under Section 37.
Key Facts
- The assessee, Export Import Bank of India, is a public financial institution wholly owned by the Government of India, established under the Export-Import Bank of India Act, 1981.
- The assessee’s primary function is to facilitate export financing, including long-term project finance outside India.
- For A.Y. 2009-10, the Assessing Officer (AO) initially disallowed Rs. 90,93,173 under Section 14A read with Rule 8D(2)(iii) for expenses attributable to income exempt under Chapter III of the Act.
- The Tribunal, in ITA No. 7796/Mum/2012 dated 24.10.2018, had directed the AO to consider only those investments yielding exempt income for computing disallowance under Section 14A.
- In compliance, the AO computed the disallowance of Rs. 90,93,173 based on exempt income-generating investments.
- The assessee contended that the AO had already suo motu disallowed Rs. 90,93,173 and that no further disallowance was warranted.
- Separately, the AO disallowed deduction of Education Cess and Secondary and Higher Education Cess under Section 37.
- The CIT(A) allowed the deduction of cesses under Section 37, holding the assessee’s claim legitimate.
Procedural History
- 03.10.2025: CIT(A) passed order allowing deduction of education cess and confirming disallowance of Rs. 90,93,173 under Section 14A.
- 25.03.2026: Hearing held before ITAT Mumbai.
- 30.03.2026: ITAT Mumbai delivered order on both appeals.
The Parties' Positions
For the Assessee
- Argued that the AO had already computed and disallowed Rs. 90,93,173 under Section 14A in accordance with the Tribunal’s earlier direction.
- Contended that no further disallowance under Rule 8D(2)(iii) was required.
- Maintained that education cess paid on income tax was a business expense and deductible under Section 37.
For the Revenue
- Contended that Explanation 3 to Section 40(a)(ii), inserted by the Finance Act, 2022 with retrospective effect from 01.04.2005, clarifies that the term 'tax' includes any cess or surcharge.
- Argued that since cesses are deemed part of 'tax', they are disallowed under Section 40(a)(ii) and cannot be claimed as deduction under Section 37.
- Relied on the Supreme Court’s decision in JCIT v. Chambal Fertilisers & Chemicals Ltd. [2022] 145 taxmann.com 420 (SC).
Relief Sought
- Assessee sought deletion of the disallowance of Rs. 90,93,173 under Section 14A and acceptance of its computation of Rs. 20,610.
- Revenue sought reversal of the CIT(A)’s order allowing deduction of education cess and secondary and higher education cess under Section 37.
The Legal Issue
Whether education cess and secondary and higher education cess paid by the assessee on its income tax liability are deductible under Section 37 of the Income Tax Act, 1961, in light of the retrospective amendment introduced by Explanation 3 to Section 40(a)(ii) via the Finance Act, 2022.
Arguments Presented
For the Appellant/Petitioner
The assessee did not contest the Revenue’s position on the cess issue. Its appeal on Section 14A was based on the argument that the AO had already computed the disallowance in line with the Tribunal’s direction, and no further adjustment was necessary. The assessee’s representative admitted that the disallowance of Rs. 90,93,173 was correctly computed under Rule 8D(2)(iii) and that the CIT(A)’s conclusion on this point was correct.
For the Respondent/State
The Revenue relied on Explanation 3 to Section 40(a)(ii), inserted by the Finance Act, 2022 with retrospective effect from 01.04.2005, which explicitly states that the term 'tax' includes any surcharge or cess, by whatever name called. The Revenue argued that since cesses are now deemed part of 'tax', they fall within the scope of disallowance under Section 40(a)(ii) and cannot be claimed as a deduction under Section 37. The Revenue cited the Supreme Court’s decision in JCIT v. Chambal Fertilisers & Chemicals Ltd., which held that education cess is not deductible under Section 37 once Explanation 3 is applied.
The Court's Analysis
The Tribunal examined the legislative intent behind Explanation 3 to Section 40(a)(ii). It noted that the amendment was not merely clarificatory but explicitly retrospective, applying from 01.04.2005. The Court observed that the Supreme Court in JCIT v. Chambal Fertilisers & Chemicals Ltd. had already upheld the validity of this amendment and held that cesses, even if paid separately, are legally part of the tax liability and therefore disallowed under Section 40(a)(ii).
"The term 'tax' shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax."
The Tribunal emphasized that Section 37 permits deduction of expenditures incurred wholly and exclusively for business purposes, but this must yield to specific disallowances under other provisions. Since Explanation 3 deems cesses as part of 'tax', and Section 40(a)(ii) disallows such tax, the cess cannot be claimed as a deduction under Section 37. The CIT(A)’s reliance on the legitimacy of the assessee’s claim was legally unsustainable in light of the binding precedent.
The Tribunal further noted that the assessee had conceded the correctness of the Section 14A disallowance, rendering its appeal on that ground infructuous.
The Verdict
The appeal filed by the assessee is dismissed. The appeal filed by the Revenue is allowed. The deduction of Education Cess and Secondary and Higher Education Cess under Section 37 for A.Y. 2009-10 is disallowed. The order of the CIT(A) dated 03.10.2025 allowing such deduction is set aside. The disallowance under Section 40(a)(ii) as amplified by Explanation 3 is upheld. The assessee’s liability for the assessment year 2009-10 is to be recomputed accordingly.
What This Means For Similar Cases
Cess Is Not Deductible Under Section 37
- Practitioners must now treat all cesses (education, secondary higher education, Krishi Kalyan, etc.) as part of 'tax' under Section 40(a)(ii) for all assessment years from 2005-06 onwards.
- Any claim for deduction of such cesses under Section 37 must be rejected outright.
- Taxpayers should review past returns for A.Y. 2005-06 to 2021-22 and consider voluntary disclosures if such deductions were claimed.
Retrospective Amendments Bind All Taxpayers
- Legislative clarifications with retrospective effect, even if introduced years later, are binding on all taxpayers.
- Courts and tribunals will not entertain arguments that such amendments are 'unfair' or 'retroactive' if the language is clear and unambiguous.
- Taxpayers must align their compliance with the latest statutory interpretation, even if it contradicts prior practice.
Precedent Overrides Administrative Convenience
- The CIT(A)’s view that the deduction was 'legitimate' carries no legal weight when a higher court has ruled on the same issue.
- Administrative leniency cannot override statutory disallowance.
- Tax professionals must prioritize statutory text and binding precedents over subjective assessments of fairness.
