The IT Act provides for the levy of surcharge and cess in addition to the tax payable. While surcharge is an additional levy on the income-tax payable by higher income category taxpayers, cess is collected from every taxpayer to meet a specific expenditure of the Government. For example, currently, every taxpayer is required to pay a health and education cess at the rate of 4% on the income tax liability (as increased by the applicable surcharge), which is later utilised separately by the Government to meet the education and health needs of below poverty line and rural families.
The IT Act allows businesses to deduct business expenses to arrive at taxable profits. Interestingly, while claiming deduction of payment made towards income-tax and surcharge is expressly prohibited, there is no specific bar towards claiming payment of cess as a deduction. Based on this distinction, many taxpayers have raised claims seeking deduction of payment of cess as a necessary business expense. As a relief to taxpayers, Rajasthan High Court and Bombay High Court, as well as various benches of the Income Tax Appellate Tribunal, have given favourable findings and allowed cess as a deductible business expense. However, despite such favourable precedents, and absent any authoritative pronouncement from the Apex Court, the tax authorities continue to deny such claims, holding that payment of cess is not a business expense since it is an additional surcharge/ tax, thereby keeping the litigation alive.
In our view, the cess collected along with the income tax liability should be characterised as a “fee”, rather than additional surcharge/ tax, given that cess is levied by the Government to meet a specific expenditure, which is the litmus test for distinguishing “fee” from tax. Furthermore, in our view and experience, even if payment of cess has not been claimed as a deduction while filing the income tax return, the same can be claimed at appellate stages of the proceedings in order to achieve additional tax savings.
 CBDT Circular No. 91/58/66-ITJ(19), dated May 18, 1967 clarifies this position.
 The argument that is being taken is that since payment of cess is a statutory liability, non-compliance whereof leads to adverse business consequences, it has an undeniable nexus to the conduct of business and is therefore an expenditure incurred wholly and exclusively for the purposes of the business.
 Chambal Fertilizers and Chemicals Ltd. vs. JCIT, (2019) 107 taxmann.com 484 (Rajasthan High Court).
 Sesa Goa Ltd. vs. JCIT, (2020) 423 ITR 426 (Bombay High Court).
 AZB successfully represented the taxpayer in Perfetti Van Melle India Pvt. Ltd. vs. ACIT, order dated September 22, 2021 in ITA No. 463/Del/2021 (ITAT Delhi) and Expeditors International (India) Pvt. Ltd. vs. DCIT, order dated July 30, 2021 in ITA Nos. 17 to 20/Del/2021 (ITAT Delhi). Also see, Reckitt Benckiser (I) Pvt. Ltd. vs. DCIT, (2020) 81 ITR (T) 577 (Kol-Trib).
 Hingir Rampur Coal Co. Ltd. vs. State of Orissa, AIR 1961 SC 459 (Supreme Court); Dewan Chand Builders and Contractors vs. UOI & Anr, (2012) 1 SCC 101 (Supreme Court).