Have You Claimed Education Cess? Be Prepared To Pay Tax As Per The New Rules

Education Cess was introduced in Financial Year (FY) 2004-2005 with the aim to finance primary education. Currently, the Health and Education Cess (Cess) stands at 4% of gross tax liability (including surcharge). Taxpayers adopted a position to claim Cess as a deduction from their taxable income, which resulted in a dispute with the Tax Department. As a result, the matter was discussed before the Bombay High Court, which granted a deduction to the taxpayer. Relying on the Bombay High Court's decision, several other taxpayers started claiming deductions of Cess, either in their tax return or through an application made before the Tax Officer/Appellate Authority.

Intending to stem the evolving controversy, the Honorable Finance Minister brought an amendment in the Act through the Finance Act, 2022 with retrospective effect from FY 2004-2005 (i.e., the year in which Cess was first introduced). As per this amendment, any surcharge or Cess shall not be allowed as a deduction to the taxpayer. It also provided that for the past years, the tax officer is empowered to issue notices and pass rectification orders. As there is a limitation of time for passing a rectification order, provided that the limitation period of 4 years shall commence from 1 April 2021.

Considering that many taxpayers have already claimed a deduction of Cess and with a view to give a one-time relief to such taxpayers, a taxpayer can file an application in a prescribed form within the specified time for recomputation of their tax. In such instances, the taxpayer shall be safeguarded from the levy of penalty. Recently, the Central Board of Direct Taxes (CBDT) has notified Rules as well as the Application Form in which this request is to be made.

Rule and Form notified

On 28 September 2022, the CBDT issued a notification to lay down the process for filing applications for recomputation of income where the taxpayers have claimed a deduction of Cess. It notifies the following forms:

Sr No.	Form No.	Purpose	Timeline
	Form 69	Application for recomputation of income	31 March 2023
	Form 70	Intimation to tax officer for payment of tax	Within 30 days of paying the tax

Once the taxpayer files an application in Form 69, the tax officer is required to recompute the total income by amending the relevant order and issuing a notice. In the said notice, the timeline for making the tax payment shall also be mentioned. Once the tax is paid, the taxpayer needs to intimate the tax officer in Form 70 about the details of the taxes paid.

Key issues

1.What happens if the application is not filed before 31 March 2023?

Where the taxpayer has claimed and has been allowed the deduction of Cess, the tax officer is empowered to pass a rectification order duly denying the said claim and raising a tax demand. It could also initiate a penalty proceeding for under-reporting of income leading to a penalty equal to 50% of tax liability.

2. If as of date, the Company has merged with another company, who needs to furnish Form 69?

In such instances, the application is to be submitted by the resulting company. In Form 69, the Resulting Company should mention the name and Permanent Account Number of the erstwhile company.

 3. What if the tax is not paid within the timeframe specified in the notice of demand issued by the tax officer?

The Rule is silent on implications arising out of non-payment of taxes within the specified timeline. However, in the author’s view, the taxpayer could contend that such delay relates to payment of taxes and not making an application for rectification. Hence, it ought not to be penalised for such delay and thereby the penalty should not ideally be levied. Having said this, there could be an additional interest that could be levied on the taxpayer.

With Form 69 now notified and the deadline is 31 March 2023, taxpayers should file the application at the soonest and should not wait until the end. It may be noted that this is a one-time relief granted to a taxpayer. It is expected that the tax officer may start issuing notices soon after 31 March 2023 to those taxpayers who have claimed a deduction of Cess but have not filed Form 69. Also, for such cases, the taxpayer would also have penalty exposure.

Source : Livemint