Vildirect: IncomeTax-caselaws-1986-VIL-391-KER-DT

1986-VIL-391-KER-DT

Equivalent Citation: [1986] 159 ITR 431, 61 CTR 287

KERALA HIGH COURT

Date: 28.01.1986

AV THOMAS AND COMPANY LIMITED

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s) : K. SREEDHARAN

JUDGMENT

[The judgment of KOCHU THOMMEN and SREEDHARAN JJ. was delivered by KOCHU THOMMEN J. RADHAKRISHNA MENON J. delivered a separate judgment].

KOCHU THOMMEN J.-The following question has been, at the instance of the assessee, referred to us by the Income-tax Appellate Tribunal, Cochin Bench :

" Whether Rs. 76,777 being the surtax liability is to be allowed as deduction in computing the total income of the assessee for the assessment year 1976-77 ? "

The assessee's claim for deduction under section 37 of the Income-tax Act, 1961, of the amount paid as surtax under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the " Surtax Act was disallowed by the Income-tax Officer, but, on appeal, it was allowed by the Appellate Assistant Commissioner. On further appeal by the Revenue, the Tribunal, following its earlier decision, held that such amount could not be deducted in the computation of profits and gains. According to the Revenue, the amount paid on account of surtax fell within the mischief of section 40(a)(ii) of the Income-tax Act, 1961, for such sum was paid on account of tax levied on the profits or gains of the assessee's business or assessed at a proportion, or otherwise on the basis of, such profits or gains. According to the assessee, however, surtax is not a tax on profits or gains, but on the total income of the assessee which is a concept much wider than what is postulated under section 40(a)(ii).

Section 40 of the Income-tax Act, in so far as it is material, reads:

" 40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',

(a) in the case of any assessee-...

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. "

This section is non obstante the provisions of sections 30 to 39 in so far as they provide to the contrary. This means that for the purpose of computing the profits and gains of business or profession under section 28 of the Income-tax Act, the deductions permissible under sections 30 to 39 do not include any sum expressly disallowed under section 40. Clause (ii) of sub-section (a) of section 40 is attracted where the amount sought to be deducted has been paid on account of (a) tax levied on the profits or gains, or, (b) an assessment at a proportion of the profits or gains, or (c) an assessment which is otherwise on the basis of such profits or gains. In order to come within the prohibition of this clause, the sum paid must be relatable directly to a levy on, or at a proportion or on the basis of, profits or gains.

One question, therefore, is whether, as contended by the Revenue, surtax is a levy on the basis of profits or gains, or, as contended by the assessee, it is a levy not on profits or gains, but on a conceptually different amount, namely, total income. The further question is, if surtax is what it is contended for by the assessee, even then can it be said that it is deductible under section 37 any more than income-tax is deductible.

We shall now read the relevant provisions of the Surtax Act. Section 4 reads:

" 4. Charge of tax.-Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule."

" Chargeable profits " are defined under section 2(5) as follows:

" 'chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (XLIII of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule."

" Statutory deduction " is defined under section 2(8) as follows: " `statutory deduction' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater ... "

The preamble to the Surtax Act says:

" An Act to impose a special tax on the profits of certain companies." (emphasis supplied)

These provisions show that what is charged under the Surtax Act is profit, although the levy is not on the total profits, but only on so much of the " chargeable profits" (which means the total income of the company computed under the Income-tax Act and adjusted in the manner provided under the First Schedule to the Surtax Act) as exceed the statutory deduction, namely, an amount equal to ten per cent. of the capital of the company as computed in accordance with the Second Schedule to the Surtax Act or an amount of two hundred thousand rupees, whichever is greater.

The First Schedule to the Surtax Act says that in computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :

" 1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely:-...

2. The balance of the total income arrived at after making the exclusions mentioned in rule I shall be reduced by-...

3. The net amount of income calculated in accordance with rule 2 shall be increased by the aggregate of-... "

This is the mode of adjustment laid down under the First Schedule to the Surtax Act. It is, therefore, the total income computed under the Income-tax Act, and adjusted in terms of the First Schedule, in so far as it is in excess of the statutory deduction that is charged under the Surtax Act at the rate or rates specified in the Third Schedule of that Act.

The assessee's counsel, Shri K. A. Nayar, submits that surtax is not charge on profits or gains, but on a different amount, which, although styled as " chargeable profits ", is in fact the total income of the assessee, falling under the different heads listed in section 14 of the Income-tax Act, subject to the statutory adjustment and limitation. According to counsel, the words " profits or gains " mentioned under section 40(a)(ii) refer to " profits and gains " falling under section 28, and the express prohibition of section 40(a)(ii) has no application unless the levy is on such " I profits or gains ". Surtax being not a levy of that character, but a levy on the basis of the total income of the company, which is not profits or gains, but income, the amount paid on account of surtax is not hit by the express prohibition, and is deductible under section 37 of the Income-tax Act.

One fallacy of this argument lies in the assumption that income-tax is levied on income other than profit. Income-tax is a tax on income in the sense that it is a tax on profits or gains arising under all the heads of income without distinction and computed in the manner laid down in the Act. The expression " profits or gains " in this context must be understood with reference to the total income and not to any particular head of income.

The heads of income described under section 14 are intended merely to indicate the classes of income. They do not exhaustively delimit the sources from which income arises. Business income is broken up under different heads for the purpose of computation of the total income. But income by reason of such break-up does not cease to be income of the business. Each head refers to income, profits and gains attributable to that particular source. Each head, though separate, exclusive and specific, refers to income, profits and gains. The profits of a company do not change their character as profits merely because they are classified under different heads for the purpose of assessment under the Income-tax Act. The heads of income describe different kinds of profits chargeable under the Income-tax Act., CIT v. Chunilal B. Mehta [1938] 6 ITR 521, 529 (PC); United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688, 697 (SC); and CIT v. Chagandas & Co. [1965] 55 ITR 17, 24 (SC).

In London County Council v. Attorney-General [1901] AC 26, 35, 364 TC 265, 293, Lord Macnaghten observed:

" Income-tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else. It is one tax, not a collection of taxes essentially distinct. There is no difference in kind between the duties of income-tax assessed under Schedule D and those assessed under Schedule A or any of the other schedules of charge .... In every case the tax is a tax on income, whatever may be the standard by which the income is measured. It is a tax on 'Profits or gains' ....... And it is to be observed that the expression 'profits or gains' which occurs so often in the Income-tax Acts is constantly applied without distinction to the subjects of charge under all the schedules. " (emphasis supplied)

Earl of Halsbury L. C. stated in Ashton Gas Company v. Attorney-General [1906] AC 10, 12:

"Profit is a plain English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to earn that profit with the income-tax, which is a part of the profit itself, one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not charge upon the profits at all. The answer is that it is. The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax-you have no right to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley J.'s difficulty in understanding how so plain a matter has been discussed in all the courts at such extravagant length. " (emphasis supplied)

See also Salisbury House Estate Ltd. v. Fry (H.M. Inspector of Taxes), [1930] 15 TC 266, at 303 et seq.; Molins of India Ltd. v. CIT [1983] 144 ITR 317 (Cal).

As stated by Lord Wright in Kamakshya Narain Singh v. CIT [1943] 11 ITR 513, 521 (PC) : " Income ....... is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation. "

The Supreme Court, in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758, quoted with approval the above observation of Lord Wright and observed (at pp. 763 and 764):

" The cardinal rule of interpretation, however, is that words should be read in their ordinary, natural and grammatical meaning subject to this rider that in construing words in a constitutional enactment conferring legislative power, the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude."

Posing the question, " what, then, is the ordinary, natural and grammatical meaning of the word 'income'? ", Das J., speaking for a Bench of five judges, continued (at p. 764):

" ... According to the dictionary, it means 'a thing that comes in'.... Its natural meaning embraces any profit or gain which is actually received .... [The] word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power. "

In CIT v. K. Srinivasan [1972] 83 ITR 346 (SC), the Supreme Court, referring to articles 270 and 271 and entry 82 of List I of the Seventh Schedule to the Constitution, held that the word " income-tax " as used in section 2 of the Finance Act, 1964, included both surcharge and additional surcharge. In Molins of India Ltd. v. CIT [1983] 144 ITR 317 (Cal), the Calcutta High Court held that surtax was not an allowable deduction in view of the specific prohibition contained in section 40(a)(ii) of the Income-tax Act, which, the court stated, was not exclusively directed against income computed under section 28 of the Income-tax Act.

If all the heads of income mentioned under section 14 do constitute different kinds of profits, all of which form the total income of the assessee, any sum paid as tax levied on such profits, or at a proportion thereof, or otherwise on their basis, is, ex hypothesi caught within the express prohibition of section 40(a)(ii) of the Income-tax Act. Although what is charged under the Surtax Act is excess profit, that is, profit in excess of the statutory deduction, determined with reference to the total income computed under the Income-tax Act after making the adjustment prescribed under the First Schedule to the Surtax Act, the levy is nevertheless on the basis of profits.

The question, however, can, and must necessarily, be considered from a different angle, particularly in the light of the decision of the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580, which we shall presently discuss. Assume that the assessee's counsel is right in contending that the express prohibition under section 40(a)(ii) has no application except where the levy is on " profits and gains " chargeable under section 28 (i.e., income under the head D of section 14) : the fundamental question then will be whether the amount paid on account of surtax is, as contended for by the assessee, deductible under section 37. Is it an expenditure laid out or expended wholly and exclusively for the purposes of the business or is it, as in the case of income-tax, a charge on income and, therefore, an application of the income after it has been earned?

The substantial reason why income-tax is not deductible in computing profits for income-tax purposes is, as stated by Lord Normand in Smith's Potato Estates Ltd. v. Bolland (H. M. Inspectar of Taxes): Smith's Potato Crisps (1929) Ltd. v. Commissioners of Inland Revenue [1948] 30 TC 267, 294 and 295 :

" Income-tax is an impost made upon profits after they have been earned, and that unless the observations of Lord Davey in Strong and Company of Romsey Ltd. v. Woodifield [1906] AC 448; 5 TC 215, which have often been referred to and applied in later cases, are to be disregarded, a payment out of profits after they have been earned is not within the purposes of the trade carried on by the taxpayer ...... "

In Commissioners of Inland Revenue v. Dowdall O'Mahoney & Co. Ltd. [1952] 33 TC 259, 274, Lord Oaksey, referring to a claim for deduction of Irish income-tax levied on a company resident in Eire and having branches in the United Kingdom, pointed out :

" Taxes such as these are not paid for the purpose of earning the profits of the trade : they are the application of those profits when made and not the less so that they are exacted by a dominion or foreign government. "

In the same case, Lord Reid, referring to the earlier decisions of the House of Lords on the point, observed (p. 282) :

" I have read and re-read those speeches and they appear to me to establish conclusively (first) the distinction between money spent to earn profits and money spent out of profits which have been earned, and (secondly) the fact that Income-tax and Excess Profits Tax payments come within the latter category. "

Income-tax is not an expenditure laid out for the purpose of the business. It is not a deduction before one arrives at the profits. It is not paid for the purpose of earning the profit. On the contrary, it is paid out of the profits. It is an application of the profits after they have been earned. It is the Revenue's share of the profits. Taxes such as excess profits tax, super-tax, Surcharge or surtax are charges on profits. They skim the cream off profits so far as they are in excess of the prescribed limit : Per Viscount Simon L.C. in L. C. Ltd. v. G. B. Ollivant Ltd. [1944] 1 All ER 510 (HL). See also CIT v. K. Srinivasan [1972] 83 ITR 346 (SC), Kameshwar Singh v. CIT [1961] 42 ITR 774 (Pat), Mannalal Ratanlal v. CIT [1965] 58 ITR 84 (Cal), Waldies Ltd. v. CIT [1977] 110 ITR 577 (Cal) and Kishinchand Chellaram v. CIT [1978] 114 ITR 654 (Bom).

The words " laid out or expended wholly and exclusively for the purposes of the business " appearing in section 37 of the Income-tax Act or the like expression of Schedule D of the United Kingdom Income-tax Act have appeared in successive statutes in both the countries over a number of years and have been the subject of judicial consideration in innumerable cases. The oft-quoted commentary on them is that of Lord Davey in Strong and Co. of Romsey Ltd. v. Woodifield [1906] 5 TC 215, 220, where he says

" These words ...... appear to me to mean for the purpose of enabling person to carry on and earn profits in the trade, &c. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits. "

See also Smith's Potato Estates Ltd. v. Bolland (H. M. Inspector of Taxes): Smith's Potato Crisps (1929) Ltd. v. IRC [1948] 30 TC 267 ; IRC V. Dowdall O'Mahoney & Co. Ltd. [1952] 33 TC 259 and Smith v. Lion Brewery Co. Ltd. [1909] 5 TC 568.

On the other hand, where taxes such as sales tax or excise duty have been paid, or liability incurred therefor, courts have held that they are not cases of application of the income, but expenditure incurred for the purpose of carrying on the trade and, therefore, deductible in computing the profits and gains of business : Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) and Pope the King Match Factory v. CIT [1963] 50 ITR 495 (Mad). Liability to pay sales tax or excise duty or like taxes does not depend upon whether profits are made or not. It is a payment which the assessee is compelled to make if he has to carry on his trade. The fundamental distinction is that such payment, unlike in the case of income-tax or similar charge on income, is not an application of the income, but cost or expenditure incurred before earning the income. Such taxes are paid to ensure that the trade is allowed to continue. They are paid wholly and exclusively for the purposes of the business and are, therefore, allowable as deduction in computing the profits and gains. This was the position in Harrods (Buenos Aires) Ltd. v. Taylor-Gooby [1964] 41 TC 450 (cited with approval by the Supreme Court in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735). It is true that the expression "for the purposes of the business " in section 37, as stated in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), is wider than the expression " for the purpose of earning the profits " (per Lord Davey, Strong & Co. of Romsey Ltd. v. Woodifield [1906] 5 TC 215), but that makes no difference to this fundamental distinction.

The question then is whether the amount paid as surtax is an expense laid out for the purpose of carrying on the business, in which case it would be, subject to express prohibition, deductible in computing the total income ; or, is it an application or distribution of the profits or gains when earned, as in the case of income-tax or excess profits tax, in which event such amount is, unless specifically allowed, as in the case of the Excess Profits Tax Act (section 12) or the Business Profits Tax Act (section 10) not deductible.

Surtax which is levied on excess chargeable profits is a levy on the total income computed under the Income-tax Act after it is adjusted in accordance with the machinery provided for it under the Surtax Act. In the nature of this tax, it is a levy on the basis of the profits or gains of the business. It is an application of the profits or gains of the business after they have been earned. Like in the case of income-tax or super tax, so in the case of surtax, any sum paid on account of such levy is not an expenditure laid out or expended for the purposes of the business. Whether or not it comes within the express prohibition under the statute, it is not an allowable deduction under section 37.

The argument that the amount paid as surtax is not attracted by section 40(a)(ii) of the Income-tax Act, for the reason that the levy is not on the profits chargeable under section 28, but on the basis of the total income earned by the assessee, must, ex hypothesi exclude such amount from the ambit of section 37. Surtax is non-deductible for the same reason that income-tax is not deductible under section 37. On the other hand, the very contention in support of deduction in terms of section 37 brings the amount within the mischief of section 40(a) (ii).

In this connection, reference may be made to section 15 of the Surtax Act. It reads :

" 15. Notwithstanding anything contained in clause (i) of section 109 of the Income-tax Act, in computing the distributable income of a company for the purposes of Chapter XI-D of that Act, the surtax payable by the company for any assessment year shall be deductible from the total income of the company assessable for that assessment year."

This shows that, for the purpose of determining the income-tax payable on the total income, no deduction is allowed in respect of the sum payable as surtax, and the latter amount is deducted only when the distributable income of a company is computed for the purpose of sections 104 to 109 of the Income-tax Act. Any other construction would lead to double deduction of the same amount.

Counsel for the assessee relies on two decisions in support of his contention. In CIT v. Gurupada Dutta [1946] 14 ITR 100 (PC), the Privy Council considered the question whether the rate imposed under the Bengal Village Self-Government Act, 1919, was an allowable deduction in computing the profits of the business under section 10 of the Indian Income-tax Act. Rejecting the Revenue's contention that the rate fell within the mischief of section 10(4) of the Indian Income-tax Act, 1922 (corresponding to section 40(a)(ii) of the present Act), the Privy Council said (at p. 105) :

" It will be noted that, in the absence of the necessary powers and machinery, which are not provided by the Act (Bengal Village self-government Act, 1919), the estimate of the annual income from business can only proceed on a rough guess, which is in no way comparable with the ascertainment of Profits and gains under the Income-tax Act, and, in the opinion of their Lordships, the inclusion of this element of business income as part of the 'circumstances' of the assessee with a view to the imposition of the Union rate does not fall within sub-section (4) of section 10 of the Income-tax Act. It is conceded that the Union rate is not 'levied on the Profits or gains', which clearly implies an ascertainment of such profits and gains, and the words 'assessed ...... on the basis of any such profits or gains' in the later part of the sub-section must also be so limited. No such ascertainment of the profits and gains of the business can be undertaken for the purposes of the Union rate. The main argument for the Crown, therefore, fails." (emphasis supplied)

It had been conceded in that case that the rate had not been levied on the profits or gains. In that context, the Privy Council said that a claim for deduction of the amount paid as tax levied on the basis of a rough estimate of the annual income, which was in no way comparable to the computation of profits and gains under the Income-tax Act, was not caught within the mischief of section 10(4) of the Indian Income-tax Act, 1922. In Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580, the Supreme Court, citing with approval the above decision of the Privy Council, held that cess paid under the Bengal Cess Act, 1889, or the Bengal (Rural) Primary Education Act, 1930, was an allowable deduction under section 10 of the Indian Income-tax Act, 1922. Any such sum, the court pointed out, was not attracted by the prohibition contained in section 10(4), as the levy was not made on, or at a proportion, or on the basis of, the profits of the assessee's business. The court said (at p. 584):

"The words 'profits and gains of any business, profession or vocation' which are employed in section 10(4) can, in the context, have reference only to profits or gains as determined under section 10 and cannot cover the net profits or gains arrived at or determined in a manner other than that provided by section 10. The whole purpose of enacting sub-section (4) of section 10 appears to be to exclude from the permissible deductions under clauses (ix) and (xv) of sub-section (2) such cess, rate or tax which is levied on the profits or gains of any business, profession or vocation or is assessed at a proportion of or on the basis of such profits or gains. In other words, sub-section (4) was meant to exclude a tax or a cess or rate the assessment of which would follow the determination or assessment of profits of gains or any business, profession or vocation in accordance with the provisions of section 10 of the Act." (emphasis supplied)

The court then referred to the observation of the Privy Council, extracted above, and said (at pp. 585 and 586):

" In our judgment, this decision is quite apposite and fully covers the point under consideration ...... In the Income-tax Act, 1961, section 28 relates to the income which shall be chargeable to income-tax under the head 'profits and gains of business or profession'. Section 30(b)(ii) is equivalent to clause (ix) of section 10(2) of the Act. Section 40(a)(ii) corresponds to section 10(4) of the Act. It is significant that in spite of the decision of the Privy Council in Gurubada Dutta's case [1946] 14 ITR 100 (PC), Parliament did not make any change in the language of the provisions corresponding to section 10(4). It can, therefore, legitimately be said that the view of the Privy Council with regard to the true scope and ambit of section 10(4) of the Act was accepted."

In these two decisions, the amounts in question were undoubtedly deductible under section 10 of the Indian Income-tax Act, 1922, if they did not fall within the mischief of section 10(4). While in the case before the Privy Council, it had been conceded that the levy was not on the profits or gains, the position was not different in the case dealt with by the Supreme Court. In either case, the levy was not a charge on income and the amount paid on account of it was not an application of the income, but an expenditure incurred for the purpose of carrying on the trade and earning the income. It was in that context that the Supreme Court expressed the view that the computation adopted under the relevant enactment, otherwise than in accordance with section 10, did not satisfy the requirements to attract the express prohibition under section 10(4). These two decisions must be understood in that context. They do not support the assessee's case and are not relevant to the consideration of the question whether surtax satisfies the requirements of section 37 to be allowed as a deduction.

The case of the present assessee, as revealed by pleadings and arguments, is that the amount in question in deductible under section 37. That question must be answered with reference to the character of the expenditure de hors the question as to the applicability of section 40(a)(ii). To say that section 40(a)(ii) is not applicable because the money is spent not on profits, but on income other than profits, is to beg the question. The question really is whether it is an expenditure deductible under section 37, and, if so, whether such deduction is expressly prohibited under section 40(a)(ii). If it is not deductible under section 37, then section 40(a)(ii) does not come into the picture at all.

As already stated, the amount paid as surtax, as in the case of income-tax and like taxes, being a charge on income, is not an expenditure incurred for the purpose of the business, but an application of the profits or gains earned by the business. There is no statutory provision allowing deduction in respect of such expenditure. In the circumstances, whether or not the amount in question comes within the express prohibition contained in section 40(a)(ii), the claim for deduction is not allowable.

Accordingly, we answer the question referred to us in the negative, that is, in favour of the Revenue and against the assessee.

We direct the parties to bear their respective costs in this tax referred case.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

RADHAKRISHNA MENON J.-I regret I am unable to agree with my learned brother, justice Kochu Thommen, and hence this separate judgment.

The assessee is before us. In estimating, for income-tax purposes, the annual income of its business, the assessee company claimed to deduct sum of Rs. 76,777 representing the surtax, levied under the Companies (Profits) Surtax Act, 1964, for short " the Surtax Act ". The assessing authority disallowed it while the Appellate Assistant Commissioner, before whom the assessee had challenged the assessment order, allowed the deduction. The Appellate Tribunal, however, rejected the claim for deduction and thus upheld the order of the assessing authority.

The assessee company, therefore, got the following question of law referred to this court :

" Whether Rs. 76,777 being the surtax liability is to be allowed as deduction in computing the total income of the assessee for the year 1976-77 ? "

The short but difficult question arising for consideration is whether the surtax levied under the Surtax Act is an allowable deduction while computing the total income of the company notwithstanding the provisions contained in section 40(a)(ii) of the Income-tax Act.

Section 40(a)(ii) :

(a) in the Case of any assessee-...

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains."

This section provides that while computing the income of an assessee chargeable under the head " Profits and gains of business or profession ", the sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall be excluded from the permissible deduction under sections 30 to 39.

The Appellate Tribunal by its order dated January 30, 1980, from out of which the above question of law arises, has upheld the view taken by the assessing authority which reads :

"The claim for deduction of Rs. 76,777 being surtax payable is not allowed since it cannot be considered as expenditure incurred for carrying on of the business, nor is there any specific provision in the Act for deduction of the tax for purpose of computing the total income."

According to these authorities, the sum paid by the assessee on account of surtax levied under the Surtax Act, falls within the mischief of section 40(a)(ii) and, therefore, not an allowable deduction.

Construing section 40(a)(ii) of Income-tax Act, the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580 at 584, has held thus:

" Now, it is quite clear that the aforesaid cesses would be allowable deductions either under clause (ix) or clause (xv) of sub-section (2) of section 10 unless they fell within section 10(4). We have already referred to the provisions of both Acts under which the cesses are levied which show that their assessment is not made at a proportion of the profits of the assessee's business. What has to be determined is whether the assessment of the cesses is made on the basis of any such profits. The words 'profits and gains of any business, profession or vocation' which are employed in section 10(4) can, in the context, have reference only to profits or gains as determined under section 10 and cannot cover the net profits or gains arrived at or determined in a manner other than that provided by section 10. The whole purpose of enacting sub-section (4) of section 10 appears to be to exclude from the permissible deductions under clauses (ix) and (xv) of sub-section (2) such cess, rate or tax which is levied on the profits or gains of any business, profession or vocation or is assessed at proportion of, or on the basis of, such profits or gains. In other words, subsection (4) was meant to exclude a tax or a cess or a rate the assessment of which would follow the determination or assessment of profits or gains of any business, profession or vocation in accordance with the provisions of section 10 of the Act."

Noting with approval a similar view expressed by the Privy Council in CIT v. Gurupada Dutta [1946] 14 ITR 100, the Supreme Court has also made the following observations (at p. 586) :

" In the Income-tax Act, 1961, section 28 relates to the income which shall be chargeable to income-tax under the head 'Profits and gains of business or profession'. Section 30(b)(ii) is equivalent to clause (ix) of section 10(2) of the Act. Section 40(a)(ii) corresponds to section 10(4) of the Act. It is significant that in spite of the decision of the Privy Council in Gurupada Dutta's case [1946] 14 ITR 100 (PC), Parliament did not make any change in the language of the provisions corresponding to section 10(4). It can, therefore, legitimately be said that the view of the Privy Council with regard to the true scope and ambit of section 10(4) of the Act was accepted. We are unable to concur in the reasoning or the conclusion of the Calcutta High Court in Commissioner of Income-tax v. West Bengal Mining Co. [1968] 67 ITR 292, in which it was held that the two cesses being related to profits would attract section 10(4) of the Act." (emphasis supplied)

The question the Calcutta High Court, in CIT v. West Bengal Mining Co. [1968] 67 ITR 292, had to consider was (at p. 295):

" Whether, on the facts and in the circumstances of the case and in view of section 10(4) of the Indian Income-tax Act, 1922, the sum of Rs. 11,906 paid on account of road and education cesses was an allowable expenditure under section 10(2)(xv) of the said Act ? "

The 'cess' levied under the scheme of the Cess Act, 1880, and the Bengal (Rural) Primary Education Cess Act, 1930, was found to be related to profits and hence not deductible as business expenditure under section 10(2)(xv) in view of section 10(4) of the Act.

The ratio decidendi of the above decision of the Supreme Court, therefore, is that to apply section 40(a)(ii) to the facts of a given case, it should positively be established that the rate or tax sought to be deducted is one levied or assessed on the " profits or gains " as determined under section 10(1) of the Indian Income-tax Act, 1922, corresponding to section 28 of the Income-tax Act. However, this prohibition will not extend to tax levied on " the met Profits or gains arrived at or determined in a manner other than that Provided by section 10 " corresponding to section 28 of the Income-tax Act. For that matter, it is not enough if the tax is related to profits. In short, in order to refuse the claim of an assessee for deduction of the sum paid as tax within the meaning of section 40(a)(ii), it should be found that the basis for the levy of the said tax is nothing but the profits or gains as determined under section 28.

It is in this background that the question requires to be considered.

The scheme of the Surtax Act discloses that the basis for the levy of the surtax is the "chargeable profits" which is defined under section 2(5) of the Surtax Act :

Section 4 of the Act is the charging section. Section 5 provides that every company whose chargeable profits assessable under the Act exceeds the limits prescribed under the Act, shall furnish the return of the chargeable profits of the company during the previous year in the prescribed form and verified in the prescribed manner before the 30th day of September of the assessment year. "Assessment year" means the period of twelve months commencing on the 1st day of April, every year. The assessing authority has been conferred with power to extend the date for furnishing the return, provided the assessee company makes an application in that behalf. The assessing authority, after considering the accounts or evidence produced by the assessee and also such other evidence or material as he may gather, shall by an order in writing, assess the chargeable profits and determine the amount of surtax payable on the basis of such assessment. The chargeable profits is computed in accordance with the provisions contained in the First Schedule appended to the Surtax Act. It also contains the usual appeal provisions, rectification provisions and provisions for the levy of penalty, revision, etc.

It can thus be seen that the basis for the levy of surtax is the chargeable profits computed in terms of the provisions contained in the First Schedule to the Surtax Act and not " the profits or gains " of the business as determined in accordance with the provisions contained in section 28 of the Income-tax Act. The learned counsel for the assessee company, therefore, argued that the rejection of the claim of the company for deduction of surtax in computing the assessable total income on the ground that the surtax falls within the mischief of section 40(a)(ii) of the Income-tax Act, is not sustainable in law. He submitted that non-payment of the surtax would entail the initiation of recovery proceedings against the assessee resulting in the sale of its assets, etc., and consequent closure of the business. The payment of the surtax, therefore, is a business expenditure wholly and exclusively laid out for the purposes of the company's business and hence an allowable deduction in computing the chargeable income.

Before proceeding further, I shall dispose of a preliminary argument, opposing the above contention of the assessee, advanced by the learned counsel for the Revenue. Referring to two expressions used in section 40(a)(ii), namely, " tax levied " and " tax assessed ", the counsel submits that it need not necessarily be that the tax mentioned therein shall be levied or assessed on the profits or gains of business as determined under section 28 of the Income-tax Act; but it is enough if it is shown that the surtax is assessed at a proportion of, or otherwise on the basis of, any profit, so as to attract the provisions of the said section. According to him, the surtax is levied on the profits, that is, the total income of the assessee, as computed under the Income-tax Act. He submits that the basis for the levy of the tax for the purpose of section 40(a)(ii) need not always be the profits and gains as determined in accordance with section 28 ; on the other hand, it is enough if it is shown that the tax levied is relatable to the profits which an assessee has made during the relevant year. This aspect, however, is no more res integra in view of the decision of the Supreme Court in Jaipuria's case [1971] 82 ITR 580. The contention accordingly is rejected.

This takes us to the question whether the amount of surtax paid by the assessee can be treated as an expenditure laid out or expended wholly and exclusively for the purpose of the business and hence an allowable deduction in computing the income chargeable. The answer depends upon the construction of section 37 of the Income-tax Act. The true test to find out whether an expenditure is laid out wholly and exclusively for the purpose of the business is, whether it is incurred by the assessee as incidental to his trade in that, without meeting the said expenditure, could the assessee keep on the trade/business going and of making it pay. (vide CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 (SC)). The Supreme Court, in this decision, has reasserted the view it had expressed in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 at 150. The ratio deducible from these decisions is this The expression for the purpose of the business " is wider in scope than the expression for the purpose of earning " profit. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be incidental to the business and the assessee shall incur it in his capacity as a person carrying on the business.

That the expenditure enumerated under sections 30 to 39 of the Income-tax Act are allowable deductions while computing the profits and gains of the business is beyond dispute. Any sum paid on account of any rate or tax is ex facie allowable as a deduction either under section 30 or under section 37 ; or else there was no need for section 40(a)(ii) prohibiting the deduction of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at proportion of, or otherwise on the basis of, any such profits or gains. The non obstante clause in section 40, namely, " Notwithstanding anything to the contrary in sections 30 to 39 " supports this view. Ordinarily, a non obstante clause is introduced in an enactment with the object of indicating that " one section of an Act takes away what another confers. " (vide Raj Krushna Bose v. Binod Kanungo, AIR 1954 SC 202).

The Supreme Court in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735, has held thus (at p. 742) :

" It may be mentioned that there was no express statutory provision for deduction of rates and taxes in the English Income-tax Act and yet they were allowed as a necessary deduction for the purpose of carrying on trade." (Sikri C.J.)

While making this observation, the Supreme Court had noted with approval the following dictum of Lord Sumner in the decision in Usher's Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399 (HL) (see [1972] 84 ITR 735 at p. 742) :

"The remaining items, rates and taxes, premiums and costs, call for no special observation. In my view, the case means to find them all to be disbursements and money 'wholly and exclusively expended for the purposes of the trade,' and that being so in fact, I think there is no reason why they may not be so in law. They are accordingly covered by the decision on the rent and the repairs. "

Beg J., in his concurring judgment, has held (at p. 753)

"On going through the provisions of the Wealth-tax Act as well as the Income-tax Act, it was not possible for me to infer that the payment of wealth-tax must be excluded from the computation of profits under section 10, sub-sections (1) and (2) of the Income-tax Act. It appears to me that nothing less than an express statutory provision would justify a denial of the right to a deduction which the language of section 10, sub-section 2(xv), (corresponding to section 37 of the Income-tax Act) confers upon an assessee." (emphasis supplied)

Having declared the law thus, the Supreme Court, overruling its earlier decision in Travancore Titauium Products Ltd. v. CIT [1966] 60 ITR 277, held that the wealth-tax paid on assets held by the assessee for the Purpose of his business is a permissible deduction under section 10(2)(xv) corresponding to section 37(1) of the Income-tax Act.

The Supreme Court has reasserted this position in two later decisions in Dehra Dun Tea Co. Ltd. v. CIT [1973] 88 ITR 197 and Mitsui Steamship Co. Ltd. v. CIT [1975] 99 ITR 7.

These judicial pronouncements do support the view I have taken that the payment of surtax is a necessary incident of carrying on the business and, therefore, the same is a permissible deduction under section 37(1) of the Income-tax Act.

The learned counsel for the Revenue, however, submits that the surtax is nothing but additional income-tax because it is levied on the profits/ gains of the company. Dilating on this point, he submits that income-tax is nothing but " the Crown's share of the profits " and, hence, it is a case of application of profits after they have been earned. In support of this argument, he pressed into service several English authorities including the decision of the House of Lords in Ashton Gas Co. v. Attorney-General [1906] AC 10.

Before proceeding further, I shall deal with an aspect which is relevant in the context; and it is this. While considering the applicability of the English case law interpreting the British Income-tax Act, to interpret the provisions of the Indian Income-tax Act, the caution administered by the Supreme Court shall always be borne in mind. This is what the Supreme Court has said in this regard (vide CIT v.. Vazir Sultan and Sons [1959] 36 ITR 175 at 179):

" While considering the case law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes, it is less elaborate in many ways, subject to fewer refinements and in arrangement and language, it differs greatly from the provisions with which the courts in England have had to deal. Little help can, therefore, be gained by attempting to construe the Indian Income-tax Act in the light of decisions bearing upon the meaning of the income-tax legislation in England. But on analogous provisions, fundamental concepts and general principles unaffected by the specialities of the English income-tax statutes, English authorities may be useful guides."

The Supreme Court restated this view in CIT v. A. Gajapathy Naidu 1964] 53 ITR 114, and observed thus (at pp. 117 and 118) ;

" The caution administered by this court shall always be borne in mind in construing the provisions of the Indian statute. The provisions of the Indian Income-tax Act shall be construed on their own terms without drawing any analogy from English statutes whose terms may superficially appear to be similar but on a deeper scrutiny may reveal differences not Only in the wording but also in the meaning a particular expression has acquired in the context of the development of law in that country."

The pronouncements of English courts cited at the bar, interpreting provisions containing the words " profits or gains " in the British income-tax statutes are no more relevant here because the Supreme Court in Jaipuria's case [1971] 82 ITR 580, has already interpreted section 40(a)(ii) containing the above words " profits or gains ". We are bound by that decision. The meaning given to these words by English courts, therefore, is liable to be eschewed. Similarly, those decisions of the English courts disallowing the claim of an assessee to deduct tax paid as an expenditure, on the ground that the tax is not an expenditure for the purpose of earning Profits have no relevance in construing section 37 containing the expression "for the purpose of the business ", in view of the decision of the Supreme Court in Malayalam Plantations' case [1964] 53 ITR 140. As held by the Supreme Court, the expression " 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits' ". Any expenditure which is incidental to the carrying on of the business is an allowable expenditure. Here, it is relevant to note the observation of Lord Sumner, in Usher's Wiltshire Brewery's case [1914] 6 TC 399 (HL), noted with approval in the decision of the Supreme Court in Indian Aluminium's case [1972] 84 ITR 735, namely, that " rates and taxes, call for no special observation, while considering the claim of an assessee to deduct them as disbursements and money 'wholly and exclusively expended for the purposes of the trade' and as such covered by the decision on the rent and the repairs."

At this stage, it is apposite that special mention is made of the dictum laid down by the House of Lords in Ashton Gas Co.'s case [1906] AC 10, 12. The dictum reads:

" The income taxis a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax-you have no right to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income tax part of the expenditure." (emphasis supplied.)

The above dictum, however, requires to be avoided for yet another reason. In this connection, it needs to be noted as to what the House of Lords considered in that case, which is discernible from the arguments advanced by the counsel on behalf of the assessee. The said argument as capitulated in the decision reads (p. 11):

" The income tax is payable by the company under section 60 of the Income-tax Act, 1842, Schedule A, No. III, rule 3, and does not come under Schedule D. The tax is a charge on the profits before distribution to the shareholders : it is one of the charges which may be deducted before arriving at the profits and calculating the dividend."

It can thus be seen that the only case the House of Lords considered was the claim of the assessee to deduct the income-tax before ascertaining the profits. There was no need for the House of Lords to consider the scope of Schedule DI, which contains provisions similar to the provisions contained in section 37 of the Income-tax Act, 1961, because the assessee himself had no such case. In fact, the assessee had conceded that the claim is not covered by Schedule D. Considering the scope of Schedule D, the House of Lords, however, held in Usher's Wiltshire Brewery's case [1914] 6 TC 399 (HL), that rates and taxes paid can be deducted as disbursements and money " wholly and exclusively expended for the purposes of the trade ". The decision of the House of Lords in Ashton Gas Co.'s case [1906] AC 10, hence has no application here.

I, therefore, am of the view, that those English authorities cited by the counsel for the Revenue are not relevant in interpreting either section 37 or section 40(a)(ii) of the Income-tax Act. Whatever that be, in view of the authoritative pronouncements of the Supreme Court in Jaipuria's case [1971] 82 ITR 580, Malayalam Plantations' case [1964] 53 ITR 140 and Indian Aluminium's case [1972] 84 ITR 735, the above argument of the counsel for the Revenue is liable to be rejected. I accordingly rejected the same.

Assuming, surtax is additional income-tax, even then the same will not fall within the mischief of section 40(a)(ii) because, as already stated, the surtax is not levied on the profits and gains as determined under section 28. The surtax can, at best, be said to be related to " profits " as understood under the Income-tax Act; even then, going by the principles laid down in Jaipuria's case [1971] 82 ITR 580, it will not fall within the meaning of section 40(a)(ii). For that matter, surtax is not levied under the Income-tax Act. But it is levied under the provisions of the Surtax Act, on the " chargeable profits " as defined in that Act. Such tax as surtax paid, therefore, is an expenditure wholly and exclusively laid out for the purpose of the trade within the meaning of section 37 and hence a permissible deduction while computing the chargeable income. The argument of the counsel for the Revenue noted above, therefore, is unsustainable in law and hence rejected.

The pronouncements of the various High Courts following the principles laid down in the decision of the House of Lords in Ashton Gas Co.'s case [1906] AC 10, namely, Maharajadhiraj Sir Kameshwar Singh v. CIT [1961] 42 ITR 774 (Pat), Mannalal Ratanlal v. CIT [1965] 58 ITR 84 (Cal), Waldies Ltd. v. CIT [1977] 110 ITR 577, Kishinchand Chellaram v. CIT [1978] 114 ITR 654 (Bom), Molins of India Ltd. v. CIT [1983] 144 ITR 317 (Cal) and Bharat Commerce Industries Ltd. v. CIT [1985] 153 ITR 275 (Delhi), cited at the Bar also cannot be pressed into service to sustain the plea of the Revenue because, according to me, the principles of law highlighted therein are not consistent with the authoritative pronouncements of the Supreme Court aforementioned.

The surtax paid by the assessee thus is really incidental to the carrying on of the business and hence an expenditure laid out wholly and exclusively for the purpose of the business and, as such, a permissible deduction under section 37 of the Income-tax Act.

For the reasons stated above, the question is answered in the affirmative and in favour of the assessee.

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.