TMI Blog1986 (1) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-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 conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 pleadin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) : " 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 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression '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 dict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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