Statutory deposit against surcharge is not deductible tax when surcharge is reduced to nil under the Surtax computation scheme.

A statutory deposit made under the Finance Act, 1976, which extinguished the liability to surcharge, was not itself payment of surcharge or income-tax and therefore could not be deducted while computing chargeable profits under the Companies (Profits) Surtax Act, 1964. On that basis, the rectification order under section 13 was held valid because the original computation had wrongly allowed deduction of an amount that was no longer a payable tax. The deposit under section 2(8) was treated as a refundable alternative mode of discharging surcharge liability, not as tax actually paid under rule 2(i) of the First Schedule. The reference was answered for the Revenue.

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Issues: (i) Whether the rectification order under section 13 of the Companies (Profits) Surtax Act, 1964, was valid. (ii) Whether the deposit made with the Industrial Development Bank of India in lieu of surcharge on income-tax was deductible while computing chargeable profits under the Surtax Act.

Issue (i): Whether the rectification order under section 13 of the Companies (Profits) Surtax Act, 1964, was valid.

Analysis: The computation of chargeable profits had proceeded on an incorrect treatment of the surcharge-related deposit. Since the Finance Act, 1976, reduced the surcharge to nil where the prescribed deposit equalled the surcharge, the earlier allowance of deduction on that basis could not stand. The question was not regarded as debatable, because the statutory scheme clearly showed that the liability to surcharge ceased on deposit and no deduction could follow for a tax that was no longer payable.

Conclusion: The rectification order under section 13 was valid and was rightly sustained.

Issue (ii): Whether the deposit made with the Industrial Development Bank of India in lieu of surcharge on income-tax was deductible while computing chargeable profits under the Surtax Act.

Analysis: The deposit under section 2(8) of the Finance Act, 1976, was only an alternative statutory mode that removed the liability to pay surcharge; it was not itself payment of surcharge or income-tax. The statutory reduction of surcharge to nil showed that the amount ceased to be payable as tax, and therefore it could not be treated as tax paid for deduction under rule 2(i) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The Court agreed with the view that such a deposit was refundable after the prescribed period and differed in character from payment of tax.

Conclusion: The deposit was not deductible in computing chargeable profits under the Surtax Act.

Final Conclusion: The reference was answered for the Revenue, and the assessee failed on both referred questions.

Ratio Decidendi: A deposit made under a statutory scheme that merely extinguishes the liability to surcharge is not itself payment of tax and cannot be deducted in computing chargeable profits where the surcharge is statutorily reduced to nil.

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