Deductibility of surtax under income tax law clarified: section 40(a)(ii) does not bar otherwise allowable deduction.

Section 40(a)(ii) of the Income-tax Act, 1961 does not bar deduction of surtax paid under the Companies (Profits) Surtax Act, 1964 where the expenditure is otherwise allowable under section 37. The expression "tax" in section 40(a)(ii), read with section 2(43), is confined to income-tax chargeable under the Income-tax Act, and the restriction applies to tax on profits and gains of business or profession as computed under that Act. Surtax, being levied under a separate enactment on chargeable profits or total income, falls outside that statutory bar.

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Issues: Whether section 40(a)(ii) of the Income-tax Act, 1961 bars deduction of surtax paid under the Companies (Profits) Surtax Act, 1964, assuming such surtax is otherwise allowable under section 37 of the Income-tax Act, 1961.

Analysis: The expression "tax" in section 40(a)(ii), read with the definition in section 2(43), refers to income-tax chargeable under the Income-tax Act, 1961. Surtax is levied under a separate enactment and is charged on the total income of the assessee in the form of chargeable profits, not merely on the profits and gains of business or profession. The restriction in section 40(a)(ii) is confined to tax levied on profits and gains of business or profession as computed under the Income-tax Act, and the principle in the earlier decision under section 10(4) of the 1922 Act applies.

Conclusion: Section 40(a)(ii) does not bar deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, if otherwise allowable under section 37 of the Income-tax Act, 1961.

Ratio Decidendi: A statutory bar against deduction of tax levied on profits and gains of business or profession does not extend to a separately enacted surtax charged on total income or chargeable profits.

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