Surtax on earned profits is not business expenditure and is not deductible under section 37.

Surtax paid by a company is not deductible under section 37 of the Income-tax Act because it is levied on chargeable profits after income has already accrued. The payment is treated as an application of profits arising after they are earned, not as expenditure laid out wholly and exclusively for business purposes. On that basis, surtax falls outside allowable business expenditure, and the article notes that it is unnecessary to consider the bar in section 40(a)(ii) once section 37 is not satisfied.

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Issues: Whether surtax paid by a company is allowable as a deduction in computing business income under section 37 of the Income-tax Act, and whether it is excluded by the bar relating to tax on profits or gains under section 40(a)(ii).

Analysis: Surtax is levied on chargeable profits computed with reference to total income determined under the Income-tax Act, and is attracted only after profits have been earned. It is therefore an impost on income already accrued, not an outgoing incurred in earning that income. Payment of surtax is an application of profits after they arise, and not expenditure laid out wholly and exclusively for the purposes of business. Once surtax is found not deductible under section 37, it is unnecessary to examine the exclusionary effect of section 40(a)(ii).

Conclusion: Surtax is not deductible as business expenditure under section 37 of the Income-tax Act, and the answer is against the assessee.

Ratio Decidendi: A tax levied on profits after they are earned is an application of income and not expenditure incurred wholly and exclusively for the purposes of business.

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