Surtax deduction under business income rejected as a post-profit charge, not expenditure wholly for business purposes.

Surtax paid under the Companies (Profits) Surtax Act, 1964 was treated by the majority as a charge on profits after they are earned and therefore not expenditure laid out wholly and exclusively for business purposes under section 37 of the Income-tax Act, 1961; the deduction was disallowed and the Revenue succeeded. The majority further held that the statutory scheme, including section 15 of the Surtax Act, reinforced the conclusion that surtax is not deductible business expenditure, making it unnecessary to rely solely on section 40(a)(ii). A dissenting judge considered surtax deductible as an incident of carrying on business.

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Issues: Whether surtax paid under the Companies (Profits) Surtax Act, 1964 was allowable as a deduction in computing business income under section 37 of the Income-tax Act, 1961, and whether it was barred by section 40(a)(ii) of that Act.

Analysis: The majority held that surtax is imposed on chargeable profits computed with reference to total income, but in substance it is a charge on profits and an application of profits after they are earned, like income-tax and super-tax. Such payment is not expenditure laid out wholly and exclusively for the purposes of the business. On that footing, the claim fails even apart from the express bar in section 40(a)(ii). The majority also noted that the statutory scheme of the Surtax Act, including section 15, supports the conclusion that surtax is not deductible as business expenditure in computing total income.

Conclusion: The deduction was not allowable and the question was answered in favour of the Revenue.

Dissenting Opinion: Radhakrishna Menon J. held that surtax is levied on chargeable profits under the Surtax Act and not on profits or gains as determined under section 28 of the Income-tax Act, 1961. He concluded that surtax is a necessary incident of carrying on the business, is expenditure wholly and exclusively laid out for the purposes of the business, and is therefore deductible under section 37 of the Income-tax Act, 1961.

Ratio Decidendi: A tax levied on profits after they are earned is not expenditure incurred for the purposes of business and is not deductible under section 37 of the Income-tax Act, 1961.

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