Surtax not deductible under Income-tax Act; majority rules against deduction, dissenting opinion on business expenditure.

The court held that surtax liability is not deductible under section 37 of the Income-tax Act, 1961, and falls within the prohibition of section 40(a)(ii). The majority judgment favored the Revenue's argument that surtax is a levy on profits or gains and not an expenditure for earning profits. However, Radhakrishna Menon J. dissented, arguing that surtax is an expenditure incidental to business and should be deductible under section 37, as it is levied on "chargeable profits" computed under the Income-tax Act.

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Issues Involved:
1. Whether surtax liability is deductible in computing the total income of the assessee u/s 37 of the Income-tax Act, 1961.
2. Whether the surtax falls within the mischief of section 40(a)(ii) of the Income-tax Act, 1961.

Summary:

Issue 1: Deductibility of Surtax Liability u/s 37
The assessee claimed a deduction u/s 37 of the Income-tax Act, 1961, for the amount paid as surtax under the Companies (Profits) Surtax Act, 1964. The Income-tax Officer disallowed this claim, but the Appellate Assistant Commissioner allowed it. On further appeal by the Revenue, the Tribunal held that such an amount could not be deducted in the computation of profits and gains. The Tribunal's decision was based on the interpretation that surtax is a levy on the basis of profits or gains, thus not deductible under section 37.

Issue 2: Applicability of Section 40(a)(ii)
Section 40(a)(ii) of the Income-tax Act, 1961, prohibits 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 a proportion of, or otherwise on the basis of, any such profits or gains." The Revenue argued that surtax falls within this prohibition, while the assessee contended that surtax is levied on total income, a concept broader than profits or gains.

The court examined the provisions of the Surtax Act, noting that "chargeable profits" are defined as the total income computed under the Income-tax Act and adjusted as per the First Schedule of the Surtax Act. The court concluded that surtax is indeed a levy on profits or gains, albeit on excess profits beyond a statutory deduction.

The court also discussed whether surtax could be considered an expenditure laid out for business purposes under section 37. It was concluded that surtax, like income-tax, is a charge on profits after they have been earned and is not an expenditure incurred for the purpose of earning profits. Therefore, it is not deductible under section 37.

Separate Judgment by Radhakrishna Menon J.
Radhakrishna Menon J. disagreed with the majority judgment. He argued that surtax is levied on "chargeable profits," which is the total income computed under the Income-tax Act and adjusted as per the Surtax Act, not on profits or gains as determined under section 28 of the Income-tax Act. He contended that surtax is an expenditure incidental to carrying on the business and should be deductible under section 37. He also noted that the prohibition under section 40(a)(ii) would not apply as surtax is not levied on profits or gains determined under section 28.

Conclusion:
The majority judgment answered the question in the negative, in favor of the Revenue, stating that surtax is not deductible under section 37 and falls within the mischief of section 40(a)(ii). Radhakrishna Menon J. delivered a separate judgment, holding that surtax is deductible under section 37 and does not fall within the prohibition of section 40(a)(ii).

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