Surtax deduction barred under income-tax law for both business expenditure and tax-disallowance provisions.

Surtax paid under the Companies (Profits) Surtax Act, 1964, is not deductible as business expenditure under section 37 of the Income-tax Act because it is a tax on chargeable profits, not an outlay incurred for carrying on business. The expression "for the purpose of the business" does not cover payments that arise only after profits are determined. Section 40(a)(ii) also bars deduction, as its prohibition on tax levied on profits or gains extends to surtax computed with reference to chargeable profits. The claim for deduction therefore failed on both grounds.

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Issues: (i) Whether surtax paid under the Companies (Profits) Surtax Act, 1964, is deductible as business expenditure under section 37 of the Income-tax Act, 1961; (ii) Whether section 40(a)(ii) of the Income-tax Act, 1961, bars deduction of surtax in computing business income.

Issue (i): Whether surtax paid under the Companies (Profits) Surtax Act, 1964, is deductible as business expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The surtax was held to be a tax on chargeable profits and not an item laid out for the carrying on of business. The expression "for the purpose of the business" in section 37, though wide, is limited to expenditure incurred in the assessee's capacity as a trader for business operations. Payments which are part of the profits themselves, and become payable only after determination of profits, do not answer that description. Decisions allowing taxes on business assets or pre-business statutory outgoings were distinguished because surtax is levied on profits, not on assets used to earn profits.

Conclusion: Deduction under section 37 is not allowable and this issue is decided against the assessee.

Issue (ii): Whether section 40(a)(ii) of the Income-tax Act, 1961, bars deduction of surtax in computing business income.

Analysis: Section 40(a)(ii) disallows any sum paid on account of any rate or tax levied on profits or gains of business or assessed on the basis of such profits or gains. Surtax, though computed with reference to chargeable profits after statutory adjustments, remains a tax levied on the basis of the company's total income and chargeable profits. The Court accepted the view that the statutory definition of "tax" does not confine the clause to income-tax alone, and held that the provision covers surtax as well.

Conclusion: Section 40(a)(ii) also prohibits deduction of surtax and this issue is decided against the assessee.

Final Conclusion: The reference was answered in the negative, with the result that the claim for deduction of surtax failed on both grounds of section 37 and section 40(a)(ii).

Ratio Decidendi: A tax imposed on profits after their determination is not expenditure laid out wholly and exclusively for business, and a statutory bar against taxes levied on profits or gains extends to surtax charged on chargeable profits computed with reference to business income.

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