1982 (10) TMI 22 - HC - Income Tax

Surtax liability not deductible from total income under Income-tax Act, 1961.

The court held that the surtax liability under the Companies (Profits) Surtax Act, 1964, cannot be deducted in arriving at the total income under the ... Business Expenditure Issues Involved:1. Surtax liability as a deduction under the Income-tax Act, 1961.2. Interpretation of section 40(a)(ii) of the Income-tax Act, 1961.3. Applicability of the principle of real income.4. Allowance of surtax liability as business expenditure under section 37 of the Income-tax Act, 1961.5. Comparison with excess profits tax and business profits tax.6. Legislative intent and specific provisions under the Companies (Profits) Surtax Act, 1964.Issue-wise Detailed Analysis:1. Surtax Liability as a Deduction under the Income-tax Act, 1961:The primary issue was whether the surtax liability under the Companies (Profits) Surtax Act, 1964, should be deducted in arriving at the total income under the Income-tax Act, 1961. The Tribunal held that the surtax liability should not be deducted, relying on a previous decision in the case of M/s. Amar Dye Chem Ltd. v. ITO, which was discussed in paragraphs 101 to 131 of the order. The Tribunal rejected the assessee's contention based on section 40(a)(ii) of the Income-tax Act, 1961.2. Interpretation of Section 40(a)(ii) of the Income-tax Act, 1961:The assessee argued that the surtax liability should not fall within the purview of section 40(a)(ii) of the Income-tax Act, 1961, which disallows any sum paid on account of any rate or tax levied on the profits or gains of any business. The court, however, held that the expression 'any rate or tax' in section 40(a)(ii) means any rate or any tax and not just income-tax. The section was not confined to income-tax only but included any tax levied on profits or gains.3. Applicability of the Principle of Real Income:The assessee contended that surtax liability is a statutory charge on the income of the company, thereby reducing the real income. The court referred to the principle of real income as explained in the case of Raja Bejoy Singh Dudhuria v. CIT, where it was held that income diverted at source does not form part of the assessee's income. However, the court concluded that surtax is a tax on profits and does not divert income at source before it reaches the assessee.4. Allowance of Surtax Liability as Business Expenditure under Section 37 of the Income-tax Act, 1961:The assessee argued that surtax liability should be allowed as a business expenditure under section 37 of the Income-tax Act, 1961. The court rejected this argument, stating that surtax is a tax on profits and not an expenditure incurred for the purpose of business. The court emphasized that the liability to pay surtax arises only after the profits have been ascertained, and it cannot be considered an expenditure laid out wholly and exclusively for the purpose of business.5. Comparison with Excess Profits Tax and Business Profits Tax:The court compared the provisions of the Companies (Profits) Surtax Act, 1964, with the Excess Profits Tax Act and the Business Profits Tax Act. It noted that under the Excess Profits Tax Act and the Business Profits Tax Act, specific provisions allowed the deduction of these taxes from the total income for the purpose of income-tax computation. However, the Companies (Profits) Surtax Act, 1964, did not contain any such provision, indicating that surtax was not intended to be deductible as business expenditure.6. Legislative Intent and Specific Provisions under the Companies (Profits) Surtax Act, 1964:The court referred to section 15 of the Companies (Profits) Surtax Act, 1964, which provides that surtax payable by a company shall be deductible from the total income of the company for the purpose of computing distributable income under Chapter XI-D of the Income-tax Act. This provision clarified that surtax was not deductible for the purpose of computing total income under the Income-tax Act, but only for the purpose of computing distributable income.Conclusion:The court concluded that the surtax liability under the Companies (Profits) Surtax Act, 1964, cannot be deducted in arriving at the total income under the Income-tax Act, 1961. It held that surtax is a tax on profits and does not divert income at source. The court also rejected the contention that surtax liability should be allowed as business expenditure under section 37 of the Income-tax Act, 1961. The question referred to the court was answered in the affirmative and against the assessee.