Surtax is not deductible in computing total income, as it remains a tax on profits and not allowable business expenditure.

Surtax under the Companies (Profits) Surtax Act, 1964 is a tax on profits levied after total income is computed under the Income-tax Act, 1961, so it does not represent diversion of income at source. Section 40(a)(ii) is treated as extending beyond income-tax to taxes on profits or gains, and the surtax is therefore not deductible in computing total income. The statutory scheme also indicates that any deduction for surtax is confined to the specific provision governing distributable income, and it is not allowable as business expenditure under section 37.

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Issues: Whether surtax payable under the Companies (Profits) Surtax Act, 1964, is deductible in computing the assessee's total income under the Income-tax Act, 1961, either under section 40(a)(ii) or as business expenditure under section 37.

Analysis: Surtax is a tax on profits and is levied only after the company's total income has been ascertained under the Income-tax Act. It does not amount to diversion of income at source or prevent income from reaching the assessee. The embargo in section 40(a)(ii) is not confined to income-tax alone, but extends to any tax on profits or gains, whether assessed directly on business income or on the basis of such profits. The scheme of the Companies (Profits) Surtax Act, 1964, especially section 15, also shows that surtax is deductible only for computing distributable income under the specific provision enacted for that purpose, and not as a deduction in computing total income. The tax is therefore not a permissible business expenditure under section 37.

Conclusion: Surtax liability is not deductible in arriving at the assessee's total income under the Income-tax Act, 1961, and the answer is against the assessee.

Final Conclusion: The referred question was answered in the affirmative in favour of the Revenue, confirming that surtax cannot be claimed as a deduction in computing taxable income under the Income-tax Act.

Ratio Decidendi: A tax imposed on a company's profits after computation of its total income is not diverted at source and is not deductible as business expenditure unless the statute expressly permits such deduction.

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