Rule 3(ii) under the Surtax Act applies only to expenditure allowed in income-tax assessment, not to fully disallowed claims.

Rule 3(ii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 applies only where commission, entertainment or advertisement expenditure has actually been allowed in the income-tax assessment and is then examined for excessiveness. If the entire expenditure has already been disallowed under the Income-tax Act, there is no basis to treat any part of it as excessive for surtax purposes, and the surtax computation cannot be used to reopen or vary the income-tax assessment. Prior approval of the Inspecting Assistant Commissioner is therefore not required on facts where Rule 3(ii) is not attracted.

---

---

Issues: Whether, for computing chargeable profits under the Companies (Profits) Surtax Act, 1964, prior approval of the Inspecting Assistant Commissioner was necessary before expenditure on commission and entertainment could be treated as excessive when such expenditure had already been disallowed in the income-tax assessment.

Analysis: The computation of chargeable profits under the First Schedule begins with the total income as assessed under the Income-tax Act, and adjustments are then made only in the manner authorised by the Schedule. Rule 3(ii) operates only where expenditure on commission, entertainment or advertisement has in fact been allowed on the income-tax side and the Income-tax Officer seeks to treat any part of that allowed expenditure as excessive. Where the entire claimed expenditure has already been disallowed in the income-tax assessment, there is no room to invoke Rule 3(ii), because no part of that expenditure remains available for re-examination as excessive. The Surtax Officer cannot, under the guise of applying the First Schedule, reopen or vary the income-tax assessment.

Conclusion: Prior approval of the Inspecting Assistant Commissioner was not necessary on the facts, because Rule 3(ii) was not attracted at all; the question was answered in the negative, against the assessee and in favour of the Revenue.

Ratio Decidendi: Rule 3(ii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 applies only to expenditure on commission, entertainment or advertisement that has been allowed in the income-tax assessment, and it cannot be used to re-examine expenditure already fully disallowed under the Income-tax Act.

---