Surcharge on sales tax treated as a profit-linked State levy, making it disallowable under section 40(a)(iib).

Surcharge on sales tax paid by a State Government undertaking was treated as a levy attached to the assessee's FL 9 licence business privilege and as payable only by the assessee itself. The analysis rejected the argument that it was merely sales tax in another form, noting that the surcharge was not recoverable from customers and amounted to a flow back of profits to the State. It was therefore brought within section 40(a)(iib) as a fee or charge levied exclusively on the undertaking, and the deduction was disallowed.

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Issues: Whether surcharge on sales tax paid by a State Government undertaking was disallowable under section 40(a)(iib) of the Income-tax Act, 1961 as a fee or charge levied exclusively on the undertaking or as an amount appropriated directly or indirectly by the State Government.

Analysis: The surcharge was held to be payable by the assessee in its capacity as the sole holder of FL 9 licence and as a levy specifically attached to that business privilege. The Court rejected the contention that the levy was merely sales tax in another form, noting that the surcharge was not recoverable from customers and was borne by the assessee itself. It further held that the levy was exclusively on the assessee and that the governmental design behind the surcharge amounted to a flow back of profits, bringing it within the second limb of section 40(a)(iib). The additional evidence showing surcharge paid by other entities was found not helpful because those entities did not hold the same licence.

Conclusion: The surcharge on sales tax fell within section 40(a)(iib) and was not allowable as a deduction.

Final Conclusion: The disallowance of surcharge was sustained and the assessee's challenge failed.

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